No Naked Short Selling => No Short Selling at All => No Future Energy?
Posted by Nate Hagens on September 19, 2008 - 10:05am
Topic: Miscellaneous
Tags: christopher cox, original, sec, short-selling [list all tags]
In an amazing (and as yet unconfirmed) development tonight, the SEC has announced a temporary ban on ALL short selling. In the 100 or so posts on theoildrum in the past 3 years, I usually save my opinions for the conclusion. Tonights news has me a bit outraged, so forgive me if I 'temporarily' diverge from that pattern. If ALL short selling is truly banned, whether it be for a week, a month or a year, the capital markets as we know them will cease to function, which among other things, will cause subtle but serious danger to the future production of energy. (UPDATED at end of post 9/19 06:30 CDT)
Backdrop:
In 1938, the SEC instituted the uptick rule, where stocks could only be sold 'short', on up or neutral 'ticks' in the stocks movement. In July of 2007, for reasons I never understood, the SEC eliminated the 'uptick' rule, allowing stocks to be sold short at anytime.
Earlier this summer, as the financial crisis began to unfold, the SEC announced a list of 19 financial stocks that would no longer be allowed to be sold short 'naked'. Naked short selling differs from normal short selling in that no stock needs to be borrowed and no margin needed until settlement date - normal short selling requires immediate margin funds AND the ability to borrow shares. OK. Fair enough - one SHOULD have margin/funds available and be able to borrow a stock to short it.
Earlier today, the FSA (Britains version of SEC), announced that short selling of financial stocks would be temporarily halted. British financial shares, after being down sharply, rallied dramatically. At the same time this was announced, US financial shares also staged a sharp turnaround - heavily shorted shares like Wachovia Bank rallied 60% - most financial companies rallied over 10%. Rumors in US markets that such a 'short-selling ban' would be more broadly instituted in our markets caused massive short covering in heavily shorted stocks. (For example, the stocks in 2 leading mattress manufacturers - Sealy and Temperpedic - had very different afternoon responses to the British announcement (and subsequent rumors). Sealy, which has very little short interest, rallied 4%. Temperpedic, which has a very similar product to Sealy, but has 61% of its float as short interest, rallied 50% from it's lows on triple normal volume. This was not random. The shorts were covering where they had to.
Tonight we hear that we are taking it one step further than Britain and announcing a temporary ban on ALL short selling (as opposed to naked short selling and as opposed to just financial stocks). The Wall Street Journal reports that the details have not been officially ironed out:
SEC Chairman Christopher Cox briefed Congress late Thursday of the agency's intention to take the extraordinary step of interfering with the market's regular functioning. Short-selling is a trading strategy of selling borrowed stock in hopes it falls and can be repurchased at a lower price.
It's unclear if the SEC's intention has been approved by the commissioners, which is required, and whether which stocks are covered or for how long it will be in effect. Earlier this summer, the SEC moved to restrict certain short-selling practices for 29 days, covering 19 financial stocks.
I spend much of my free time trying to kickstart a national energy discussion and suss out ways of taking at least baby steps away from our global conspicuous consumption carrot, but I still maintain close friendships with some former wall street colleagues. After seeing this news, I have talked to a gaggle of wall streeters and the mood is somewhere between bewilderment and bitterness. Here is an aggregate of opinions and reactions. The predictions are my own.
First of all, we simply CANNOT halt all short selling. The public (Hillary Clinton and Chuck Schumer) position is that short selling was the root cause for the demise of Bear Stearns and Lehman Brothers and why Morgan Stanley and Goldman are currently on the ropes. The truth is that SOME short sellers have recently used unscrupulous methods to make short selling stocks (or more correctly, Credit Default Swaps), a self-fulfilling prophecy, and thereby profit. The vast majority of short sellers however act as cleaner-fish, policing the stock market for crooked management, unethical practices and bad business models. I have been told that what is underway is a large scale witch hunt that in the next few weeks will show the public some 'very well known' names ending up in jail. But just as pursuing ethanol to wean us off of oil, and pursuing oil speculators to blame oil price rises on, eliminating ALL short sellers in order to punish a few bad eggs will have wide boundary unintended consequences. Instead of the normal knee-jerk scapegoat lynching, perhaps this time our leaders will look deeper for the real 'witch' responsible for the recent explosion in systemic risks and financial upheaval - whoever approved and subsequently encouraged the use of enormous leverage in the financial markets via scaling of investment banks assets and liabilities. Oh wait - that would be the same people looking for the witches..
What will happen if the SEC continues down this path of banning short sellers:
a) an enormous short covering rally. If there were no grandfather clause (meaning existing shorts would have to cover), we could see all time highs in stock market within weeks. I expect if this rule goes into effect there will be some clause preventing this and that only financial stocks will be censored- but who knows?
b)once all the shorts have covered, the long-only hedge fund managers would say 'thank you very much' and sell their (now vastly overvalued) holdings in Corus Bankshares (81% of float short), Downey Financial (69% of float short), etc. at valuations far higher than the underlying businesses deserve.
c)once the up/down purification was complete, we would have far fewer market participants, much less liquidity, lower stock prices, and much less trust in our markets, without having any impact at all on the fundamentals of the companies involved. Quelle surprise.
d)changing rules overnight like this is beyond a Monty Hall campaign. It is the beginning of the nationalization of industry, which started with the Bear Stearns bailout and has continued with various market interventions. Until now I thought financial markets would be the last thing to go - not the first - if this rule goes through I am not so sure.
e)People are not allowed to short in their IRAs. So Wall street created synthetic securities that you can 'buy' (go long), but the return you receive is the inverse of the underlying index (or in many cases, double the inverse such as the SKF in finance). Think of all the tens of thousands of people that own some SKF (or any related ETF) in their IRAs and will wake up to double digit losses tomorrow, only owning the stock with the purpose of lowering the risk of their retirement 'long only' account.
f) in a world where renewable energy infrastructure needs urgent and massive scaling, and access to high quality fossil reserves is getting more expensive by the year, functioning capital markets will be vital to this transition.
g) in a world needing financial capital for energy, we will also need the ability to vote against smart, optimistic, confident entrepreneurs that promise new energy futures based on prototypes. The aggregate hedge fund/short seller will suss out the true value of these new energy technologies, and buy them if for real, and sell them short if they are like most new 'green' energy companies - good on an empty planet, but lacking scalability, and profitability using wide boundary criteria - we desperately need to avoid the Tragedy of the Energy Investing Commons in a declining EROI environment. .
h) options trading would either totally cease, or the bid-ask spreads would be so wide as to make it ineffective as a hedging vehicle. Options market makers need the ability to short sell to hedge exposure when big options trades come in. How will retail investors (or any investors) hedge their exposure on stocks they own if they can't buy puts?
i)the lone silver lining I see here is that Congress and the rest of American polity may undergo a giant wake up call on how lack of understanding, oversight, and foresight have allowed us to reach this financial morass. If they recognize the misdirection of our financial policies perhaps they will have the courage to learn and change our energy straits at an accelerated pace.
Christopher Cox has no idea what he is doing if he allows this to proceed - why not just reinstate the short on 'uptick' rule that was reversed earlier this year? Hank Paulson (in my opinion) knows exactly what is going on. When he suggested today a resurrection of the RTC (Resolution Trust Corp) that was used after the US Savings and Loan debacle in the 1990s, longs cheered and shorts scrambled to cover related financial names. But Paulson (so far) has been craftier than that. The terms the Treasury extended to AIG were onerous, not a freebie, and intended as a message that the moral hazard has been approached if not breached. By re-opening the RTC (they are apparently waiting for a President), they would put firms in receivership to monitor and oversee the liquidation of assets and liabilities - this would NOT be a bailout for these companies - the shareholders might be left with nothing, and the bondholders left with some value.
This short selling rule is over the top. I see no way that it will actually be instituted the way that CNBC announced it tonight. Someone will have to overturn or modify it before the open tomorrow - already SP500 futures are up 100 points from early afternoon trading.
In sum, I will close this rant from a mild mannered guy with this thought. We have entered new territory (obviously). Scary territory for many who have become accustomed to a certain way of life, and have not yet thought through the possible paths we might collectively go down in the coming years. Ultimately this is a story about energy - lower energy surplus all around makes people more likely to swing for the fences. While swinging for the fences inevitably some are going to strike out. The umpires at the game should have the wisdom and guts to call those players 'out' while letting the other athletes continue playing the game. In a perfect world, some of the best athletes, who have been pursuing inclusive fitness defined in our era by pecuniary terms, will migrate towards an area that urgently needs creativity, passion, tenacity and follow-through - the local and global scaling of renewable energy infrastructure that we will need as fossil fuels decline in coming decades. Without functioning financial systems, and the trust of large capital players, the energy future we are attempting to change, cannot even get started...
In the end, I think the SEC wants to halt shorting of CDS and other derivatives, but is sending a signal via stocks. However if this rule holds, I predict a positive feedback unraveling (in a negative way) as shorts cover, then EVERYONE sells and we are in worse situation than we started, and playing short stacked to boot. I fully expect, (and hope) that when I wake up tomorrow, this rule will have been voted down, or at least watered down...But the way things are going, perhaps I will wake up to a news flash - that the Fed and SEC are working towards a new mandate that will guarantee stock returns at or above their historical average of 10% forever (but a ban on buying if we ever exceed +15% intrayear).
(Disclosure: In my own portfolio, I am short some stocks (though none mentioned here), as hedges against my longs, to reduce the volatility of my overall portfolio.) I have also put my fathers IRA into some SKF - he will not be pleased).
P.S. Note to Hillary Clinton, Chuck Shumer and Christopher Cox - let's remember to not disallow ALL short selling, because short selling of oil futures gives American's lower gas prices!!!! (sarcasm, for those who weren't sure)
(**UPDATE 6:40 am Well, , they did it, though as expected a watered down version limited on the surface to only 799 financial stocks. Other wrinkles will require short sellers to publicly disclose their positions and easing restrictions on securities issuers repurchasing their securities. But the damage is done I am afraid. Who is going to want to short stocks now, even non-financial ones, at risk of future rule changes at any point? Expect coming lawsuits from state class-action from retirees invested in SKF as a hedge - expect strong language as analysts on CNBC and other network that understand the implications of this move fight back. This will cause the SEC to further backpedal on this rule, perhaps publicly stressing that current shorts don't need to cover, etc..
What the SEC fails to realize is that there will be a mini-exodus from the business in the next 2 weeks before quarter end and maybe a mass exodus from the business by year end due to lack of confidence, which up til now Paulson and crew continued to convey to the larger players. The short selling ban may actually hurt the very firms it was purposed to defend. The end result now will be far worse than some of our banks going under (which will happen anyways due to deteriorating company fundamentals) -it will continue the demise of confidence in the financial system, and may well lead to a Constitutional crisis. Furthermore, the volatility it will engender might stave off bank runs, but almost certainly will incite 'runs on hedge funds', as people under lock-up will want to exit funds at the earliest opportunity - in addition to the many funds that will just shut their doors due to changing rules intra-game. Thus, the intent to delever, if done too rapidly, will beget even larger volatility.
I expect just like with any freebie, there should now be a long line of 'related' companies raising their hands and asking to be added to the list of 799. Financial companies like Capital One and GE (GE Capital is large % of their business) may have valid cases - but then autos, airlines, health care.....dare I say energy companies? will also line up for protection - where will the line be drawn?- Who will be the first brave Paul Revere company to say - "please remove me from the no-short selling list as it endangers our financial system"? This is truly a 'finger-in-the-dike' scenario - plug one hole and then some other angle not thought about Thursday night surfaces. If I wasn't living it I would think this is all being made up. We need to stop being reactive and start being proactive, which will only happen if we have a new political party or new way of measuring success other than wealth transfer, (or both).
While I have been in the near term peaking camp due to accelerating costs of the marginal barrel (lower net energy), due to this debacle, I believe both nominal and net Peak Oil are now things of the past. There will never be a year where we produce more crude oil than in 2008, (and if things fall fast, then 2008 still may not catch 2005). Energy and finance are critically linked. The deepening banking crisis now combined with apathy and reduced confidence in our financial system will evaporate any chance we had of offsetting oil depletion with new production and new technology. You can bank on it.
I've been hanging out over at Calculated Risk, and everyone one is stunned.
I though the Fed saying one could use equities for collateral was over the top (you can print your own money, no helicopter needed), but his is really in has stepped over a line in the sand.
Mish's comment, with a very good email from a correspondent:
http://globaleconomicanalysis.blogspot.com/2008/09/peak-insanity-sec-pla...
Peak Insanity: SEC Plans to Temporarily Ban Short-Selling
I guess we are seeing cognitive dissonance on a grand scale. Makes you wonder what will happen when the consequences of an accelerating decline in net oil exports begins to sink in. Reminds me of an Ayn Rand quote, "One can evade reality, but one cannot evade the consequences of evading reality."
I think it would be fair to chalk one up for the extreme Doomers at this point.
Buuuut buuut Bush got on TV today and assured us that all was well.
Speaking as a doomer I still have hope I'm wrong but on the other hand the only solution I could come up with that would not lead to a crash was a systematic winding down of our oil economy and transition into a sustainable economy any and all attempt to prop up the system will result in a crash.
And this time I'm confident enough to say will not can.
And probably more important for us the nature of the problem with its complexity and feedback loops prevents timing the situation we could crash in a few months or a few years.
What your seeing now is one aspect of the problem that makes timing difficult feedback problems like stopping short selling obfuscate the real problem. We have seen in oil that prices are not responding in a normal manner and various government reports on the status of production and stores has become increasingly questionable.
Expect the misinformation and resulting mistaken moves by whats left of a open market to result in swift changes once the truth can no longer be hidden. This is a critical part of the collapse of complex system
lies play a integral part of the process.
