Confessions of an underwater short

For the last year or so, my personal investment portfolio has been heavily, aggressively short US equities and the US dollar. It’s not working out for me so far. Both the dollar and US stocks have done fairly well, and I have significant unrealized losses, and am struggling a bit to cover my positions. I find that being short is an ethically interesting and challenging position. I find troubling my awareness that to some degree, I have a financial interest in bad things happening. A terrorist attack in Saudi Arabia leads to a spike in oil prices? Ka-ching. A hurricane in the Gulf? GM declares bankruptct? Ka-ching, ka-ching, ka-ching.

That makes me feel nasty, like some evil Gargamel plotting misery and mayhem from his castle keep. Really, I’m not. Like most people, I’d like for everything to work out for everybody. So how is it that I’ve put myself in a position I stand to profit from other peoples’ loss and misfortune? (And perhaps there is justice, the hand of God even, in the losses, rather than profits, I’ve made from the strategy.)


3 Responses to “Confessions of an underwater short”

  1. HZ writes:

    Purely on an investment perspective, to short on US equities in general is to bet on deflation (or to bet against the Fed). You may be right on the sentiment, yet inflation could still wipe you out.

    Currency bets to me are also just that, bets. Good investments produce a stream of future income, not just a one-off gain. And the leverage required to make a decent profit makes it even less attractive. Banks make money on the transactions, not the directions.

    Investment aside I do agree with your friend. I have quoted Keynes on Setser’s blog. It roughly goes something like: no promised future good is worth the current sacrifice. So much for my complaints about consumer (and politicians’) behavior :-)

  2. HZ — First, thanks for commenting! Makes it feel less lonesome here.

    Re: Inflation wiping out a short position, that’s a risk I was aware of when I got into this (psychological/financial) mess. My reasoning at the time was that significant asset deflation would have to precede an inflationary fed. The Fed was well into a tightening cycle, housing was already a bubble, and equity, while not stratospheric like in the late nineties, was priced for growth at a moment when I thought growth unlikely. I did and do think that the Fed will eventually end up tolerating a lot of inflation (hoping for deflationary overcapacity to mask much of it), but I thought there would need to be a manifest crisis before that would happen, and that crisis would manifest itself via falling equity values. Timing would be critical. I still believe most of this, but I underappreciated the upside risk in the meantime. Timing and even very transient upside risk, I have come to learn, are very critical when you are short.

    I also agree with you about what a good investment is. Betting on currencies (and gold), going short on equity, these were not things I considered “investments” really. Nor did I consider them mere speculation. I put myself into a very speculative position for reasons I considered defensive, conservative. Persuaded as I was (and am) that we are on the verge of a significant financial crisis, the valuation and analysis of equities that I might do in ordinary times seemed like betting which are the best swimmers on the Titanic. Holding claims on US money didn’t feel conservative or safe either. I prefer to be an ordinary buy-and-hold-ish investor, but felt like it was not the moment.

    More interestingly are the ethics of all this. I actually think there is a strong case to be made for why going short is admirable, especially given that generally positive inflation rigs the game against shorts. More on this soon. But I have to say that it really does feel nasty. Regardless of any higher purpose, the psychology of short sucks.

    And I have to say that I am torn between Keynes and Schumpeter. I’m trying to come up with some way of distinguish creative destruction from the ordinary destructive kind. I can distinguish the Vietnam War rally case from say, the closing of an inefficient factory, thus: Shop-windows broken by rioters were going to need to be replaced as they were. There was nothing wrong with those shop windows. The destruction, while it may have served some purpose, exacted a very clear cost, such that it would be much better if the purpose could have been served without the cost. An inefficient factory, if somehow forced to close or destroyed, would not be restarted or rebuilt. It exists and operates at a cost, out of a kind of habit, and breaking that habit, however painful, is a macroeconomic good. Closing the factory is a current sacrifice for the workers (who, per Keynes, ought not be persuaded that it is somehow good for them), but a current benefit for its owners and for the economy as a whole. Summing an economist’s fictional utility, creative destruction is not destruction at all, but net creation.

    Fictional and self-serving as they are, these are the kind of stories I have to content myself with. I think the US economy has a lot going on that seem like good things but that are in fact current costs. Housing construction, import consumption, the proliferation of beautiful retail and restaurant chains, seem like good things. They are good things. But my claim is that at the moment they are goods like yet another glass of wine would be after you’ve already had six or seven. I have voted, in the only way I knew how, for them to stop.

    Still, more Keynes, in the long run we’re all dead. I might have spent this last year just enjoying the new shopping malls, just hoping for the best along with all the rest. Instead I’ve been contrarian, curmudgenly, short, fearful of the economic growth around me rather than cheering it on. Regardless of how my financials work out, perhaps this was too great a current sacrifice.

  3. HZ writes:


    A brainy blog does not attract as much audience as a controversial one.

    Thanks for sharing the insights on the short side. I admire your courage and you may still be right yet. I would say though, most businesses are in pretty good shape financially. Many large caps are also transnats and well diversified in national economies. So the down side is probably fairly limited. That said, the upside on S&P or DOW is fairly limited as well.

    Talking about timing, last April or October it was so gloomy, then came January everything is sunny again. I just don’t care for that kind of fickleness. I find enough interesting businesses that I am willing to hold for years so I nibble on some when there is a price opportunity. To me I have to assume I am at a short term information disadvantage from the get go. I will arbitrage for long term gains with patience and tolerance of volatility.

    Yes the psychology is interesting. Sometimes we have to look beyond the financials and look at the real economy. I am thankful that most basic needs are met in this country and ever more are being met around the globe. I am grateful to be living in a time of peace and prosperity. Yes many households will experience significant financial stress, but somehow most will “muddle through” (borrowing Mauldin).