The next bubble: short selling
Tech stocks drove off the cliff in 2000. Real estate went poof in 2007. Financial stocks melted down in 2008. So what’s the next bubble to burst? Short selling.
As we look back on three major market busts in a single decade, we have begun to idolize the shorts. Michael Lewis’ book, “The Big Short,” does exactly that. The New York Times just did so as well, lauding a shorts fund manager named Hugh Hendry, who says he wishes he could “short Obama.”
Practically everyone involved in capital markets now admires David Einhorn, who, in early 2008, warned that Lehman Brothers was dangerously leveraged. He was excoriated for saying so, and got the last laugh when his short-sales of the firm became lucrative.
Because shorts of the recent past look smart – and some became wealthy — it’s suddenly trendy to bet on decline. Investors now jumping into short selling — gambling that worrisome trends will continue — are making a move they should have made several years ago. This is exactly how bubbles form! Lots of people, recall, jumped into high-tech Internet stocks a couple years later than they should have, gambling on the notion that positive NASDAQ trends would continue.
According to figures compiled for this column by Lipper senior analyst Tom Roseen, from June to September of 2008, as the Dow and S&P were spiraling downward, a net of $10.7 billion flowed out of dedicated short bias funds. With a big fall in progress on Wall Street, that was the time to take profits on short positions. Since then, Roseen finds, a net of $26.9 billion has flowed into short funds.
True, $26.9 billion isn’t Lehman money – that company took $600 billion to Davey Jones’s locker when it hit the iceberg. But when billions of dollars flow into a specialized, very risky asset class, we have the makings of a bubble.
Shorts are assuming more bad news to come. What if economic news enters a cycle of steady improvement instead? (That’s what my book, Sonic Boom, supposes and there is considerable data to back the notion.) If we’re headed for years of steady, unspectacular economic improvement – shorting will be another bubble.
Which, of course, everyone will claim in retrospect to have known all along.
Here are two other bubbles to watch for:
- Gold Prices:
In adjusted dollars, gold prices have nearly trebled through the last decade. Gold prices collapsed in the early 1980s, and buyers lost their shirts. That can’t possibly happen twice, can it?
- Cupcake Prices:
Also, cupcake prices are in for a major correction. Even in New York City and San Francisco, people seem unlikely to continue paying $5 for a cupcake that’s mainly icing, which, in turn, is mainly sugar. I’d unload Georgetown Cupcake now. Someday the cupcake bubble will be a standard b-school cautionary case study.