You can think of this as a physical problem a structural member in a airplane with hairline cracks lies about its state in a sense since most measurements cannot distinguish it from one that is sound. This concept of misinformation does not require humans. Another example is a snow field on the verge of avalanche its almost impossible to detect much less time. Humans of course use a more blatant form of lie making even obvious problems opaque to many but thats just icing on the cake.
Shorts are the only people buying when a stock is falling without them stock values can and will head quickly to zero as sellers panic once they realize that there are no buyers at any price.
Good luck to all and maybe in 5-6 years we can use HL to figure out when peak oil should have been.
Sigh....Naked Short Selling (NSS) has always been against the law; it's just that the law hasn't been enforced for the last 40+ years. I pointed to this issue soon after becoming a member of theoildrum collective 3+ years ago. Some found the issue interesting and pursued it; and since it's mostly off topic, I rarely revisited it. NSS cost me about 1 million dollars. Actually, the equity was stolen through fraudulent stock manipulation primarily consisting of NSS. Legal short selling is another matter all together different, primarily because it's legal when executed correctly. I believe very strongly that our current financial malaise started with 2002's massive increase in predatory NSS, which many complianed about, and offered eveidence for, to the SEC, which proceded to protect the lawbreakers. I repeat, the SEC colluded with billions of dollars in NSS that ruined many investors and started the current unraveling of the financial world.
There are quite a number of people who were making 7 and 8 figures that are responsible for the current financial mess. Yes, everything happening now would never have happened if the laws and regulations were enforced. The propaganda system wants to ensure few people understand that fact.
If there's a hero in this, it's Patrick Byrne, CEO of Overstock.com, who almost singlehandliy took on the NSS pirates. Then there's the mysterious Bob O'Brien, aka theeasterbunny, aka dirtydirtydeeds, and some select others, who helped to form the National Coalition Against Naked Shortselling--NCANS. The blog and message board war carried out against the paid bashers of the NSS hedgefunds was intense and heated at times--I mean how often do you get to "debate" the people stealing your money, who know what they're doing is illegal and almost boast about they're freely breaking the law. (PDF letter from NCANS to SEC outlining position and complaints against NSS and "RReg SHO.")
It has been long standing Republican ideology that government is the problem. One should not be surprised that when such people are placed in positions to enforce the law they do not do it. The Bush administration only enforces laws that suit it. It ignores the Constitution using fear, flag waving and patriotic rhetoric to justify things that would have been unthinkable years ago.
I find it odd why NSS was not balanced with Naked Long Buying where one could buy stocks that don't exist. Maybe it would have made the fraud so obvious that even the government hating and rule of law despising Republican officials could not ignore it.
In any case I find the concept that things that are borrowed can be sold to be rather bizarre. If I rent a car and try to sell it, I would expect to be arrested. If I borrowed a friends tool and sold it, it would probably be the end of the friendship.
While short selling may make for market liquidity short term, I doubt that there is a long term benefit to it except to market makers and those specializing in it.
There are many markets that are liquid with out short selling. The labor market comes to mind. Clothing markets don't have short selling and yet no one runs around naked. Same thing goes for food items not trading on the commodity exchanges.
Short selling facilitates the market makers and the flipping of financial assets quickly. It helps to create fast market conditions where long term investment is held in contempt because no one is committed to their investments. If investments were less liquid like real estate, people would likely not be so flip about buying a particular stock or commodity.
Volume of trades would slow, much to market makers dismay, but financial decisions would hopefully become more sound since buyers would be committed for longer time periods due to illiquidity. There would still be ups and downs as in the current housing market, but I doubt the world would come to an end or that markets would cease to function.
"In any case I find the concept that things that are borrowed can be sold to be rather bizarre. If I rent a car and try to sell it, I would expect to be arrested. If I borrowed a friends tool and sold it, it would probably be the end of the friendship."
Wrong analogy. Its not a car or a tool, its a cup of sugar. I borrow it from you, to pay back tomorrow (plus a small fee). I'm guessing sugar will be cheaper tomorrow than today, so I sell today, and buy it back tomorrow. After I pay you the fee on the loan, I pocket whatever difference is left. Of course if I guess wrong, I have to pay more than I sold it for (or at least enough that I can't cover the interest I'm paying you without losing money)
Naked short skips the borrowing part. I find a buyer who wants sugar. I offer to sell him some at slightly under current price, if he waits till tomorrow for delivery. Since I don't actually own any sugar, I take my contract to the bank, show them that he's gonna pay me this much tomorrow, get a loan, and then use that to buy sugar at the last minute. Again I'm gambling that sugar will have dropped enough to give the buyer the discount, pay the interest on the short-term loan, and still leave some profit for me.
Either way, since some sugar didn't get purchased today, the odds are good that the price will drop slightly tomorrow. If we all do this, we can artificially push the price down (and then yo-yo it back up as we all try to cover our shorts, leaving the last few guys hung out for a loss)
I would describe the benefit of short selling as follows: Two parties - A and B. A owns a stock at price C. B owns none. B implicitly acknowledges the validity of price C by not buying at that price and by not selling at that price. B can only sell by a short sale since B does not own the stock. If short sales are blocked then, when B no longer acknowledges the value of C, C does not directly adjust in response. The market in the stock becomes illiquid. A eventually loses confidence in price C and sells to run away from the uncertainty.
we can argue about the benefits of short selling until we are blue in the face. given a long time horizon I might agree that short selling doesnt add a huge amount to the market. but given a long time horizon, the market doesn't add happiness or well-being to the planet or it's denizens. the issue at hand is there are hundreds of funds with trillions of dollars at their disposal - changing the rules of this magnitude is like a big ocean wave hitting a river canoe - it will teeter - it will rock back and forth, and its a coin flip whether if will capsize.
same here
basically a load of guys are just betting something is overvalued..
is it or isn't it?
are all those mortgages correctly valued or not?
I would agree with Karlof on NSS. In general, some regulation and oversight is necessary and SOME authority needs to step in take proactive action as in the well-known case of overstock.com. The repeal of Glass-Steagall was another 'free market' disaster.
Karlof1,
I feel your pain on the naked short selling issue. As you say it's simply a case of ordinary fraud. Even the most libertarian, laissez-faire free market proponents recognize that the government has a policing role in preventing fraud. I think that part of what happened is that selling short is conceptually slightly difficult for the average person (even more difficult for politicians). Since selling short in futures markets is completely normal, fair, and integral to the central concept of futures markets, somehow it's not obvious that shorting equities is not strictly analogous to selling commodities contracts into the future. If you allow shorting of a common stock without borrowing it, it’s functionally equivalent to counterfeiting the stock and selling it on the open market.
However, I think that an explanation of the current financial meltdown is incomplete without considering the unprecedented credit expansion. In his book Money, Bank Credit, and Economic Cycles, Jesus Huerta Desoto gives an interesting historical overview of the phenomenon of boom and bust credit cycles caused by bankers using fractional reserve banking. It's been going on since antiquity and is always characterized by bankers co-opting the political system to create inflationary booms followed by busts. In fact, the current debacle is only unprecedented in its scope. The grand scale of this boom and bust seems to me like an outgrowth of digital information processing. There is no way that the bookkeeping required for the massive de novo creation of financial derivatives could have been done without electronic digital processing and storage. This issue is currently mostly framed in political terms but it seems to me that it is largely a technical problem of how to regulate fractional reserve banking in an era where the "moneyness of credit" (to quote Doug Noland) has taken money creation out of the hands of central banks.
"when peak oil should have been."
I don't get this memmel ? It sounds like what I would expect from Danny Boy "Jerkin" Yergin. But CERA's pRojeCTions were based on BAU + Technology saving the day.
The past few weeks look like RIP for "BAU."
This Current Stunt in the markets looks like one Major Mileston for Bakhtiari's T1 Phase of Transition.
''The problem is that we now are in 'Post-Peak' mode, and that none of [the pre-peak assumptions] above applies anymore.
'But even during that rather benign T1, the unexpected might become the rule and the orderly 'Pre-Peak' rapidly give way to some chaotic 'Post-Peak.'"
http://www.moneyweek.com/investments/commodities/why-we-must-take-peak-o...
I'm predicting a war with Iran in the near future. These market moves will have a negative impact on the oil industry and future projects well beyond the current price decline. Even if I'm wrong about war with Iran in the short term in the longer term the chance of war in the world just went up 1000% fold.
These above ground events and others will serve to disrupt supply and to some extent demand over the coming years masking the geological potential production. In many cases producible oil will be left in the ground because of war.
This is what I mean by we will never know. We may never pump oil at anything like the current rate literally any day now. And we may never return to the point that we ever again extract oil at its maximum rate.
In my opinion these above ground factors have probably resulted in and effective peak geologic or not I doubt we ever pump as much oil going forward as we are right now. But on the same hand we will never know when the real i.e geologic peak happened.
This is the key point, imo. I've always maintained that once Peak Oil became an established reality, it would be the geopolitical environment - in reaction to that reality - that would determine the fate of the industrialized world.
It will be the moves that nations make which will ascertain how the remaining supply of oil will be dispensed, not the total quantity of recoverable oil itself. Thus, PO, though a highly significant factor in the coming demise of this global society, will not be the determinative one. When all is said and done, significant amounts of oil will forever lie untouched, as mankind starts all over again.
I understand the idea of a chemical phase transition but struggle to map this to time periods -does Bakhtiari's 'Transition' indicate a brief period of economic dislocation as we move between periods or does it refer to the periods between these dislocations?
E.g. if transition 'T1' is now (2008) and T2 is in -say- 2012 then what is 2005-2007, 2009-2011 refered to as? (or does it mean T1=upto 2008, T2=2008-2011, etc.)
[Remember that he thinks the transition periods relate to shifts of ever increasing decline rate and the shockwaves that this will cause...]
Nick.
Yes, the late, great Dr. Bakhtiari's Transition was based on the timing of peak and subsequent increasing rates of decline.
The exact timing for each phase was left vague, but each refers to a period in oil production history. The economic and geopolitical dislocations occuring would be symptoms of the "phase change" taking place.
Thermodynamic phase transtions might work pretty well as an anology- from ~2005 through the present we've been at Peak Production, or the Melting Point... and as we have been witnessing, our world economy and geopolitics are Melting.
I wonder what the period covering the Boiling Point will be like.
Aren't you forgetting Pixie Dust? Oh, looks like Captain Hook has captured Tinkerbelle and Peter Pan has left Never Never Land. Oh well...
Apologies I'm replying to this page which I'm very behind with reading, but this looks like a serious misunderstanding:
But shorts don't buy, instead by definition they do the opposite and sell. And they cause the price of that particular thing to fall faster not slower.
Ok, a point for the doomers.
Maybe they could outlaw poverty, unhappiness, and Britney Spears while they are at it... :)
Einstein? Ho, he puts him up as an authority! That bugger never even got it clear in his head, never understood, gravitas! I mean look at that hair, strictly hippie wananbe! Didn't get it even generally!
Come on, he got it "relatively".....
(collective groan)
sorry, couldn't help myself....
Mash
Father, Farmer, Doomer, Engineer, Drummer.
Next step: ban selling stocks alltogether! We will be rewarded a never-ending boom without bust, and no more "creative destruction" will ever sour our days.
Communism just arrived guys, the great bright future of never ending prosperity is here. Oh my Goodness.
I am sorry for all of you who are involved ..... but is the the U.S. government and the Fed´s in a Wile Coyote moment with Wile going way over the cliff edge with a Big Ivan Thermonuclear device firmly attached to his helmet and his tail on fire. Isn´t Wile just trying to blow out his burning tail?
I don't have a link for the following article, but it's pretty interesting. You can see why it appears that government officials are in a full blown panic mode.
Platts Says Oil Companies Shunning Banks for Trading
This is stunning. I don't blame the oil industry for losing confidence in the banks.
There is no "FDIC" to cover future's contracts with banks that might be liquidated long before the Future arrives, and insurers of banks derivatives, etc, like AIG, certainly no source of confidence either ?
Story at Hellenic Shipping News.
Morgan Stanley quits Platts oil trading window
Here's the original story at Bloomberg.
I agree, but there must be limits. The bottom line is hedge funds should not be able to short a struggling company into the dirt. This decision would be like cutting off your arm cause you've got a mole though.
Here is a wonderful idea. Let's ban hedge funds!!
And I have another wonderful proposal. How about we declare a "Traders Strike" tomorrow to protest the changing of all these rules. That would show them.
What? I needed this bump to get rid of my remaining long positions once and for all. In fact, sell longs and shorts (now that money markets are guaranteed) and wait until someone tells us what the rules are going to be.
This is a truly fascinating month, one that will be talked and written about for a long time.
Yes! Let all the traders on Wall St take Saturday off.
Maybe Bush ought to do what FDR did and declare a trading holiday till the end of the month.
Oh no, the weekend again!!!
Seems like the FED & treasury are busier on the weekends.
So, what's left to prop up?
How about a large bank failure that drains the FDIC and necessitates a bail-out of the FDIC fund?
Our Congresscritters will be working through the weekend, hammering out the details of the bailout plan.
Reason enough to worry...
Does any of this craziness move you closer to the "fast crash" camp?
Cheers
Not me. I have read the Archdruid Report.
In fact a monetary and economic crash is likely to prolong the environmental one. The wildcard being frozen methane, of course; there might be a Permian event just around the corner...
How did you come to this conclusion? Are you saying that if we have no economic crash we will have a quicker environmental collapse? Sorry for all the questions but your statement leaves me scratching the old head bone.
It stands to reason. I mean, the fall of the USSR added a few years to the date of peak oil - just looking at Russia, they had a decade with consumption dropping from about 4Mbbl/day to about 3Mbbl/day - factor in the other FSU and former Eastern bloc countries and you get four or five million barrels a day demand disappearing, rather than increasing steadily as it would have been with business as usual.
Economic collapse --> reduced demand for resources --> less impact on the environment globally - except for forests. Basically wood is the only thing which gets consumed more during an economic downturn or collapse, since it's free (or cheap) heating and cooking fuel.
