Cash flow 010 Short positions part e currency example - YouTube

We've been taking the topic of short positions and breaking them up into

several different lessons because it's just new we could do a long position in

one lesson because people understand buying low and selling high they really

get this side of it when the direction is up when the direction is down it's a

little freaky and since most people have never done it before it's worth spending

some time on with several examples so let's say a person says you know Andy I

get it I've gone short all the time I get this you know this is old hat for me

well let's do a couple of more examples just to drive this home because

there's a lot of other ways to take a short position other than just stock

remember we did this with a cell phone we've done this now with a share of

stock well we could do it with anything we wanted right we can do this with

anything that we want to do it with and one of the ones that

I really like is currency you can go short with a currency so let's say we

have this currency here let's blow it up a little big and introduce it this is

called a Zimbabwe dollar it's from the Bank of Zimbabwe so here

we go let's pull this money off here and go into Zimbabwe cash and the funny

thing about Zimbabwe money is it it experienced something we call a

hyperinflation so if you remember back from the four pillars in fundamental

analysis we had talked about currencies remember the Continental the

hyperinflated and the Confederate dollar

that hyperinflated and the Pengo that became a forint at

the hyperinflated well if you remember in 1980 a Zimbabwe dollar was worth a $1.47

U.S. but as that lost value pretty soon you know it was it

was almost worth nothing as a matter of fact what was interesting is these wind

up in the garbage can if you can imagine you know if I blow this up this is

Zimbabwe currency right here and there's you know millions of dollars just thrown

in the garbage can next to banana peels and orange peels just millions of

dollars I mean you know five hundred thousand dollar bills and I don't even

know what that one is under there there is a two hundred thousand just this

whole garbage can is full of cash because it just lost so much a value I mean for

example if you had shares of Enron stock today where would you do throw them you

throw them in the trash can because they're garbage now they're not worth

anything when something's not worth anything anymore it becomes garbage let

me say that again when something isn't worth anything it has no worth we throw

it away there's no reason to keep anything and there's no value to it so

let's go back to our idea of confidence and let's say that you know

that you got a confidence level of a hundred percent that you could see the

future and that you said you know what I think I'll tell you what I think I think

the Zimbabwe dollar is going to go down let's make this a little smaller

right here okay so let's move all this off here and do everything in in

wisdom and order here so let's say this is the Bank of Zimbabwe let's label it

this time this is the Bank of Zimbabwe where you can get Zimbabwe dollars and

currency and you see that the the that the high price the price of a Zimbabwe

dollar right now is one dollar and forty seven cents U.S. that's what you can buy

a buy or sell this you know that's the exchange rate

okay and let's say that we have an exchange here as well like eBay that's

all that's all it really is right I mean isn't that true that's all it really is

is we have an exchange here but this exchange is not a stock exchange this

exchange is what we call the foreign exchange so we'll just call this the

foreign exchange market or what they call the Forex I did that wrong the

Forex for sure so let's review $1.47 U.S. is what these are going for

U.S. dollars we have the Bank of Zimbabwe right here and we have the foreign

exchange market right here so we have the four gotta get the R in there the

forex you see that you gotta get the forex in there and so we believe with

with confidence we say these guys are printing these things and they have this guy

I think his name was Mugabe who is just a bad president and a bad leader and

they're printing this stuff like who's gonna stop us so we say we think this is

gonna go down okay if we think the Zimbabwe currency is going to go down

what do we do the first step would be to to borrow so this is an interesting

question now if we go back to the cell phone example if your confidence gets to

a hundred percent what would have been better than shorting an iPhone

well shorting two iPhones or four iPhones or 10 iPhones in other words

when the confidence level rises if my confidence level got to a

hundred percent right I don't know that even I trust my own my own self but

let's say that I really knew it that I had a DeLorean and I could go in the

future and I could see this going down I knew it that's kind of how Soros feels a

lot of the time George Soros I'd want to do as much as I can as fast as I can

you know borrow sell as much as I can as fast as I can

now that's weird to think about borrowing as fast and as much

you could to go as fast as you could and as deep as you could but let's do it

let's go to this Bank of Zimbabwe and they've got all this cash here you say

I'd like to borrow a hundred trillion Zimbabwe dollars wouldn't that be

something a hundred trillion Zimbabwe dollars now of course the engineers are

gonna say they'd never loan you that you gotta have collateral look engineers

relax we're just learning concepts it's just an example guys relax a little bit

why do I give the engineers so much grief I'll tell you why when I was

playing basketball in college it was all those engineers that were so smart that

took the curve up so I had a harder time maintaining my eligibility competing against

