Friday, October 05, 2018

Musk and the proposed ban on shortsellers

On August 7th, Tesla's boss Elon Musk famously tweeted that he had secured some $70+ billion to buy all the Tesla stocks for $420 a piece.

The bold statement was a complete lie, as sane people knew right away and as was getting explicitly but gradually confirmed in the following days. And this lie was rather demonstrably motivated by Elon Musk's desire to financially hurt the shortsellers – people who bet that the Tesla stocks are overvalued and bound to drop.

Within a day, the shortsellers were made $1 billion poorer by that tweet – while Elon Musk got $1 billion wealthier. Clearly, the law says that untrue statements by the CEOs that have a tangible effect on the prices are called "securities fraud" and considered criminal acts. For a good reason: by lying about the nature of the asset, the CEO is effectively offering something else to the investor than what he is actually giving to them. This simply has to be illegal – otherwise everyone would be deceiving the other side all the time.

Well, that jump after the fraudulent tweet was obviously not the last change of the price. In the following 2 months, the stock went up or down by more than 10% several times. For example, last Friday, Tesla lost 14% after the SEC's "guilty" verdict and on Monday, it gained 17% after the SEC punishment was seen to be symbolic.

The shortsellers and other traders who lost money after Elon Musk's untrue tweet have sued him. On top of that, the Department of Justice (DOJ) is deciding whether criminal charges will be made – and whether the U.S. government will seek a prison term for Elon Musk.

Meanwhile, the Securities and Exchange Commission (SEC) has already concluded its investigation. The verdict was that Musk's tweet was a clear example of a securities fraud. When the verdict was revealed, they used a tough language. The SEC isn't going to enable the violation of law just because the culprit has a similar image in the mass culture as Kim Kardashian, the SEC bragged.

However, the acts didn't match the language. A day later, after some hesitation, the SEC and Elon Musk decided on a settlement. Musk would pay a symbolic $20 million fine, Tesla would add another $20 million, and Musk would be replaced by someone else as the Tesla chairman within 45 days – while he can remain the CEO.

The $40 million fine is high for a tweet. But if you realize that he did something existentially wrong and consequential, the amount – comparable to 1% of his net worth – really is symbolic. In the same way, removing Musk from the chair of the chairman is a symbolic gesture as well if he can remain the CEO. In practice, as "just" the CEO, he will be allowed to do everything just like he did before, right? The change is purely cosmetic.

The settlement must still be confirmed by a New York judge. Common sense dictates that Musk should be extremely grateful for this settlement that allows him to be basically unpunished – especially because the courts still have the capability of preventing the settlement. Well, it isn't the case. Last night, Musk published the following incredible tweet:

OK, so he renamed the SEC to the Shortseller Enrichment Commission. Nice. The officials should be grateful to Musk that they weren't outed as pedos. Aside from this obviously unjustifiable insult – the SEC watches the lawfulness of the trading whether long or short positions are involved – I must point out that I am shocked by the low IQ of Elon Musk that this tweet unmasks. He just doesn't have a good sense of humor. He isn't capable of writing an efficient tweet that just sounds great.

In particular, the second sentence "And the name change is on the point" is completely redundant. It's obvious from the first sentence that he has "proposed" a name change and he probably wants the readers to believe that such a change would be justified. So why does he add the redundant second sentence? Because he doesn't really see it's redundant, it's reducing the efficiency of the tweet and the concentration of humor and cleverness in it, and he doesn't see it because he just isn't a bright man. His management in Tesla is analogously inefficient and dumb.

Also, given the fact that he was tweeting to 22.8 million followers, he could have done some proofreading and catch a typo – the missing word "say" or "write" (or another synonym) before the word "that". In fact, shouldn't the proofreading have been done by the Twitter nanny that Musk has received from the SEC as a part of the settlement? Does she do any work at all? Does she exist at all?

Needless to say, Elon Musk is surrounded by people who fawn over him – most of them hope that they could get a fraction of his wealth by doing so. So as a typical arrogant man, he is shocked that there exist people who aren't sycophants, who dare to point out that Tesla as well as he as a manager or an inventor are heavily overvalued. Shortsellers are the main enemies. They think Tesla is overvalued, and possibly approaching bankruptcy rather soon, and they are willing to risk their money to support this opinion and make a profit if they are right (or a loss if they are wrong).

Musk and a fanboy wrote the following tweets in recent hours:

Cute. This just shows what kind of a complete moron – who doesn't get capitalism at all, not to mention other things – Elon Musk is. We are told that shortsellers are criminals and "value destroyers" because they hope that a company goes bankrupt, and that's why they should be outlawed.


In reality, shortsellers are exactly as useful for the process of "finding the fair prices that optimally allocate the resources" as the investors with long positions. The price of a stock should ideally be the time-discounted sum of the future income produced by the stock, up to the moment of the disappearance of the company (or perhaps also the end of life of the investor, whatever comes earlier), with some premium or discount for volatility, uncertainty etc.

This is the intrinsic value of the stock. A company may get a part of the funding by selling stocks and it's important for the efficiency of capitalism that the stocks are reasonably priced. This simplifies the access to new funding for the promising companies that can do something good in the future, and makes it harder for the companies that are probably not promising.