Whereas economic boom --> increased demand for resources --> more impact on the environment globally.
Nope. Quite the opposite, actually.
So does this mean that there might be no shorting of precious metals? If that becomes the case things could really get interesting as it relates to financials and thier short positions of gold and silver. John
Exactly! If they disallow short selling - where do they draw the line on hedging? Can you short sell oil futures? Corn?
Microsoft futures?
My response to Dragonfly above was going to be "they just made hedge funds activities illegal...they don't have to ban them."
It's either a scare tactic or the precursor to a drastic change in our finance and governance structures.
You choose.
Yeech! Thank goodness I'm (way) too poor to be running in THAT crowd! (I think...)
I have been short Microsoft (well zero interest really) since discovering Linux in 1995.
Shorting a struggling company warns the public that the company is struggling. That makes it harder for that company to get credit, but that also means that if the company goes under, it doesn't drag down any lenders with it.
Which makes shorting a company a public service.
I agree again, however, an individual shorting a few shares, and a hedge fund shorting a few million shares are a bit different. AIG is a great example, it has plenty of assets to cover itself, but it got eaten by the market before it could liquidate anything thanks to overly aggressive shorts. Did it deserve to go belly up? Maybe. Did it deserve a shot to try to right itself? Probably.
If it wasn't leveraged 35-1 then the small amount of shorts would have made no difference and the shorts would have lost their shirts. AIG was overextended, plain and simple. Someone called them on it. Too freaking bad. I cry no tears for gamblers who are in over their head 35-1.
Hey hey GreyZone,
I voted your post up, but I also disagree. It is more complicated than that. Highly leveraged gamblers being punished is fine by me, but fundamentally sounds companies being driven to bankruptcy by hedge funds (also highly leveraged gamblers) is another.
Which camp is AIG in? Insurance is inherently a leveraged business. If the insurer ever has to pay out on all of their claims at the same time then the company is toast. AIG insures financial products with credit default swaps, which have collateral requirements. AIG was shorted down far enough to force the credit rating agencies to down grade its credit. When its credit was down graded its collateral requirements went up and it had to come up with billions overnight or file for bankruptcy. A self full filling prophecy.
Now, I think AIG was toast anyways. IMO, they made bad bets and would have had to pay out on more claims then they are capable of paying. But, do I get to make that call? And, is it possible for me to kill a healthy company the same way?
Lets say that my next target is a railroad company. This company took on debt to upgrade to electrified rail and expand in preparation for peak oil and it has entered into contracts to hedged against energy price increases. Then energy prices ease and the economy cools. The company has suspended dividends and expects to lose money for several years until the economy picks up. It's on the edge right now and I think that I can make a ton of money by pushing it over.
This example is a little over the top, but nothing is ever simple. How do you set things up so that there is liquidity in the commodities markets so that energy consumers can hedge and liquidity in the stock markets so that investors can short and still prevent people from killing something off because it is worth more dead than alive?
The whole system needs to be reworked.
I don't understand - how can shorting affect the value of a company's stock and assets?
Sounds like you and Nate just got trapped in a short position to me.
What you guys don't think lender's can do their own due diligence.
You think you are doing it for them buy shorting a stock to the ground because you think they are not viable.
Hahaha, sounds like a bunch of whiners to me.
Sounds to me if you don't like a company you shouldn't trade it.
Sounds like to me that shorts want to make that decision for you by the oldest hustle in the book price manipulation.
If you are worried about crude prices going to the roof then don't buy it. But of course your greed, lack of morals and me me me me mentality will not allow that.
Bend over and kiss your pie hole good bye
you have absolutely no idea of what you are talking about.
Uh...the pie hole is the one the pie goes in you idiot. A troll, and a stupid one at that.
So we rely on anonymous investors to do the job the bankers should have done in the first place. I was a little surprised when I learned about mortgage bundling. Someone not credit worthy gets a loan which is grouped with the credit worthy and then sold. The original lender made a quick profit off a loan which may not even have its first monthly payment due. As long as bad debtors were a small enough percentage of the bundle everyone made a good profit. A few years ago these failing banks were making record profits by bundling. But now that fuel prices are triple what they were 8 years ago pushed more people over the line of worthiness the bad loans have become an increasing percentage of the bundles. If mortgage bundling had been illegal then the original lenders would have been more careful with who they lent to. With fewer people out of the real estate market the housing bubble would have been avoided and today's crisis may not have happened.
The same would have been true if the commercial bankers had been more careful about the business plans they backed. Instead they bet on making a killing with the IPO which is what had happened in the dot com bubble. The question then becomes what will the next bubble be? More Pacific Ethanols? Wind farms? Lithium?
From what I am reading now in the New York Times about a Vast Bailout agreed to by Congress and the Senate, I can only assume that Paulson and Bernanke went into a meeting with an extremely urgent doomsday scenario.
I have no idea what is going on, but it's very very bad.
From my Hubbert's Peak-aware perspective, the program to remove illiquid mortgage assets from the balance sheet of banks is conducive to an ACCELERATION of a doomsday scenario due to physical, not financial, constraints. In Easter Island's terms, they are trying to remove a financial obstacle to the continuation and expansion of moai building activity.
The importance of the matter leads me to propose to TOD editors that a poll similar to that for oil prices be set up, asking TODers:
My first comment to Nate when he sent me an email about this was "Hunh?"
My second was "what about the uptick rule? why not just put that back in first?"
The third was "this is either a scare tactic to induce a massive short-covering or it's TEOT(F)WAWKI."
Fear and panic in the air.
Fannie and Freddie get bailed out.
Lehman goes bankrupt.
The Fed lends JPMorgan $138 BILLION to settle trades with Lehman (smells like a stealth bailout of JPMorgan - close off positions with Lehman)?
AIG gets nationalised.
Morgan Stanley, Wachovia, HBOS, Lloyds all talking mergers.
Goldman Sachs share price goes off a cliff.
All this in the space of a few days?
If this is what is made public, imagine what is happening behind the scenes.
Don't forget Washington Mutual (WaMu) because its failure would likely bankrupt the FDIC.
I'm with you Goose, put back in the uptick rule. IBD also agrees with you. (See today's editorials.) I always thought the uptick rule made good sense and to re-instate it now would, in my opinion, be preferable to no short sales.
All I can say Nate is that all this blatant "changing of the rules on the fly" and overt manipulation (whereas prior interventions were in the shadows) means that there is some scary sh*t going down. The big players (large corporations and government officials) are panicking and pulling out all ammunication to keep the wolves at bay.
I said awhile back that I think our future will see the nationalization of all important resources in most countries jockeying for control. Once complete (nationalization), globalization will cease and the big daddies will go mano a mano.
Today's events were very bad tidings indeed.
The creation of new, supposedly short-term rules to offset behaviors largely caused by previous rule-changes and lax policies is highly suspect and dangerous, in my view. The rules should never change during duress and should never take immediate effect. Once again it seems that these changes will benefit those who took unnecessary risks for high rewards when times were good, yet cannot stomach the fallout as times get hard.
Normally I would think that bankruptcies and fire-sales would be the result, and that savvy cash-rich investors would have a field-day buying up the remains. Though financial defaults are expensive and damaging, resorting to these sorts of actions during weekends and evenings and springing new rules on market players on a daily basis seems far worse. It is worse still that it seems to be driven by political entities and the affected stocks, rather than a blue-ribbon team of market experts.
In the long run, I'm sure the market will adapt, but I suspect it'll do so this time by bumping way up as short-sellers hit the sidelines, and head just as far back down as the fundamentals sink in again. Surely somebody will come up with another, less visible way to bet against companies (derivatives, again?). Nothing about these moves will help provide stability or add trust to the market.
May you live in interesting times.
This reminds me about when the dot.com crash was half way over, Greenspan did an emergency 50bp rate cut in the middle of options expiration day. Stocks went up 5-10 percent that day, as I recall, but the down trend resumed a week later.
You know it is really bad when the market goes up 400 points and half the talking heads on CNBCs Bubblevision are mad.
Equity = short bus
Nate,
This applies only to the stock market, right?
It seems to me that the prevailing modus operandi in the financial world as far as the commodities markets go is exactly the opposite: ban the longs, encourage the shorts, so as to drive commodities prices down to the breaking point.
Any thoughts on this disparity?
Why would the capital markets collapse if people could only sell stuff they already owned? Why the heck should people be allowed to sell stuff they don't own in the first place? That's not how the rest of life works. It is the existence of short selling that requires justification, not its elimination.
What's so special about the Holy Marketplace that all rules connecting investments to the real world should be allowed to be diluted or severed? If it is so sacred to be allowed to sell things you don't own, then I have a bridge in Brooklyn I'd be happy to sell you.
Increasingly fantastical derivatives that are divorced ever farther from the underlying things and activities that produce real value have been one of the major causes of the current financial crisis. The Holy Marketplace has become nothing more than a gambling casino where if you are a little guy you can lose everything, but if you are a big enough Playah you can either win billions or have all your losses bailed out, i.e. unlimited upside with zero downside. The crusty old phrase "moral hazard" comes to mind.
Gambling in the stock market is not a value-generating activity. The world will not collapse if less such gambling is allowed to go on, especially if it is largely the extravagent lengths to which the gambling has already progressed which is causing the entire Ponzi house of cards to come crashing down in the first place.
Utopia in Decay
http://home.comcast.net/~kevin.cherkauer/site
Kevin Cherkauer
first of all, (especially in a world of flat to declining energy gain), gambling in stock market and in casino are identical except for timeframe -you pay the house a small commission for a long term bet with negative outcome.
I agree that the roulette wheel that has used Credit Default Swaps as a leveraged switchblade to disembowel companies needs to stop. But short selling provides a very valuable function. Liquidity for one. Information for another. If they disallow short selling the only possible way they could do it without destroying the credibility of our market is to postdate its start - to 2010 or some such..
The entire financial services industry does little to generate value. Over time we need a large labor shift into energy and other value producing sectors. But as I said above, not overnight..system is too fragile to begin with....
The entire financial services industry does little to generate value.
Far too narrow a statement. What parts of our economy do generate value that will be meaningful in a post-peak world? Certain not the "defense" industry. Not the auto industry, what's left of it. The airlines? Go down the list, tell me? Value has to be redefined to mean, not profit, but relevant to survival and to conserving the resources that will be vital to survival in the remainder of the century.
sorry - I have no time for making comments, let along putting up this post - turning computer off now. What i meant was that there are more people now (or until just recently) as a % of our population (and in aggregate) employed in financial services than at any time in history of our country since 1929. Most of them just pass around a hot potato and take a bite first.
John Bogle, founder of Vanguard, estimates that the financial services industry siphons $560 billion annually out of the real economy. He understands it better than I.
But you and I Dave, agree that our priorities are wrong, bygolly.
Nite
Nate
Actuaries are really part of the financial services portion of the economy.
The financial services folks sort of make sense, if you have a constant growing economy. Once that goes away, compound growth and all the other things that make their products work goes away. There is no longer need for more than a relative handful of financial services people.
That is my view as well.
There's a reason why usury (charging interest on a loan) was considered a terrible sin in the ancient world. It's not something a steady-state economy can support very much of. Let alone a shrinking economy.
Amen. And thence it should return.
Perhaps it was here or on another site but charging interest was only for agricultural seed transactions. Someone would loan a new farmer some seed and was repaid that seed and a sack more if the crop went well. If the crop failed the loan of the seed was forgiven.
Intermediation (brokerage) adds economic value in the sense that by bringing buyers and sellers together quickly, they save both a lot of time and trouble and facilitate a transaction that might not otherwise have even happened. It is that service to the buyers and sellers that adds value, nothing more.
This was pretty much how the financial services industry worked for centuries. What has developed over the past couple of decades goes far beyond this.
Chairman Mao already tried the "drive them back into the fields" management theory in China. Didn't work then, won't work now, won't work in the future.
RC
"But short selling provides a very valuable function. Liquidity for one. Information for another."
Boy I bet that is some unbiased reliable information they provide too!
As for liquidity...I have a hedge fund...I bet my clients money on shorts (not my own, my clients) then I spin rumors against the firms I am shorting...
Yeah, that's a valuable function alright.
Several months ago, rumors were being spread of "runs" on banks that even now when they are at deaths door have not seen a "run".
This is "hysteria marketing" pure and simple. The short sellers could care less about "rooting out currupt management" or "providing information. There may be a use for them in very limited circumstances (just as vultures and maggots provide a cleaning service of sorts) but a market ruled by them is no "market" at all, it is a feeding frenzy...smell blood in the water and attack...and if you can't smell blood, spread rumors and create some.
But you can't outlaw it or stop it, I assure you. Instant 24 hour internet and cell phone communications has made it possible. What's the Fed going to do, outlaw those?
RC
You have no idea what you are talking about. One of the canaries in this coalmine was the guy who was shorting Bear Sterns. He made public statements about the problems at BS. He went on TV to talk about it. If anyone had listened to him, some of the problems we are in could have been averted. He at least gave the ordinary citizen a chance to sell Bear before it went belly up.
The idea that more than a few short sellers are trying to manipulate the markets is a complete crock. Most short sellers are tying to make money, just like everyone else in the economy. By doing that, they performa a valuable service, or they lose their shirts (like the people who short POT).
Basically what is happening now is that we have a serious threat to the functioning of the economy on account of the clueless public being whipped into a frenzy over "short sellers" and "speculators".
Oh, well. In the end, you get the country you deserve.
I think they were pretty much forced into this. As Denninger pointed out on Tuesday:
Once they started down the bailout path, this was inevitable.
It looks like the connected (who appear to be singlehandedly controlling the USA right now) have no intention of controlling, scaling back or God forbid regulating this derivatives BS. Which means that the bloodsucking of the productive economy hasn't even started yet-it is like a cokehead finding a sugar daddy or mommy. Should be interesting.
