One of this desk’s regular macro reads is John Authers’ daily mailer “Points of Return” and the latest piece is highly recommended for its macro overview of the latest moves in the stock shorting arena. An extract:
“…shorting companies with bad balance sheets has gone badly on several occasions in the past, even if the strategy has never suffered quite as drastic a reversal as in the last few months. Against that, there are broader problems. If the GameStop saga ends with lots of retail traders holding stock in heavily indebted companies, the odds are that it will end in tears. And we should also be concerned by the mere fact that squeezing shorts who forensically took on the weakest companies has worked so well. It is yet another reminder that a consequence of cushioning the blow of the pandemic — and of the global financial crisis before it — leads ultimately to a softer form of capitalism, with less creative destruction, and more capital continuing to go to companies that cannot put it to good use.“
Temporary gains on short squeezes are not difficult to conjure, as long as your pocket or pockets are deep enough the mechanism is straightforward. However, the most shorted stocks any any sector, mining or otherwise, tend to be shorted for very good reasons. The amount of utterly dumb money lining up to shortsqueeze stocks like MUX or AG will learn this without a doubt, the only question is whether the owners of that money learn from their peers, or via expensive experience.