People don't have a crystal ball and they only have guesses, analyses, and opinions, and those generally differ from the opinions of others. So the market does a certain job to find a compromise value – a weighted average of a sort of the numbers that are believed to be right by the relevant investors, those who are willing to reserve some money. The money they reserved for the trading determines the weight of the trader. But only those traders whose "fair price" is close to the actual current "market price" influence the price significantly. If you think that a stock is much more (much less) valuable than the current price, you have probably already invested everything into the stock (or to shorting it) and your position won't change with the new events much.

If a stock is overbought by a cult that can only see the positive aspects of the stock, and Tesla is arguably the best example of such a company in the history of the mankind, the weighted average of the long-position investors' opinions will clearly indicate a heavily overstated price of the stock. That's where the shortsellers become important – and indeed, Tesla is also the most shorted company in the world today (although Apple and Amazon which are much larger may sometimes beat Tesla in the absolute numbers). They push the price down, towards some fairer value, by shorting it.

So the investors with long positions and short positions only differ in the sign of their opinion about the company but they are doing an equally important service to capitalism. They are not "value destroyers"; instead, they are "funding allocators". And the more cultish the long investors into a company are, the more important – and more widespread – the shortsellers will be, too. Shortsellers also helped to keep companies such as Enron in check – they are the main people with the incentives and critical eyes who look into the corporate wrongdoing and fraud. Critical eyes are needed in science, technology, business, politics, and elsewhere; rosy hype just wouldn't be enough for progress.

Do the Tesla shortsellers hope that Tesla will go down and/or bankrupt? Of course, they do. They believed it was the case, that's why they made their short positions, and that's why they hope that they will be shown correct. Is there something immoral about it? Not really. Tesla is a company that produces losses – its net contribution to the mankind has been negative in every single year of the 15 years of its existence – so it's sensible and ethical to hope that this loss-creating business that wastes the people's money and the human work (and the time of all of us) will stop. The money that could flow to such a bad business will be redirected elsewhere, and these alternatives places to use the money will be positive and constructive!

As a tweeting shortseller said, they are not shortselling Tesla. They are investing into Elon's tweets! ;-)

So at the end, the bankruptcy of Tesla – or any other company – just redirects the resources to a place where they're usually used in a better way. This is a magic of capitalism: the destruction may often be constructive; the usual phrase is "creative destruction". When Tesla goes bankrupt, the buildings and machines will be sold to someone who will try to do something better with them. The employees will return to the job market and may be hired by better companies that actually do something useful and produce profits. Profits mean that the amount of material well-being and happiness, as measured by the consumers' will to pay, is greater than the expenses i.e. the amount of misery and suffering (e.g. the employees' work, as measured by their demands to get a certain salary) that went into the product. If a company is making loss, it's adding more misery than happiness to the world.

In communism, companies couldn't go bankrupt and people couldn't really be fired (without finding a similar job for them). Aside from the absence of competition and incentives in general, those were some of the reasons why communism sucked and reduced the GDP per capita of the countries plagued by that system by an order of magnitude relatively to similar countries that were shielded from communism.

These are some of the reasons why it is a sign of utter hardcore communist stupidity to propose a general ban on the shortsellers. There are surely situations in which I could think that the shortsellers are doing something bad – and even Soros' shorting of the British currency could be an example – but to ban shortselling in general would mean to throw the baby out with the bathwater.

My arguments above have been "ethical" arguments based on the "big picture" and the general mechanisms that allow capitalism to be effective. But we may also look at the shortselling "microscopically", from the viewpoint of the particular steps that people follow when they shortsell a stock. What do they do? They effectively borrow a stock and sell the borrowed stock right away. At some moment, they must return the borrowed stock, so they must buy it again. But if their belief that the price of the stock will go down is correct, they will buy it for a lower price than what they paid at the beginning. So they will make a profit. Or they will make a loss if they were wrong.

Equivalently, you may find pairs of long (L) and short (S) positions. These are people L and S who simply make a contract. If the price change P=P(final)-P(initial) in some period of time is positive, L gets |P| times V (volume) from S, if it is negative, S gets |P| times V from L. It's a totally symmetric bet. It's complete nonsense to say that betting on one sign of P is more ethical than the other choice.

After all, the numerical value of the price of the Tesla stock – Tesla will start around $274 today, after a 4% drop yesterday and an extra 3% pre-market drop – is a ratio of the value of the Tesla stock and the value of the U.S. dollar. The value of the U.S. dollar expresses some kind of prosperity in the U.S. as a whole. So if I "hope" that the Tesla stock will go down, it may be phrased as a negative sentiment. But it may equally be phrased as a positive sentiment: I "hope" that the value of the U.S. as a whole will go up, when expressed in the units of the Tesla stock. ;-) Just consider the reciprocal value of the price. All the sentiments get reversed.

(This is also why the black swan guy's fearmongering about the short positions against the Bitcoin were so idiotic. He presented the shortsellers of the Bitcoin as committing suicide or destroying the civilization. BTCUSD is above 6,000 and "something looks like an infinite loss" of the shortsellers if the Bitcoin price goes to infinity. But you may equally consider the reciprocal USDBTC ratio which behaves exactly in the opposite way. So conceptually, the long and short positions are completely symmetric – the contracts may be designed in a symmetric way – and it's just plain stupid to spread fearmongering about one of them.)

Elon Musk is mainly a heavily overrated, selfish, and narcissist moron who doesn't get the basic ideas about the modern world and who mainly wants to "disrupt" the rule of law in the U.S. The SEC should notice that he doesn't really want any generous settlement and they should propose a harsher one instead, one that will lead to some tangible creative destruction and not just a symbolic gesture.

No comments:

Post a Comment