Yea, Leanan, with the ban on shorting stocks, the SEC is trying to stop hedge funds from driving share prices down and corporations to their ruin. I think something is about to happen, the announcement will be made after 5 pm, that will send the stock market crashing. The SEC is trying to mitigate the crash. Bloggers like Mish, Mike Shedlock, are angery at the decision because he works for Sitka Pacific Capital Management, a hedge fund. His company likely just lost big on its short positions. These hedge funds are not regulated sufficiently, and their activities are hidden. His friend (and by posting the email, he) whines like a Libertarian against government regulation and intervention knowing that hedge funds are being punished for their greedy excesses. His friend blames a huge list of individuals and institutions for the current economic crisis, including presidents from more than 70 years ago, to hide (prsumably) himself among the forest:
These are the guys who carry the risk of collateralized debt obligations based on sub-prime mortgages and are desperately trying to recover their losses by driving share price down to reap the rewards of selling short. Some of the players who created the subprime mess are being punished.
Burn, hedge funds, burn....
This kind of reminds me of Ayn Rand's Atlas Shrugged, where toward the end she has the powers that be thinking that if they can just bring the entire economy to a complete stop, then they can sort things out and make it all work right.
I'm wondering at what point it is going to start dawning on some corporate titans that being a public corporation is no longer advantageous, and then there is a massive rush to go private?
Sure.
But the target is deserved because marked to market they all are less then zero.
This is also why the drive for the bailout comes from Clinton and Shumer. If the crooks on Wall Street don't get bailed out, the whole state of NY (as well as their main subsidiary in CA) is bankrupt.
Look at the main figureheads at the meeting to push this through. Pelosi, Reid, Dodd, Frank, and never mind that the main economic advisers from the D side come from Morgan Stanley and Goldman Sachs.
It's just as easy to talk your book in a long position as a short one. Talking your book should be what's illegal, not shorting.
The law allows me to sell dollars I don't own in exchange for housing, college education, cars, and really anything.
Shorting stocks is the same idea. Banning it is a huge mistake. Short sales help prevent bubbles from forming, and they help pop them way earlier than they otherwise would.
Short sellers are the scapegoats for this week.
As I understand it this is only about naked short selling; where you cannot even guarantee that you will be able to purchase or borrow the stock you are selling and may fail to deliver on time.
Short selling is being banned full stop in the UK, not just naked short selling, AFAIK.
No, it actually appears to be all short selling. That sounds kind of desperate.
Naked short selling is like being granted a loan without income or asset, regular short selling at least has some minimal insurance that the loan is likely to succesfully be repaid.
To extend your analogy, banning all short-selling for a time is the equivalent of having bad credit worthiness.
Actually, that isn't true.
There are plenty of companies out there that "short" products.
For example, I am sure that, at some time during your life, you have ordered something from a store (either brick-and-mortar or online) and were promised a delivery date, but then the delivery date passed. You then proceeded to contact the company, only to find out that they didn't have the product in stock and that it was backordered. They then promised you a new delivery date.
This is essentially the same thing. The company is selling you a product that they don't have on-hand. This would be called a "naked short" in the market. The company then goes to purchase the item from someone else at a lower price (one of their suppliers).
Many people refer to this as a Just-In-Time Inventory system.
The store can get away with not providing the bricks they promised you, the brokerage firm can't. They have to go to the market and buy the stock to deliver to you. Home Depot doesn't have to go down the street and buy you bricks from a competitor.
If I understood the short-selling-and-bear-stearns theory, the idea was that short sellers drove down BS's market capitalization, which rendered Bear stearns unable to obtain short term loans.
To which the rational response is GOOD. If they were going under, it's good that they didn't sink anyone els by taking out bad loans.
The other response is that lenders aren't going to look only at the stock price when the remaining investment banks come to them for loans. These are rational people with a cautious outlook as it is, and so the loans won't happen anyway.
So this rule change won't save anyone.
I kinda figured the financial system might be the first thing broken.
There's a reason many peak oilers have it all in cash or gold. Or toilet paper...
Cash doesn't seem like the safest place for it either. I'd wager a guess if Peak Oil hits hard inflation would be out of control... I think I'm going to empty my swimming pool and start hording gasoline.
Hoard gasoline? I heard that it goes "bad", like milk, after a while.
it does, not as fast as milk, but it does. one word: stabil
Fill it with Silver bars instead.
Let me know when you find silver bars for sale anywhere near spot price.
They haven't been available on apmex.com for months.
1. I had to check myself and sure enough ALL silver bars, including the "always" available 1000 oz Comex deliverable are gone. Nowhere. Wow. (Fwiw, if you don't mind the paper trail APMEX has been very good to us...)
2.In times like these the spot price becomes irrelevant; what you should consider the spot price is what you'd need to pay for any given ounce. It's been interesting to see the large swings in premiums among precious metal dealers.
3. I am assuming(!) that it will only be a matter of time before the "markets" (and holders of dollars) realize the massive monetization of debt and dilution of our money supply inherant in this massive move from TPTB.
4. Thank you TOD and all involved.
Optimists buy gold, pessimists buy guns, realists buy socks. We don't make socks in America anymore.
best post of the day, sums things up nicely.
I looked at apmex for the 90 percent silver bags of dimes, quarters and found the price to be a dollar an ounce over spot...That markup seems very high. Does that seem normal to all at TOD?
It isn't normal, normally. Funds like SLV can be shorted; although I don't know how (and am too lazy if I did) to do the research, I assume that some of the central banks or other parties have been shorting it, even if it means losing some of their money, to drive its price down.
The inevitable consequence of a command economy (where the price is artificially set) is shortages of the product. Holders of the stuff aren't willing to sell, so they just keep it. Think of stories of the empty store shelves in the old USSR, for example.
The other inevitable consequence is a black market. While the premium-over-spot isn't quite a black market yet, it does hint that the "price" of silver has been artificially manipulated.
If it's only a dollar an ounce over spot, it's probably to good to be true. My brother says the premium is around thirty percent for actual silver vs paper silver as of a few days ago.
Try Tulving.com; Comex bars at $0.79 over spot NET
Inflation vs. deflation is a long-time debate here. Stoneleigh says it will be deflation - massive deflation. Cash will be king.
She could be wrong, but after what's happened the past week or two, it's hard to bet against her. She's been warning about this for a long time.
I've had an ongoing argument with her about this.
The guys predicting inflation also predicted the events of this week, years ago. Read Eric Janzen, Jim Wille, Ty Andros. They all expect a financial collapse.
Inflation is thought to come from the government efforts to fight deflation. All the bailouts we are seeing.
The government response to the Great Depression was to devalue the currency by 40%. This was done by confiscating gold and then changing the gold peg from $20 per ounce to $35 per ounce. In other words, the government response to the Great Depression was to ENGINEER INFLATION of 40%.
The government response to the Second Great Depression will be to bail out everyone in sight, doubling the national debt to around $20 trillion, and thus, since we have a floating currency, leading international investors to mark down the value of the dollar by 50%.
Since we no longer have a gold peg, the US can't just declare a devaluation. But they can bring about a devaluation by engineering inflation, which they do by simply running up debt until the world marks down the value of the dollar.
The idea the a government can ever be in a position where it can no longer engineer inflation is not supported by either the Great Depression (they did it) or the Japanese experience (they did it - look at currency, not CPI).
Karl Denniger, Stoneleigh et al have been arguing the Fed cannot engineer inflation - but their arguments overlook the fact that Ben and Paul will simply re-write the rules until they create a structure which allows the desired currency devaluation to take place. Constitution be damned.
After going back and forth alot, I think hyper-inflation is where things are going.
I think this will start when China, Japan, Europe stop buying our bonds. At that point, the government will have to loan money to itself and the financial system and repayment terms will be very loose.
One of the pivotal questions is, can the government create / distribute money as fast as it can be destroyed by defaults. I think the answer is probably "yes" although perhaps not very evenly.
It is easier than ever for the government to increase the money supply, I don't understand how we could have long-term deflation when increasing the money supply can be as simple as changing numbers in a computer.
Then again, I am not a financial expert at all, just read alot about money.
As was mentioned up thread, FDR did a 40% inflation after a 60% deflation. Agricultural and other products were still lower priced in gold terms afterwards than they were before the deflation. Depends on when you are starting your deflation clock. Before or after the First World War?
We are going to have to just give everyone an ATM card with two thousand new dollars on it and start over again. We are not going to be able to untangle this mess.
Your assets will be confiscated to pay off the pensions the various levels of government have run up, or at least a portion of them. Maybe an equity stub will be left and the government will give you ten percent of your NPV of social security, etc, so you can trade stocks and provide a liquid market?
The Republicans have promised to privatise at least part of the stock market and the present situation looks like they are going to make good on their promise.
This is larger than a US issue. Beggar-they-neighbour devaluations (by whatever mechanism) may come from a variety of directions, and knee-jerk herding reactions will also cause pronounced swings in relative value, making the net effect unpredictable. Personally, I would expect the dollar to rise significantly on a knee-jerk flight to safety (after the pullback that is currently underway is over).
As I have said on our site (click my screen name for the link), I wouldn't be surprised if the US ended up with the worse of both worlds - higher long term interest rates in the bond market, due to the deliberately created perception that it plans to 'print' endlessly, combined with no increase in actual liquidity as everything they 'print' ends up disappearing straight into the black hole of credit destruction. A sharply appreciating dollar would make this even worse, as will the on-going hemorrhage of confidence in the market that has been greatly exacerbated today.
As I said on the Drumbeat a few days ago (Sept 16th?). There is an important distinction to be made between the value of the dollar internationally and its value domestically in comparison with available goods and services. Internationally, relative currency value is likely to be chaotic, depending on which currency is deflating most quickly at any time. Domestically, credit destruction will collapse the money supply relative to available goods and services, so that asset prices fall across the board and purchases will be able to be made for pennies on the dollar. Cash will be king.
unless export and currency exchange are controlled, why would anyone sell goods and services cheap here for the devalued dollar?
Desperate people will sell anything they can for whatever they can get for it, locally, since selling things elsewhere for any other currency will not be an option. If they want to eat and make their debt payments, they will have no choice. This is exactly what happened during the Great Depression.
In any case, I expect the dollar to appreciate significantly, at least initially. It has been rallying since March, and I would expect that to continue for at least many months to come (although in the short term we will probably see a counter-trend pullback in the dollar along with counter-trend rallies in precious metals, oil, stocks and the euro). If there is a subsequent engineered devaluation, it will be dwarfed in its effects by the global collapse of credit. The net result will be deflation.
After the current short-covering rally (ie surge in artificial demand) is over, there will be no support for stock prices, as there is no real buying interest. We are likely to see a monumental price collapse in a relatively short period of time, with losses ricocheting through the derivatives market, magnified by leverage
Confidence, which was already ebbing away very rapidly, has been heavily undermined today. The resulting extreme volatility will wrong-foot many players, ruining both the reckless and the prudent, the creditor and the debtor. The only (relatively) safe place to be is out of the market on the sidelines in cash. Anything else is a very risky position indeed, even if you are confident that you know where things are ultimately headed, as short term fluctuations can wreak havoc with one's trading strategy.
will precious metal producers/dealers be desperate people, locally? if not, then why won't precious metal be a better bet than cash? dollar was gold backed during the Great Depression, no?
Given the prohibition against financial shorting, it occurred to me that short interest will increase dramatically for the non financials. Consequently, the prohibition against short selling will have an effect contrary to its intent. Or does Paulson not care about the non financials since his main mission is really to save them; let the taxpayer and the little guys take the hindmost. No doubt, after these latest irrationally exuberant rallies, there a bunch of overheated stocks out there that are ripe for the picking.
Right now,though, things are very confusing so I would tend to agree that trading over the near term would not be prudent. But still, when I see stocks that have not been beaten down zoom up twenty or thirty points for no fundamental reason, shorting is tempting.
Stoneleigh said:
Well that's the whole argument isn't it? The NET effect. We both agree there will be a catastrophic decline in asset values across the board, we both agree there will be a depression, mass unemployment, social unrest etc.
I think to some degree we are talking past each other as I do not expect the efforts of the Fed to bring about a recovery in asset prices. And I agree that people will be selling off their boats and trucks for pennies in the dollar.
I am simply saying that the ATTEMPTS to restart the economy will lead to the US taking on huge amounts of extra debt, and this will lead to a devaluation of the dollar. Particularly relative to real things ( food, fuel etc). If every other country is trying to devalue at the same time the exchange rate will be somewhat unpredictable.
The idea that the USA can run up another $10 trillion in debt without effecting the dollar/oil exchange rate is where we part ways.
Here is 'the Telegraph' documenting by the credit default swap the chances of the US defaulting, which is rapidly rising.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/21/ccliam...
Presumably this would lead to money a la Zimbabwe?
Deflation is what you will get if the government does nothing, and lets deleveraging take its course. On the other hand, if you get a bunch of government big-wigs gathering together in emergency meetings and announcing massive bailout programs, while the debt is being monetized by having the Fed buy massive amounts of Treasuries, then that would be a very good sign that we're actually going to get inflation. That is a sign you just might want to be on the lookout for. ;-)
No.
Believe me, no one thought the government wouldn't try to inflate away the debt. The question is whether it will work. Does Helicopter Ben have enough helicopters?
I think the answer is probably no, though we won't find out for awhile.
All the credit that is being destroyed...that is hugely deflationary. The Fed is bringing out its biggest fan, but it's up against a Cat. 5 hurricane. They cannot stand behind all the bad debt out there. They may try, but they can't.
Long term you are right. Deflation will win in the end. However, there is the short term to get past first, and the government can be counted upon to try the old inflation trick one more time before it gives up.
Actually I see it the other way around. Long term they'll inject enough liquidity, generate enough credit, print enough currency, etc. to inflate. Three or four years hence, that cup of coffee may be $20.