you guys so now I have to kind of get a little revenge I hope you're okay with

that but engineers relax okay we're just we're just teaching concepts here so we

borrow a hundred trillion Zimbabwe dollars a hundred trillion let's take

that to the back so it stays a hundred trillion Zimbabwe dollars we owe this

Bank now okay now what's our next step trade this away remember that you can be

a buyer and a seller at the same time eggs and bacon right eggs and bacon easy to

remember right you're always a buyer and a seller right this guy trades bacon and

eggs is he a buyer or is he a seller right

well you have this you're gonna trade this so you're a buyer or a seller so you're

gonna be a buyer of U.S. dollars and you're gonna be a seller of this let me

see if I can find a dollar here somewhere I gotta find a dollar here it

is so we're gonna trade this at $1.47 U.S. well let's do the math on

this that means that you have this dollar times look at this times one point

four seven trillion that's what you have one point four seven trillion dollars

for one hundred trillion is that no it's even more than that it's a hundred

and forty seven trillion is what you have

okay so $1 times 147 trillion and you owe 100 trillion why because the

exchange rate is $1.47 U.S. and we think it's going down

so we've borrowed and sold we've borrowed and traded right pretty amazing

so we traded this on the Forex exchange let's put it back over here and they

gave us when we gave them this hundred trillion they give us $1.47 for

every single one we we traded on this foreign exchange market so now we have

this so let's make sure we label things here let's make sure we keep it right so

this is the Bank of Zimbabwe and this is the foreign exchange this is the Forex

and that's how we're able to do this so now we have maybe this is like a balloon

payment to these guys a 30-year with a balloon and we don't have to make any

payments until the end it just balloons we pay the whole thing back plus the

interest well how far down and this go what was the low price well this one

actually made it all the way to the garbage can didn't it it went all the way down

to zero so it's gonna be tough to even find these now on the foreign exchange

because where did this go if you go to the foreign exchange they're gonna say well we really

don't have this anymore we threw them all in the garbage can and in reality

these guys aren't gonna want it back because it's not worth anything to them

either but in theory if they said yes we do want it back you could simply go to

the garbage can right it doesn't matter where you get it as long as you get it

back that's key for the next example doesn't matter where you get it as long

as you get it back it doesn't matter where you get it as long as you get it

back right and so we buy this for zero money because it's in the garbage can we

can buy this for free we can no one's gonna care if we pull out of the

garbage can right no one's going to care and so we pull this out of the garbage

can and we say here Bank of Zimbabwe there's your worthless money and we go

ahead and we return it just like that let's line that up beautifully we return

it and now we have no liability whatsoever and we're left with a

hundred and forty seven trillion dollars now that's an extreme example of course

and I never made a hundred trillion dollars no one has but George Soros has

taken down incredible trades this way absolutely incredible trades you know

this is an interesting article from the Investopedia maybe that's a little big

bring this down to size a little bit but we're not gonna worry about how these

are made you know the forex does it in pairs a little difference but the

idea is is very similar where we have we have all these incredible trades and one

of the ones they said the best want so the best trades are George Soros

Stan Stanley Druckenmiller made millions with two long bets on the same

currency working for trader George Soros but Soros just crushes this one

let's just take an example of this the British pound shadowed the German mark

leading up into the 1990s even though the two countries were very different

economically many speculators George Soros chief among them wondered how long

exchange rates fight market forces and he began to take up what kind of

position a short position against the British Pound Soros borrowed heavily in

heavily to bet more on a drop in the pound so he's betting on it going down

makes sense Soros made at least a billion dollars

off of this trade for the British government's plummets the devaluation of the

pound helped so the fact is is when the currency was devalued in the British

Pound Soros pounds they made a billion dollars right so it's not just this type

stuff and and he's done all kinds of trades like this he's done it I mean

he's taking he's made countries nervous by the positions he's taken so

far so it's not just a cellphone you can do with this with and it's not just

a stock you can do this with you can do this with currencies as well but the key

to breaking through on this type of stuff if I can blow this chicken

scratch up the key to this is it really helps to understand what buying

and selling is and what is a buyer what is a seller well he was selling bacon and

buying eggs he was selling eggs and buying bacon and the moment you put a

dollar in here for some reason it makes people have our time to say look in this

case I was what I was borrowing and selling Zimbabwe dollars right and

trading it for a U.S. dollar so I was a buyer of the U.S. dollar and a borrower

and a seller of the Zimbabwe dollar right buying and selling really think

about that you know bacon and eggs the the bacon he was a seller of bacon and he

was a buyer of eggs this guy was a seller of eggs and a buyer bacon and

that's how it works so here we were a seller of the Zimbabwe dollar

and a buyer of the U.S. dollar when we come back let's see I said we're gonna

do example after example after example after example so I owe you one more

example when we come back we're gonna do what I think is one of the best short

plays that can be done