Sarcastic phrase use to define someone who is retarded with out offending that person.
People usually get confused "You are the Shit" with "You are the Greatest" but haven't live
long enough to know
the real roots of the Term. "They are the Shit" too.
Example:
A
Vegan walk into the Room and let you know he is a Vegan, then you say "You are the Shit"
Donald Trump say there is no
Global Warming and then you
acknowledge him by saying "You are the Shit"
Most likely they won't get the sarcasm and will respond "Yes, I am".