For now, we have deflation as the value of everyone's house collapses and takes the entire finance industry with it. The scuttlebutt is (thanks Stoneleigh) that the sheer magnitude of this disaster dwarfs the entire world economy.
In the really really short term (today and maybe next week or two) we'll see the markets -rise- from this injection of liquidity and the ridiculous distortion of trading rules.
Effectively, wouldn't Republican tax cuts eventually get put into bank accounts, thereby recapitalizing banks? (Possibly after said banks go bankrupt and are put back into business by their creditors?) Or to go further, couldn't the government just mail everyone money (energy rebate checks, you-voted-republican checks, please-vote-for-me checks), thereby increasing the money supply?
I keep hearing about these Republican Tax Cuts (tm). When are they gonna happen? My taxes have only gone up the last 8 years :-/
Oh, the tax cuts would only affect the richest 1% of the population. Not YOU.
Is that because you have made more money? Otherwise, I can't imagine why your taxes have gone up.
More money, but it's worth less. According to shadowstats, my income has gone down.
We are basically in financial overshoot. Over the past several decades, as the manufacturing base of the US shrank, and we became the world's biggest debtor nation, we have created this financial industry that has created more and more bogus wealth analogous to the 'ghost acres' that sustain countries that have a negative balance on sustainability. The Japanese and Chinese and a few others have been financing a greater and greater amount of the debt resulting from this bogus wealth and now we are discovering that a lot more of the country's wealth is bogus than we ever suspected. The past decades increase of financial instruments like Credit Default Swaps could be seen as analogous to the 'super straws' of the oil extraction industry. These financial instruments allowed creation of massive amounts of bogus wealth which allowed extraction of financial support from all the countries that have been buying US debt. We have now past the peak and are firmly on the downslope, or more correctly, over the cliff.
In principle, I am not sure that CDSs are bad. After all, they are intended to protect investors in things like corporate bonds. In principle, bond insurance doesn't seem like a bad idea. The main problem, as I understand it, is that the issuers of these CDSs haved not maintained sufficient capital to pay off the CDS holders in the event of an underlying default. This seems like fraud to me. Traditional insurance is regulated based on actuarial data. CDSs are not and therein lies the problem.
Those opposed to regulation, like McCain, would say that buyers of CDSs need to perform due diligence. The problem, however, is that the trillions of dollars worth of CDSs is threatening to bring us all down, the innocent and the guilty.
Anytime there is fractional reserve banking/lending involved, there must be some degree of fraud.
Mish had some interesting comments a while back that suggested that any "on demand" deposits should be 100% in the bank at all times, not touchable by the bank, not "sweepable", and certainly not lendable. Anything else the bank did, such as savings accounts, certificates of deposits, etc., should all be supplied with a very clear and obvious reminder that such deposits would be loaned out and that recovery of such deposits was always dependent on whether the cash was free or not at the time of the request. In return for loaning the money to the bank, people would receive interest and the risk they would take would be in making the loan. But checking accounts would be 100% off limits, subject to whatever fees, etc., but always present for immediate withdrawal.
Such a system would allow people to use checking, debit cards, etc., without putting money at risk if they did not wish to do so. And if they did, they would know it was at risk from the beginning rather than assuming their money is "safe" in a savings account. (This is where the government enabled fraud begins.)
The problem behind CDS is that they were a relatively recent "invention" and circumvented any specific requirements for capital backing them up. CDS are one major category of derivatives and not long ago there were over $750 TRILLION in derivatives worldwide - i.e. about $12-$15 in claims against every $1 in annual global GDP (depending on measurement method used).
So CDS are only the latest incarnation of the fractional reserve fraud system, whereby 100% of the people are fooled into thinking they have some form of money saved somewhere but there is only some subset of that money actually available for some subset of those people.
You know, the United States got along fine for over a century without a central bank. Inflation never became the monster that it has in the last 90+ years under the Federal Reserve (who, laughingly, were charged with keeping our money "sound"!!!).
(Click thumbnail to see full size image.)
Yes, but don't forget timing.
I'm sure that even Stoneleigh will accept that in the very long term deflation will most likely turn into hyperinflation for political reasons, ie a largely unproductive welfare society voting benefits to themselves.
Note that I fully agree with the deflation scenario, but even if one has the trend right one still has to nail the timing.
Maybe the speed of communication we have now will significantly shrink the meaning of long term, all one can do is watch and see.
One doesn't have to win the race by 14 laps as long as one gets there in front of the herd.
I'm banking on Kunstler's investment tip:
high quality hand tools.
What calibre do you suggest?
Standard hunting calibers, and don't expect to have to use them on humans. The only people able to hurt you are the ones able to reach you, and their numbers decline with declining availability of gasoline.
I'm investing in woodworking tools, mostly.
I was making a half-hearted attempt at humour.
A couple of hunting rifles would be nice if I decide to move closer to the mountains. Both to put food on the table and to discourage some of the bigger critters from getting too friendly.
The areas west and north of here have very few people at the best of times - and I'm not expecting that the coming decades will be the best of times.
Theare enough people on this site who talk like this in all seriousness, so I must insist on giving them discouragement even at the cost of ruining a good quip.
Gold could be next. In 1933, when the price was $20.67, FDR banned private ownership of gold. Anyone who objected was vilified as a "hoarder." (Sound familiar?) He reset the price to $35 in 1934. I would not be surprised to see a massive flight to gold if this short-selling ban is enforced.
Capitalism is dead - if it ever really existed - and owners of gold will likely be the next victims of its demise.
Wayne
We've all seen Gold rally spectacularly with the recent fears of financial unravelling -but if the stockmarket lift 'down' button removed won't that mean money piles back into this asset class -possibly at the expense of Gold??
(Gold hit almost $920 yesterday but fell $60 on the short-ban news...)
Nick.
I realize that. That's one reason I don't recommend putting it all in gold.
Indeed. I'm not sure if I have posted that point specifically, but I'm fairly sure I have. The big economic pounding has been pointing to the fall for some time. I kind of figured that's where everybody was looking, at least among those expecting an economic collapse of one size or another. It is a primary reason I keep repeating THERE IS NO TIME. That and a near-term peak.
Are many here really surprised?
Cheers
Historical logic places the date "Very shortly after the Nov. US election".
Or just before if Obama looks like winning?
Then they declare an even greater state of emergency, and the need for even greater untrammelled power.
A strike on Iran might do nicely, then the $700bn disappearing down the pan could be blamed on those conniving Iranians, who were plotting how to get bombed all the time.
The recent provision of bunker-busting bombs to the Israeli's does not engender great hope.
** snaps fingers **
That's right I forgot! I'm off to Costco first thing (or when they open at 9) to buy toilet paper!
Wait just a dagbone minute! Doesn't a 'speculator' buying a long contract have to have a short at the other end of the contract??? So if shorts are banned, how can someone be long without a counterparty? Please, experts, educate me....
(well, with cooler fall weather, we didn't want to wear shorts anyway:))
Some other long person has to want to cash out. Like the article says, it will make the market much less liquid.
(Doesn't a 'speculator' buying a long contract have to have a short at the other end of the contract??? So if shorts are banned, how can someone be long without a counterparty?)
No you have to have another buyer on the other end. Simple you buy something the sell it to another buyer if available at a higher price. If not available you keep lowering your price until a buyer is willing to pay your price.
It is simple it will regulate it's self short interest is the market destroyer it is not needed for anything other than manipulation.
Hmm, let me see.
"Advancing" "credit" means that money is given that will have to be paid back.
Money that has to be paid back is a debt.
Therefore, credit increase implies debt increase.
Debts are collectable in the future.
Therefore, debt increases imply increasing burdens on the future.
Therefore, increasing credit implies increasing burdens on the future.
As long as there is a belief that the future will be able bear the burden of the total of the credit advances, everything chugs along.
When it comes to be feared that the future will not be able to bear the burdens that have place on it. Suddenly, you can't short sell.
I am of the mind that obviously ample energy supplies/surpluses would be adequate to generate a faith that the future could bear its burdens ( environment be damned - too long a time horizon ).
I suspect that the financial bubble found itself constrained by the developing notion that energy is now constrained.
JP
Hey hey jp,
Note: I meant to write a reply to your post, but I ended up write a pretty long rant. My apologies.
I don't think that this financial disaster is due to declining, or even plateaued, energy supplies. A declining energy supply definitely would kill the finance sector, but it is also possible for finance to kill itself, as it did in the 30's. Like so much else in or world, the financial sector is in trouble because of exponential functions.
Finance grew in tandem with the economy, industrial output, for decades after WWII. Had it remained coupled to the real economy then it would have survived until peak oil killed the economy, but it decoupled. Sometime after the 80's credit, debt, and the financial sector started to grow faster than the rest of the economy. And, in a classic boom and bust cycle, the growth in the financial sector propelled growth in the real economy which drove the expansion of credit and debt that much faster. Then in the late 90's, and especially the last few years, the financial sector accelerated further. This situation was utterly untenable and bound to implode at some point.
The trigger for the implosion we are witnessing was subprime, not the cause, just the trigger. Now that the subprime problem has emerged all hell breaks loose. The system is over leveraged and interconnected, credit default swaps with hundreds of counter parties, auction rates securities markets seize up and municipalities are looking at bankruptcy, the commercial paper market vaporizes, and the money markets need a backstop. Again, in self reinforcing classic boom and bust cyclical nature, the drying up of credit will force the real economy of goods and services to contract which will cause corporate and personal debts to go bad, which will further hurt the credit markets, etc.
The government is going to try to save this wreck but it will not succeed because the problem is bigger than the government. The Fed, the bankers' bank, will pull some strings to get the rules changed in hopes of saving its own. The Treasury will pull some strings to arrange a tax payer bailout. Congress will go along with it because they don't understand the problem very well and because it is in their own personal interests to delay the problem or at least to be seen as doing something. The result will be that a huge sum of money is spent propping up a corpse, and only for a little while.
To add insult to injury, the global economy will contract enough to hide peak oil and marginalize and mitigation efforts for years. When the world finally recovers from its credit hangover it will run right into an energy shortage and then climate change will kick in shortly after.
The real problem, at its core, is that the same people, businesses, regulators, politicians, organizations, and paradigms that created the problem are going to be in charge of fixing it. All the dynamics that created peak oil, climate change, and the greater depression are still going to be in place when we come to address those problems.
Like so many others on this site I am a doomer, not because the problems are insolvable, but because I don't think that the our present system is capable of solving them. Unlike many doomers though, I believe that we will create new systems that are capable of solving collective action and long term planning problems that will eventually result in a better and brighter future, but not in time to avert a global collapse.
Whew, that felt good! Sorry about the rant.
-Tim
That seems about as good a short summary of the situation as one might expect. I have one small quibble, though: The effects of climate change are already occurring and are already affecting people. Perhaps you mean the effects will manifest in earnest?
Cheers
The trigger wasnt subprimes. The trigger was the inflation in commodities that left subprime borrowers without enough money to pay their mortgages. (People will pay their gas and electric bills before they pay the mortgage.) The reason commodities inflated (compared to the rest of the economy) is because they are all coupled to oil, which reached a production plateau 3 years ago. If oil production kept increasing, it is most likely that people would have been able to continue paying their mortgages. And with continuing economic growth, the finance sector would have been able to absorb that small number of defaults (mainly caused by increased monthly ARM payments).
How can anyone fault people who did the math and said "I make enough money to pay all my bills" only to find that they did not set aside enough money to pay the extra $200 or $300 a month in increased energy costs? Ron Paul is correct when he refers to inflation as a tax. The Inflation Tax. Where people are at fault is how they expected 8 years of Bush's tax cuts and these expensive imperial crusades to pay for themselves. But that is the majority of Americans, or at least everyone who voted for Bush/Clinton/Obama/Gore/Kerry. The closest any of those candidates ever came to telling the truth was when they talked about "future generations" bearing the burden of all this endless borrowing and spending. It's not future generations anymore. It is THIS generation that will bear the burden of THIS generation's wasteful borrowing and spending. Through the Inflation Tax.
The purpose of the stock market is for companies to inexpensively raise capitol to expand their businesses through either the sale or stocks or bonds. Somehow the stock market has been turned into a casino by Wall Street. You haven't explained in your argument that you add any value via short selling. You are a gambler. Go to Vegas baby!
Short sellers (I am one) prevent the waste of capital on rah-rah foolish companies.
Landry Restaurants are badly run with corrupt management (they make more money off real estate than selling bad food).
Their efforts to raise more capital and go private have been frustrated several times by waves of short selling. A good thing for the economy.
Alan
You want to inform the market that a company is worthless, post an advert. However if you did this you would run the risk of libel. So why should someone be allowed to do the financial equivalent (short selling) without consequence?
Look, the finance industry has always been a confidence game. Provided nobody suggests its built on air, it continues. When Wily E Coyote realises he's running on air, he falls. Short selling is the equivalent of Roadrunner giving Wily an anvil - it can bring down what would otherwise continue to float on unsupported.
The finance 'industry' is in the middle of realising where it is, that its a confidence con and that it long ago ran out of fundamentals. Do you really want it to crash to earth?
Because it the person engaging in the short sale is wrong, the stock price will go up and the short seller will lose money.
If someone who takes out an ad is wrong, oftentimes there are no consequences. Unlike the UK, many other countries have written constitutions, some of which mention free-speech rights. This can mean that their libel laws may not be quite as absurdly draconian as in the UK. In the UK, libel law is used to suppress bad or negative news, or even just negative press on airhead celebrities.
OTOH if the short seller is wrong, the short seller loses big time. Keeps 'em more honest when they've got to put their money where their mouths are - and if they're not in undue fear of frivolous lawsuits from incompetent or criminal company managers.
What can I say, I think most of those downmodding my post are wrong.
With libel the individual feels hurt and might suffer some small consequence if the story is believed. With short selling the company can be forced into bankruptcy. The downside risk to the short seller is minimal, particularly if your trades are major enough to move the market.
