Tuesday, 23 February 2021 / Published in Analysis

When 100% of outstanding shares are shorted in any stock, you get a sort of a black hole short interest phenomenon. In other words, even if someone covers his shorts, someone comes on top and shorts even more shares. Very soon more than 100% of all outstanding shares are sold short and covering becomes impossible, because there are no available shares to be covered. More or less, that is what happened in the case of Gamestop.

But Gamestop is not the only heavy shorted stock. There are many more than meets the eye. And it’s not just stocks that are heavily shorted, EFTs are shorted also. For example, according to an article from the Motley Fool site (link here) the SPDR S&P Biotech EFT (XBI) has a short interest of 103%%, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is shorted to the tune of 91% and the SPDR S&P Retail ETF (XRT) has a short-interest ratio of 465% recently. Yes you heard right, 465%. The ETF has 2.6 million shares outstanding with more than 12 million shares short. In comparison, the short interest of Gamestop as f Feb 5 was 89%.

The question is, are seasoned professionals right in shorting these securities so much? The answer is yes and no. Professional investors and managers know all too well that any mania can’t last forever, however a speculative mania can last longer than anyone imagines, and stocks can rise for no reason, or much more than thought possible. In other words, as Keynes correctly said, markets can remain irrational longer than you can remain solvent.

The bottom line is that we are witnessing a market like no other in history. A speculative frenzy I have never seen before, and a market that behaves irrational in every respect.

I am not sure how this ends or how long it will last, but I am sure that in the end, irrationality will be punished, and prudence rewarded.

Wednesday, 03 February 2021 / Published in Analysis

I have never subscribed to the theory that interest rate differentials are what determine the value of currencies. Yes, differentials do play a role, but in my opinion a lot less than most people think.

While the yield spread between 10-year US treasuries and 10-year Bunds has increased, this has not stopped the dollar falling almost 10% vs the Euro. Obviously if yield was the main driver of currencies, this should not have happened.

When looking at the current valuation of the dollar, many other factors are in play at the moment, that overshadow yield differentials.

The greatest factor is Inflation tolerance: The Fed has repeated many times that it will tolerate higher inflation for a considerable amount of time, even after the pandemic ends. At the same time, it has also said it will continue to purchase assets for at least the same amount of time.

And contrary to what happened in 2018-2019, when the Fed tried to raise interest rates in order to offset the US government’s increased spending, this time around the Fed will do nothing of the sort, instead opting for continued bond purchases and thus preventing yields from rising.

This will probably create a dilemma for holders of US treasuries. And the dilemma is, will the interest earned compensate for the dollar inflation they will incur. The answer is probably not, which might an additional reason for the correction of the dollar.

Finally, because the fed’s balance sheet is poised to rise for the foreseeable future, in a way this dilutes the value of the dollar a bit. However insofar as the rise of the Euro vs the dollar, please also remember that the US has a twin deficit while the Euro zone a current account surplus.