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The 4.2 percent Consumer Price Index (CPI) bounce for April sent a chill through some traders and financial commentators who had expected a tamer number like a 3.6 or 3.9 percent from last year’s covid price level air pocket.
The MarketWatch headline screamed, “U.S. Inflation Soars in April to Thirteen-Year High, CPI Shows, and Reveals Fresh Stress on the Economy.”
Barron s was slightly more relaxed: “Surging Inflation Is Hammering the Stock Market. Why It Isn’t Time to Panic Just Yet.” Then there was Nobel laureate Paul Krugman, who tweeted, “So, the inflation report wasn t a nothingburger, but it was sort of a White Castle slider not a very big deal.”
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Amid the controversy over GameStop, many cynics argued that something sinister was clearly afoot because the hedge funds had shorted 138 percent of the outstanding shares. In this article I’ll review that particular claim, as well as another seemingly dubious practice, so-called naked short selling. My conclusion is that shorting more than the total outstanding shares isn’t perverse or fraudulent, whereas naked short selling depending on the context might be.
A Review of Short Selling
Before diving into the specific variants, let me first explain the basics of short selling and why it can be a healthy activity in a free market. (In this section I reproduce material I published in an earlier mises.org article.)
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