Its game theory crossed with experience - we know it happens, and we know why it can happen. To somehow say that such speculators do not exist is to ignore the evidence.
Nope, sorry but short selling is an example of the market moving from its original purpose as a vehicle for investing in companies to a casino game with 'double your money' options. A market without those factors is much more stable and controllable.
If the company is forced into bankruptcy, it is because it cannot operate without an extension of more short term credit.
If it cannot operate without an infusion of credit, it is in such shaky state that it's probably not a good idea to give it credit.
And short selling is how the lenders find this out. No good company is ever forced into bankruptcy by short selling.
Short selling is a chance for a limited gain at the risk of unlimited losses. Anyone who shorts a stock takes the risk that the company could have some major breakthrough that sends their stock soaring. The shorters then have to cover, creating a short squeeze which adds to staggering losses. Because the risk is so great, short sellers typically do more research than longs. Longs are just big dumb money ... pensions and 401ks and stuff like that. Most people dont do any research on how their 401k is invested. That investment mentality is what leads to massive corruption of the marketplace, which in turn leads to trillions of dollars being swept under the rug, and ultimately the loss of those 401k and pension investments. Without a doubt, short sellers serve an extremely vital role in the marketplace. And anyone who says otherwise is just stating their opinion.
Hey, what da'ya know? I just watched the Daily Show transmitted a few days back and the Wily E Coyote reference is in there referring to the financial market meltdown. Great minds huh?
I wonder if they need any scriptwriters?
Most of us who read TOD have had the Coyote on our minds for years.
Wearing a silly helmet with wings on it, he looks toward the viewer (camera?), pedals the air a few turns (the rocket powered bicycle is missing), looks down, looks back at the viewer, and holds up a little hand lettered wooden sign that says "bye bye" or something similar. Then disappears.
Don't look down.
I might grant some worth to short selling, but am convinced that naked shorting is a usless activity and should be banned. There may be one or two rational excuses for allowing naked shorting (lazy brokers, speed of money) but the downsides seriously outweigh that. (allowing broker nakeds to float huge amounts of stock never authorized by company boards, completely overwhelming ratonal market demand, just to drive the price of a company down so they and their cronies can then buy up controlling blocks at bargain prices). Naked shorting simply contributes to volatility, which is good for the brokers (don't care where the price goes, as long as everybody does lots of trading). Follow the money, straight into the boardrooms of the big WS brokerages.
Too many good small (now increasingly larger) companies have been ruined by hedge fund bear-rushing with nakeds.
Shorting is a vote against the current operations plans etc of a company. Shorting unlike going long is quite fundamental.
Longs enjoy the benefit that a rising tide lifts all boats while shorts find out who is swimming naked when the tide goes out.
Plain and simple...making money on the short sell of any financial institution was getting way to easy because they were ALL cr@pping out at once. It was a sure thing. The casino owners could not keep people guessing on the outcome. Therefore, they closed the tables...temporarily...right?
Funny that no one ever wants to cut off the irrational longs. Remember when going long the internet was a "sure thing". I would argue that irrational longs have done far more damage the underlying structure of the economy than shorts could ever think off doing. In fact, it is not a stretch to draw a line from the internet mania (and subsequent crash) leading the Fed to all the interest rate cuts that has caused the mess we're in today. All markets will eventually find their fundamental value. Having longs and shorts acting in concert just makes that discovery faster. The problem is that a lot of these companies' fundamental value is zero. We'll find it out one way or another soon enough. I liken the response of the government and markets to a two year old sticking their collective fingers in their ears and singing "LA,la,la I can't hear you...".
I don't think they've gone nearly far enough -- not only short selling should be banned, pessimisn in deed, word and even thought should be banned!
More seriously, as you say, there will clearly be winners and losers, killings made and those killed. I agree that Paulson is smart, but I believe he is far from innocent and impartial.
What's at issue now is capitalism itself. I do not advocate a return to Stalinism, which brought more or less everything under state control. Let capitalism do what it can do, but let it not prevent the gov't and people from doing what it cannot. And let not the gov't be run by those who profit from capitalism -- let there be severe penalties for those who corrupt and who are corrupted.
Capitalism needs to operate on a franchise basis, a franchise that is periodically renewed and subject to performance reviews.
Apart from what is happening right now, the market is totally unable to properly price finite resources: oil, gas, water, soil, forests, etc. The corporate model is by design irresponsible, has a limited planni ng horizon, and externalizes as many costs as possible. In a word, a government subservient to capital and the corporation cannot possibly get us through the challenges we face.
One might legitimately have some sympathy for the small or medium sized business of yore, where by dint of sweat and hard work a business is built up. But this is not the route to the big and fast bucks. For that one must use other peoples' money, i.e. leverage, and even more one must have influence in the gov't to make sure one doesn't capsized. This romantic vision of capitalism has been out of date for a long time is very far from the reality of modern finance capital.
Many, maybe most, will pooh pooh such talk, and in truth I think that we may go down like Slim Pickins in Dr Strangelove, except we'll be hugging our portfolios instead of the bomb (or maybe we'll be hugging both!)
Didn't Plato say that in the Republic? Separate capitalists and government? Or maybe it was capitalists and the military. Either way, it seems pretty clear having an oil man running the show for 8 years didn't work out so well.
Rob Kirby has an article over at financialsense today which theorizes that JPM received 138 billion dollars of taxpayer money through the Lehman bankruptcy. Jim Willie also has a very interesting article there today. My point is that the assumption that Hank Paulson, Ben Bernanke and Cox are objective referees just trying to work for the common good of all the participants has to be backed up with hard evidence at this point. Massive amounts of money are being transferred from the unwitting to the connected with little or no oversight whatsoever. Who exactly is policing the police on this one and the other actions before and the likely unprecedented ones to follow? No one at all.
You know, it seems like people have forgotten what a stock is. It's ownership in a business. Ownership implies an interest in the well being of the business, or at least a responsibility for it. It's *definitely* not something that you borrow or bet on.
I think the confusion is rooted in the limited liability insurance that comes (free!) with every LLC. The idea that the owners of a company should not be liable for the debts of the company is simply... beyond rediculous. Either they should be liable, or the comapny should PAAAAAYYYY for liability insurance, the cost of which would be reflected in it's earnings, which would be reflected in it's stock price. You know, like in a real-life market, as opposed to the utter horses**t con-game we've had for the past century.
My personal opinion - betting is for Vegas and the OTB. But fine, you want to bet on businesses, stop betting while the risk is evenly distributed to all us taxpayers.
I'd like to offer a view from another side; one that knows nothing about financial markets and the various ways stocks can be bought and sold. I'm betting less than one in one hundred people know much about buying and selling stocks, and less than one in ten thousand can talk about what has happened this week in the financial markets with anything approaching a full understanding. This is not a bad thing, it is simply a fact of life. Fortunately there are ways the financially "challenged" can contribute. By simply admitting our lack of knowledge, others who do understand can remember to give us a broad picture of a incredibly complex problem.
Your last paragraph did just that. It allowed me to step back from trying figure out what I can't (without taking several college level courses:) and see how intertwined our energy future is with our financial future. It's ironic how simple the concept of peak oil is compared to this complex crisis in the national and international financial markets. I'm now beginning to understand we can't solve one without solving the other. Scary, very scary. Thanks, I think:)
...and less than one in ten thousand can talk about what has happened this week in the financial markets with anything approaching a full understanding.
It IS less -- it's zero!
I'm now beginning to understand we can't solve one without solving the other.
It isn't necessary to fully understand the financial markets in order to see that capitalism isn't working and isn't going to allow us to deal with the energy and ecological crisis, nor the everyday survival of the majority. We are going to have to limit the role of capitalism, control it, and not allow profit to override rationality in dealing with our future.
When the captain goes beserk and is threatening to sink the ship, your first task is to bring such a person under control, to bind them up, not understand the nature of their affliction. Of course, the captain possesses some very needed skills, so, true, you have a delicate problem, but you don't let him return to the helm.
Dave: You use the term Capitalism when the issue here is massive fraud-this isn't a failure of capitalism, it is the predictable end result of massive fraud. Capitalism has never thrived without the support of government regulation and enforcement. A lot of this activity isn't Capitalism any more than knifeing someone then stealing their wallet is Capitalism.
That sounds more an example of supply and demand and free market economics
I must have missed something somewhere in my economics and poly sci courses. Correct me if I am wrong. When government intervenes massively in economics it is communism not capitalism. And all this with a Republican as President. How´s that for irony?!
I think you did miss something. These moves seem a little more like corporatism: http://en.wikipedia.org/wiki/Corporatism
You can read more about a similar movement of people's wealth to the banks here: http://en.wikipedia.org/wiki/Benito_Mussolini#Economic_policy
Hope that dispels the irony a bit. This seems more like a family proclivity.
Chris
Yes, I recall that last bit now. Poppy´s Papa
So this means untold wealth for those in those mystery meetings. The top 1% runs everything and the the rest of us a relegated to serfdom.
Is that more accurate?
Just so long as the serfs are fainting in admiration of the wise leaders.
Chris
I am not happy. I hope this won't last. I was just learning how to put together data in order to effectively short. My big test case was Citibank. I could tell that it was only worth $24-18 when some analysts were talking about $55. The fundimentals didn't support the share price. It has since gone lower.
I actually think there is a moral isssue here. I think the shorts help police the lunacy of overleveraged corporations with good PR departments.
I think some of these corporation's excessive risk taking is part of the reason for our current problems. In the future, I was hoping that the threat of shorting would make these investment bankers avoid such risks and the bailouts that go with them.
For me, shorts are a way to challenge the over-optomistic analysts and brokers. It's a way for the small time investor to say with their own money, "The emperor has no clothes."
Should we not be able to say that?
well said.
Applying to oildrum theme, what if some optimistic charismatic engineer creates a car that can run on water, and sweet talks a bunch of folks into financing and scaling up this idea in the millions of units (all the while using finite high quality energy reserves to build his factories and electrify his machineyards.) The ability to short is one of the checks and balances that keeps us from the tragedy of the energy commons. Look at last years ethanol stocks. Pacific Ethanol at $40 with no short sellers would have scaled and wasted more of our high quality resources on a gross up of a break even energy balance sheet...
We shouldn't all quit our day jobs and become shortsellers, but they serve an important function. The mere suggestion that they will be removed, will defacto cause some of them to go away, (I know this because I talked to a tearful money manager tonight who is in top 15 of Morningstar ratings last 5 years that is closing down). He told me even if they back off this ruling, who knows whats coming next.
Whether we realize it our not, we spend our lives in an effort to turn financial capital into real capital (built, natural, social and human). Most of us do that at retirement. Peak Oil is going to accelerate that timeline a bit -maybe faster than some would like (me).
You make a very good point about "who knows what is coming next". All this talk about the USA as any sort of safe haven financially definitely went up in smoke. I have no idea what is "off the table" at this point. The uncertainty level re USA guv actions is incredible. The scary thing is an all out nuclear destruction of Iran certainly wouldn't be the surprise it would have been a month ago, simply because almost nothing these guys would do would be surprising.
I don´t think anyone is going to nuke Iran. Russia still is a nuclear power and so is China. Both want Iranian oil and natural gas. Nukes would destroy that. Israel just voted in a new Prime Minister I believe. Would the first item in a new administration be a direct nuclear confrontation with Russia and China. I think not. I believe our military already stopped the Veep from ¨obtaining¨ a nuclear tipped cruise missle a while back. This is about money. You can always make more of it as long as you are still alive.
I remember a couple of years ago Georgie was mouthing off about Iran; Rusiia sold anti-missile missiles to Iran who demonstrated their use and China shot down one of their own orbiting satelites with a surface to space missile - Attacking Iran would be the start of World War III.
No sane person would contemplate it,( so the Yankies will probably do it is the sarcastic epilouge)
It still gets down to bankers being more careful about who they make loans to. This is where legitimate consulting services could be used. Bankers are not experts at physics, chemistry, engineering, etc but they could hire experts to evaluate business plans before the loans are made. They would tell the bankers that the water car idea is bogus and that business would never get off the ground. This leaves more capital for ideas that actually work. Short sellers come in after the big killing has been made with the IPO and the water car guy has cashed out and is sipping champaign on the beach in the Caymans.
Hi Priority,
"By simply admitting our lack of knowledge, others who do understand can remember to give us a broad picture of a incredibly complex problem."
I agree in one way, however, the problem is actually so simple its laughable. In the interest/debt economy, a bank has a deposit of €/$/£10 on which it 'creates out of thin air' loans of €/$/£100 as leveraged debt/fractional reserve banking. Now this would be fine if all the debtor had to do was to pay back the €/$/£100. But they have to pay back €/$/£100 + interest of say another €/$/£10. Where does that money come from? There are only €/$/£110 in the whole system? It comes from the magicking into existence of that extra €/$/£10 by borrowing it. Granted it is usually borrowed on the back of 'production of goods and services', but now there is effectively €/$/£120 in circulation and as a consequence everything else has just gone up in price due to more money being available for (in this example case) the same number of goods. So more is loaned out, and interest charged and more is loaned out etc. But money is a form of exchange and as such has no intrinsic value. Ultimately the interest/debt repayment is demanded 'in flesh' as some sort of means of fulfilling the debt obligation. The problem is, as is now being realised by the 'markets', that the recent effective hyper-inflation of borrowed money via various 'financial vehicles', has no possibility of the interest/debt being paid back because no more can be loaned into existence, because everyone is scared it won't be paid back and so on. The whole fiat monetary system is now a fiat-accomplait!
The system goes bang and the game is started all over again, either with a new 'currency' or a new 'confidence' trick, such as a write off or bail out.
As Aristotle pointed out:
"Aristotle understood that money is sterile; it doesn’t beget more money the way cows beget more cows. He knew that "Money exists not by nature but by law":
"The most hated sort (of wealth getting) and with the greatest reason, is usury, which makes a gain out of money itself and not from the natural object of it. For money was intended to be used in exchange but not to increase at interest. And this term interest (tokos), which means the birth of money from money is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth, this is the most unnatural." (1258b, POLITICS) " (From: http://www.monetary.org/usurytalk.htm)
I know this is probably useless as an explanation - but there are alternative systems of exchange/money such as the demurrage currencies (see: http://www.ratical.org/many_worlds/cc/CC.html) and LETS (local exchange trading systems) that allow the system to work properly by focusing on the ends i.e. exchange, rather than the means - money. They also tend to reinforce community and equality.
This link explains just how little 'real' money - coins and notes - there is - 3%! http://www.moneyreformparty.org.uk/money/about_money/index.php
And on natures 'budget' going overdrawn: http://uk.news.yahoo.com/pressass/20080923/tuk-nature-s-budget-has-run-o...
Sorry if I have confused instead of clarified - I really shouldn't post when this tired!
L,
Sid.
Face up to it, no one really knows what will happen.
I hear suggestions that the reason for the financial "adjustments" is that deregulation did not "go all the way". The pure capitalism & free marketplace fantasies on the order of Uncle Miltie were not put into place properly. Something akin to the "clean room" experiment that the Chicago boys tried to achieve in South America were never allowed to foster in the USA. And so you can't pin the failure on unfettered rule-lessness. In the mean-time, they are left to pick the scraps from smaller scale "disaster capitalism" scenarios, which feed their own greed.
But this is all speculation anyways because no one knows what happens with marketplace psychology, reverse psychology, and double-reverse psychology.
You all know I like the mathematics and statistics aspects of this stuff. So ... where is the math???
Isn't the flow of capital a purely virtual, algorithmic exercise? Not quite, IMO it is full of dilemmas leading to some strange zero-sum game.
WebHubbleTelescope> I hear suggestions that the reason for the financial "adjustments" is that deregulation did not "go all the way". The pure capitalism & free marketplace fantasies on the order of Uncle Miltie were not put into place properly. Something akin to the "clean room" experiment that the Chicago boys tried to achieve in South America were never allowed to foster in the USA. And so you can't pin the failure on unfettered rule-lessness. In the mean-time, they are left to pick the scraps from smaller scale "disaster capitalism" scenarios, which feed their own greed.
Yup -- the first law of bad management is, "If something isn't working, do more of it!"
Utopia in Decay
http://home.comcast.net/~kevin.cherkauer/site
Kevin Cherkauer
Or, as we peak oilers likes to say..."If things aren't going well, build a bigger stone head!"
That's a totally amazing statement.
Not allowing 'naked' short selling is a clear and present danger to the security of our energy future?
I would have thought the reverse. Clearly, the run up in oil was from speculators using naked shorts and that run was very bad for long-term energy investments, the public-at-large and it turns out the whole financial system--as oil was used as a hedge against other securities.
In the end the entire financial system became a casino. (I don't understand how gambling is investing.) What's interesting is that market mob psychology of following hot tips will drag huge numbers of speculators into making ever larger and less likely bets i.e. into destruction. Is the destruction of 'other people's money' a good thing?
At any rate, the law of averages means you will lose in the end and the odds that you will win on a huge bet are terrible.
http://en.wikipedia.org/wiki/Gambler%27s_fallacy
Can you support that entirely looney sounding hypothesis (and I'll ignore the fact that I believe you worked in a hedge fund)?
Is there any kind of academic study at least that maybe provides a theoretical basis for such a claim?
Short selling was banned for mutual(hedge?) funds until 1979,
does that mean the US didn't have capitalism between 1940 and 1979?
http://en.wikipedia.org/wiki/Short_selling
I seriously doubt the run up in oil was funded by short sales in stocks.
Oops, I meant speculators ran up the price of oil [without the naked short in it].
just to be clear, I never said 'naked short selling' restrictions were a problem. But eliminating regular short selling, with hundreds of billions of dollars, possibly over a trillion, currently short, is a recipe for disaster, though it will make lots of people feel very good for a short time.
Gambling is putting money up when you know the odds are against you. Speculation is risking money when the odds are in your favor (but you still might lose). Investing is speculation for the long term. In each case you pay the house a small commission. In each case, the ostensible reward is monetary, though many (if not most) enter into the 'bet' (investment, etc) for the unexpected reward -the dopamine. I totally agree that our markets have become casinos, and have actually written about it here (too tired to get links), but removing the liquidity AND causing hundreds of financial firms to go out of business by eliminating short selling is NOT a well thought through plan. As PG said, and I echo - I fully expect this to be backpedaled as an overstep - if not then we are in worse shape far earlier than I originally expected. A black swan for peak oilers, if you will.
For everybody with a long interest in financials who feels very good today, there will be an short who is possibly bankrupt if he can't cover in time. Anybody who knew that this was coming will make millions.
I expect new restriction on futures will be coming next.
Regardless of your belief on the value of shorting, I thing we should all agree that changing the rules at 2am is about as amoral as you can get, and will vastly decrease trust in the system.
Interestingly if oil rallies strongly becasue of this plug pull on shorts, then ironically energy speculation might get hit next. I say ironically because it appears to have been speculation dumps that have caused a $50 retreat from all tiome hight in the face of a huge number of fundamentals that would have seen the price go UP! (I conceed though the one downward fundamental of depressed demand).
Marco.
Anybody who knew that this was coming will make millions
MTG was up +80% yesterday to $9.xx.
By comparison (from somewhat vague memory) when they sold their last good asset (Australian operations) for $14/share in cash, they went from $6.xx to $8.xx.
So getting cash in hand over 2x stock price was worth a +30% jump, but yesterday ...
Alan
1) The topic at hand is a ban on all short selling, not just naked short selling. They are not the same thing.
2) Whether capitalism can function without short selling is beside the point. The point is that short selling plays a huge role in our current capitalist system, and that system is already unstable. Banning short selling outright with no advance warning will be very disruptive and may very well be the final blow that causes the system to collapse. Moral judgments about past or hypothetical economies aside, Nate is making an accurate observation about our current reality.
Government in a free (capitalist) society has very limited functions. Punishing fraud or making laws against fraudulent activity is one of these limited functions.
So is printing your own money fraud? The answer is obvious. Is printing your own stock certificates and selling them a fraud? Naked short selling has much in common with printing your own money with the exception that ultimately you must buy back the "counterfeit" certificates. I can see a strong case for this being illegal. As for borrowing someone else's certificates from your broker and selling them, I think there is some merit in at least requiring clear approval from the owner. So what owner would willing allow someone else borrow his certificates to be sold to drive down prices. This only happens because most longs do not realize they are participating in actions that are against their own best interest. Are not brokers who hold your certificates supposed to represent your best interests, and is loaning them to someone else to drive down the price in your own best interest? Seems to be a violation of their fiduciary responsibility.
So all in all, I don't understand how prohibiting short selling is anti freedom. If you expect a stock value to decline, then don't buy it or if you own it, then sell it and put your money into something you expect to appreciate in value. How much liquidity in the stock market is really provided by short selling anyway?
It looks to me like short selling is either a fraud (naked short selling) or brokers taking advantage of the long customers they are supposed to represent in favor of other customers who wish to short.
So how does short selling provide capital to the market as is asserted in the original post? I don't get it. Seems to me it would work the opposite. Upstart wind generator company A issues stock; the company experiences losses during early years and needs more capital from a second issue of stock; if short selling has already driven down the price of the stock the second issue is at a more depressed price than otherwise it would have been and this makes raising additional capital more difficult.
As far as taking the short side of a commodity contract, there is a difference as compared to short stock sales. In a commodity contract many of the participants are actual commercial customers who wish to lock in prices for actual future delivery. Speculators are needed on each side of commodity contracts and provide a valid economic function. Of course there are some huge abuses in commodity contracts, particularly supported by government itself as in the case of silver where a small number of banking interests sell huge numbers of contracts in order to manipulate the price (read Ted Butler). Existing regulations in this market are ignored by regulators who are in the hip pockets of the large financial interests who don't even have a legitimate purpose for selling silver other than to manipulate the market.
Naked short selling is illegal in the USA-the SEC under Cox has chosen to turn a blind eye to the activity. Don't worry-he has found Jesus and now he will straighten everything out real good.
Your completely ignoring the case of when the short seller is wrong and the stock goes up.
The owner of the stock gets to double down if effect getting twice as much money.
This is very simplified but.
You own stock and you expect it to go up. You loan it to me because I expect it to go down. If I'm wrong and decide to pay off the loan I have to buy the stock at a higher price to repay the loan plus the original lender still gets the profit from the increase in stock price.
This is over simplified but you get the idea that its a bet between two people with strong views about the health of a stock. I've taken out brokers which simply act as the middle man and of course make some money in the process and via brokerages the longs and the shorts do not enter into and actual face to face agreement.
But I think this is a pretty simple way to present it thats basically correct.
What?
You borrow my stock from my broker and later let us say the stock price goes up. You hold on to your short position anyway, and I sell at a profit, but because you previously added supply to the market I did not get as much profit as I would have if you had not short sold. Your broker substitutes someone else's shares to maintain your short position. You then cover you short and the price of the stock is affected somewhat by your buy back which does not benefit me since I moved on to another investment.
So how did I double double down, whatever that is?
Again, I think that short selling is fraudulent because the broker is violating his fiduciary responsibility to his long customers. I see no genuine economic function to short selling other than to produce added commissions to brokers, and to facilitate speculation by shorts that is against the best interest of investors in companies and the companies themselves.
If it were not for the immorality of brokers using a longs shares to loan shares to speculative shorts against the best interest of the long, you could make an argument that short selling more quickly shifts capital out of the hands of investors in bad ventures and restricts new capital available to these ventures. This would happen anyway, but short selling might accelerate it. But then there is the chicken and egg question; if large short selling occurs and drives the share prices down to extreme levels, it does not necessarily mean the venture is ill conceived, but such action still might deprive the venture of new capital which ultimately results in a failure that would not otherwise happen.
Speculating in commodities has a valid economic function and benefits society. I don't see the same benefits when someone speculates on the short side of the stock market.
Ohh come on your missing the oldest game in the book the short squeeze. If shorting was a perfect way to make money then everyone would do it. In general you lose your ass unless your right about it being fundamentally overvalued and have enough cash to live through a short squeeze.
How many shorts are going to get blown out of the water with this latest move.
http://www.investopedia.com/terms/s/shortsqueeze.asp
This is the mother of all short squeezes and has absolutely nothing to do with the fundamentals.
I have to think that if your agianst shorting then you probably think that loans from these same investment banks with ratchets covenants are perfectly legal. The point is there is absolutely nothing wrong with contracts with covenants and ratchets etc etc. What they do is set a line in the sand that the management of a company better not cross. I've seen far more companies that probably would have made it dismantled because of convent breaches than shorts any day of the week.
I think you missed my point that if you no longer have your long position, a short squeeze, or any other short covering does not benefit you, and you have been damaged by selling out of a market that has been affected by short selling between the time you made your initial purchase and the time you sold.
I simply pointed this out to refute your argument that short covering would doubly benefit a long when a market goes against the short. You assume that all the longs damaged by short selling would still be holding long when the short finally covered; this is not a valid assumption; some would be and some would not.
And by the same token the short caught in the squeeze that gives up on a stock that later falls dramatically because its fundamentally unsound loses.
Longs that exit before the top of a stock lose.
So whats your point again ?
Claiming that someone mistimed when the exited a stock as validation on shorting being wrong is ridiculous.
Its like saying I'm Un-American just because I did not buy a house at its peak market price so the pooor long previous buyer did not make the maximum profit.
Wait how about this your a god fearing American thats only long in stocks so let someone borrow your stock so you can keep it and sell it later if it goes up in value.
And you get the dividend. But wait a sec thats ......
Short Selling !
I don't think we are communicating.
I simply told you that your double down thingy was a flawed argument because not all people would benefit as you claimed from short covering, since some of them might have exited the market before the covering. I am not complaining about poor market timing, just that your argument was flawed on that point which seemingly you can not bring yourself to recognize, in spite of it being obvious.
Mistiming your entry and exit into the market is a strawman argument it makes no sense to bring this up for anyone short long or both. I'd not be surprised to see our government pass a law allowing you to only sell stock for a profit. The uptick rule on steroids :)
The only reason I keep replying to you as this argument is false and I'm sure people will use it.
The whole rational of shorting is to hope to drive down the price just enough to trigger the long-term investor's stop-losses, which they know are there. By triggering the stop-loss sales of the long-term investors, the naked shorts are assured of having easy access to shares with which to cover their positiona, at prices they like.
And because the naked-shorters are triggering the stop-loss sell point of the long-term investors, memmel's hypothetical scenario goes bogus because the long-term investors no longer own the stocks when the market re-bounces after the bear rush.
Short selling isn't about directly providing capital to this or that company.
It's about making sure capital is directed to deserving enterprises rather than to thieves and morons. It encourages sound capital allocation by scaring people away from bad capital allocation.
The current crisis in the markets is directly due to years of misallocation of capital. When you ban short-selling, you tend to encourage further misallocation of capital.
The new rules, if they are enacted, will mean that the markets react much more slowly to thieves and morons than they used to (and God knows they were never too quick). They will survive (even China's ludicrous markets survive), but they will become less efficient at their most important purpose, which is very sad.
I am not sure that the argument that short selling discourages misallocation of capital a valid argument. Without short selling, unprofitable allocations of capital would nevertheless be corrected. It might take longer, but on the other side of the coin, there is also the possibility that shorts would drive capital out of worthy ventures simply by ganging up on certain targets with no other motivation other than speculative profits. I am sure that there are cases where worthy ventures have been driven from the market place because of short speculation, even if this is probably the exception rather than the rule.
And again, I question the morality of a broker, who has a fiduciary responsibility, providing shares of his long customers against their best interest, to another short customer. So if you want to talk about thieves and morons, I think there are some of those around the stock market (both sides) as well as those who are inside corporations mismanaging or plundering.
I think if you go back to the fundamental problem which is a faulty and predatory monetary system, and correct it, there would be much more tranquility in the markets and short selling would be a minor issue. When government grants privileges like the privilege granted to banks to loan new money into existence then you open Pandora's box. Where do you think all this debt accumulated over the last 75 years came from? It was put on the asset side of banks' books in loan transactions in which equal amounts of checking accounts were created out of thin air on the liability side of banks' books. That is why the money supply is 25 times what is was back in the 1930's, why the US dollar purchases pennies on the dollar compared to the 1930's, and why we face the inevitable financial collapse (debt collapse) that follows great debt expansions.
I think that getting one's tits in a twitter over the possibility of ending short selling are focusing on the wrong problem and overstating the case for liquidity in the market place. I have never heard of liquidity being anything by having liquid assets available. Shares of stock are not liquid assets, but are purchased by liquid assets, so short sales sop up liquidity, not create it. Short selling might facilitate a more efficient market in calm times when the market might be deficient in supply of shares, but as is obvious, short selling can create great market imbalance in times of market stress and also in times where everyone tries to cover at once. I think this liquidity argument is substantially bogus.
Nate,
If short selling is such a good idea why not allow it with real estate to increase liquidity. How would you feel if 80% of the houses in your suburb had been shorted and the value was not 10% of what you paid?.
Large stocks in the US are very liquid and don't need shorting. Short selling should be limited to borrowed stock and then a maximum 5-10%, not 80% shorted!
Financial institutions need protections and regulations, otherwise it will be back to the days of "runs on banks based on rumors".
Most stock market investors are long term, pension funds, sovereign wealth funds, investing for an individuals retirement in 10-30 years or a countries future wealth when resources have run out. How much liquidity is needed? A lot over decades but not much day to day.
After the 1929 crash shorting and margin lending was regulated. The lessons of 2008 are that those regulations should never have been dismantled. Capitalism did OK from 1930's for 50 years with these regulations.
Commodities futures are a different matter, providing shorts match longs.
Not true. The root of the problem with the markets at the moment is the illiquidity of mortgage-backed securities. Runs on banks are another symptom of illiquidity.
Once you destroy faith in the markets, you make everything that illiquid. And when things get that illiquid, people put their cash in mattresses.
Liquidity is synonymous with faith.
You are not going to be able to finance this economy if people don't have strong faith that they can get their money when they need it.
Perhaps I am ignorant on this subject. How is it that short selling stock provides liquidity to a market? It provides a supply of stock that would otherwise not be available, but is this liquidity? Does selling houses provide liquidity to the real estate market, or is it available capital saved or borrowed that provides liquidity?
I think the problem of lack of liquidity (sellers, but no buyers) is aggravated by short selling of stock because it seems to me to use up funds in the market, not provide them.
I think that solvency is more an issue in the current crisis (financial institutions with more liabilities than assets), particularly when the liabilities of banks, currency, checking accounts and savings accounts are the money supply.
When the one selling a stock short deposits a margin, the broker's institution gets an infusion of cash. When the Glass-Steagall Act was repealed in 1999, the holding companies of commercial banks were allowed to buy into the financial markets and access this cash giving them more money to lend. The proponents of shorting stocks are arguing that the current blended financial system should remain intact. The Glass-Steagall Act should be restored, isolating commercial banks from the rest of the financial industry which would cause a reduction in liquidity. They are refusing to let go of the defective system created by deregulation.
Hank specifically mentioned the illiquidity of the mortgage-backed securities. But surely the illiquidity is a result of the "fact" that the underlying assets (houses) have fallen so much in value that the securities have a value far below "par", the value itself is highly uncertain, and the holders cannot admit any significant loss in value. In effect, most of the banks' balance sheets actually consist of Level III assets, even if they aren't labelled so !
Moe_Gamble
Not just liquidity or probably effectively the same is velocity which is the number of transactions a particular dollar undergoes. Dollars stuffed in the mattress have zero velocity. Liquidity and velocity are very similar concepts. Shorts allow stocks to trade on the way down this velocity is the same is liquidity.
Without liquidity or velocity you could well find your mattress is stuffed with confederate dollars when you finally decide to spend them no one wants them. Without liquidity or more important velocity or a large volume of transactions price changes can and will be dramatic and brutal. For example look at the housing markets right now they are effectively seized up with very few transactions without transactions you don't have a market and without a market you can have a universally accepted market price.
As you lose this velocity or liquidity fluctuations in the remaining transactions tends to get magnified first up but generally down as people dump stock on the slightest decrease since they cannot hedge with another transaction. Velocity and liquidity stabilize normal markets. In markets with a large number of weak players like today these transactions act to rapidly cleanse a market and set a new market price just like in housing where foreclosure sales under distress act to establish a new stable market price.
Short selling is effectively a distressed sale and works exactly like a foreclosure setting a floor on prices.
For most of the financial companies this floor is zero.
Nate this is actually the most important point. In my opinion right now the TPTB have decided to buy up as many assets as they can regardless of price since the currency is worthless and now the people that man the printing presses are doing the buying. Via taking control of the GSE a good bit of the housing in the US has been transfered to the government. The recent bailouts also serve the purpose of transferring assets to the government. In time these assets will be transferred to the worlds first trillioniares for pennies on the dollar.
We are in the midst of the biggest asset sweep the world has ever seen and the people doing the sweeping do not care about the nominal price in dollars they care about the intrinsic value of the assets.
By taking most of the players out of the market as corporations fail as they must we will see that the only buyer is the government and thence transfer of the assets at nominal prices to the insiders.
When the people that print the money no longer care about its value then you can be pretty damn sure we have a problem.
"When the people that print the money no longer care about its value then you can be pretty damn sure we have a problem."
Or when the people that print the money simply don't have a CLUE.... same applies.
The past few weeks have shown me that there are equal amounts of greed and incompetence at work here.
I will repeat. I think in general our government has bordered on a negligent response to the crisis we face - but Paulson has made some pretty crafty moves. I doubt he is behind this short seller rule - we need politicians that look not one not two but three steps ahead in their decisions. Paulson is good for at least two..I'd like to sit down with him for an hour and give him the broad view analysis of peak oil and see how that changes his chess moves...
You really think Cox would have proposed this rule without Hank on board? I don't.
But remember, they haven't actually enacted such a rule. All it takes is a big fat bluff.
Moe_Gamble I thought about that. Its a high probability that the will pull back from this but the bluff is probably worse than actually doing it. Shorts will leave the market in droves over the coming weeks then the only way to go is down.
In general from here on out anyone that sale stocks and makes a profit will be extracting money from the markets.
Anyone that buys will sell later at a loss. Except for the vanishing small number of companies that are actually properly valued without the shorts I just can't see how most of these stocks wont just tumble to zero.
Bluff or not the damage is done shorts will exit the market in droves now some with a profit and some without.
I suspect a lot of this money will have to end up in commodities and gold at least in the short term. It will be interesting some could well go back into real estate. Needles to say we will see some fascinating and weird moves as money starts desperately looking for a safe haven. Its literally impossible to determine what this action will result in even if its a bluff once you get past the initial short term pump.
It literally sends all markets into and unknown condition within a few months. I'm guessing all kinds of crazy mini bubbles blowing up and popping as money ricochets around. But thats the scary thing about this bluff once you get past a few month at most and at worst a few week pump to the stock market the next condition is literally impossible to figure.
Nate I've never had any doubt that this Administration including the Feds are very peak oil aware.
Also they are the few that actually have real data on the state of Saudi Arabia's fields.
All of their actions with the invasion of Iraq highlight that they understand peak oil and in my opinion also seem to indicate that they also believe that it is imminent if not past.
This is why I believe the current situation is a huge asset sweep with the government and behind them the wealthy using the financial system to convert money into tangible assets that will have some value regardless of the financial health of the system. Soon I believe the target will be the means of production i.e manufacturing companies.
Someone who owns 1000 acres of farmland is wealthier then someone that ones 1 acre regardless of the monetary system. And at the end of the day oil will be sold in exchange for goods and services or fixed assets.
By taking control of these they ensure the flow of oil and the great game continues. This simple barter overrules fiat currencies and I believe that Paulson understands it well.
Yours is an interesting idea. It's taking everything in reverse--back a few hundred years to the days of kings and vast armies on horseback like the movies. Food is energy is land and water. It is probably in the back of their minds. It must be. Their computer programs have run through the scenarios and they have selected the most favorable one for them.
I guess it is clever of them.
Buit they're not getting simply fertile farmland-- they'd be a lot of old houses with all the driveways, the porches, the desert land if its in the southwest. They're not going to farm it easily perhaps.
Yet I guess they will get some food instead of none.
Do you also subscribe to the theory that the US housing bubble was deliberatly created by the Fed to cause demand destruction and thus help ease us over peak oil?
No actually I don't the housing bubble has been going on for some time. The finale if you will and peak energy are related but our current situation is the end of a trend that started back in the middle ages with the formation of kings forest's.
http://www.smr.herefordshire.gov.uk/education/Medieval_Countryside.htm
Notable events where the discovery of the new world for example but the formation of the energy/resource exploitation and associated fractional banking system has its roots all the way back here. For most of this time period ending with oil we always managed to find new resources to exploit. Peak per capita energy happened back in the 1970's-1980's and from then on wealth concentration via inflation became dominant as expansion finally slowed. This is marked by the rise of globalization which generally resulted in no real net gain but moving of the means of production to cheaper regions with the "service" economy supported by ever higher debt loads.
So your seeing the end of one thousand years of misguided exploitation the fact that this has resulted in congruent desperate actions at the end is simply a sort of compression even as we get closer to the collapse of one thousand years of exploitation. Certainly everything is linked but if you look from the really big picture like this you can see that these actions are really linked at a higher level as the basic assumption of expansion becomes ever more obviously false. Details of a housing bubble caused or put into effect because of peak oil are irrelevant or more importantly the details of the connections don't change the situation.
I don't see any obvious need for a link but if you look the housing bubble has been going strong ever since the US peaked in oil production certainly with minor setbacks but overall upwards. But this is linked with moving off the gold standard which happened as we peak in US oil production so ...
Take my very long view and I think you will get the real picture.
Posted to fast and left off the most important point.
We are returning to the period of the Kings Forest right now this is why the super rich are performing asset sweeps. Don't be fooled by financial moves the Kings of the World are right now claiming their lands and eventually we will be their serfs.
I think the question should be raised about the proper function of government in a free society.
Government created the fundamentals for this problem when it unconstitutionally granted the predatory and monopolistic power of money creation to banks. Money is loaned into existence by banks when banks make loans and put these loans on their books' as assets and at the same time creating checking accounts in equal amounts out of thin air and put them on the liability side of their balance sheets. The checking account balances then just circulate through the banking system and are settled between banks, but never are paid to customers; they can only be reduced by repayment of loans which cancels out the related checking account. This is why the money supply is 25 times what it was in 1930. In order to keep the house of cards from tumbling, the supply of money must be kept expanding, otherwise the economic activity and artificial asset values created by previous money expansion will contract, bringing into question the collateral supporting the loan assets on the banks' books, not to mention the increase in the default rate. This is a balance sheet problem and solvency of banks and related financial institutions is the issue. (You all should be familiar with the impossibility of keeping a growth rate going indefinitely from the several presentations in the peak oil community relating to the unsustainability of compounding systems.)
Then the Federal Reserve took upon itself to manage the economy through the monetary system using interest rates and bank reserves to effect the rate at which the money supply was expanded. The government exceeded its constitutional authority also by attempting to manage the economy through its rate of spending. The free market dies quite some time ago, so don't get alarmed now about the end of capitalism.
This system is predatory because the banks extract wealth from the average person directly from interest payments on the loans it created for them and indirectly on the loans it created for government. It is all a house of cards because the debt is at unmanageable levels and ultimately will collapse as is the rule of history.
Government has increasingly interfered in the workings of what little is left of free market capitalism. The current system is corporatism is hardly more than outright theft, and the actions of government are directed at helping their most favored friends.
Against this backdrop, you criticize the day to day government actions in managing the economy without questioning whether they should be involved or not. You ought to see that essentially they are incompetent to deal with this just as they were incompetent to deal with Katrina and are incompetent to deal with peak oil or declining EROEI for energy. They have created this disaster by imposing upon us an unconstitutional, predatory and inherently flawed monetary system for the benefit of banks and politicians who thrive of deficit spending. It likely does not matter what the government does, right or wrong, because the entire system is flawed and will collapse, whether it is today, of five years from today with government tampering to fend off the inevitable.
My conclusion is that the resulting collapse will bring on civil disorder equal or greater in magnitude than 1776 or 1861 and by 2020. Read The Fourth Turning.
Complaining about these clowns in power making bad judgments seems to my cynical mind almost comical when whatever error you think they are making is compared to the totality of situation we are facing, although I do sympathize with your feelings about the rug being pulled out from under your short positions; but then government is notorious for changing the rules at the expense of those without privileged position.
Henry's remark:
is highly relevant. But before answering it, it is important to raise another question: Who is free - from what? - to do what? Unconditionally 'free' might apply to a person alone in a desert. 'Society' implies neighbors, constraints and competition. One may say that the freedom belongs to the strongest one.
I think that the functions of a government - in any society - are 1) External, to defend and strengthen the society, in competition with neighboring societies, and 2) Internal, to constrain the internal competition, defending the majority of 'losers' against the minority of 'winners'. In the long term this is also in the winners' interest, because they are more dependent on the losers than vice versa. Unconstrained competition can break down a society, and ethical competition constraints don't work any more in a large society, when differences grow large, as they do with unconstrained competition.
If I was American, and not being a corporate manager, I would hope that the 2nd, internal, function would be of overriding importance.
Nate,
The IPCC report points out that the energy transition can't happen quickly enough using market mechanisms. Your example of how short sellers cut out the wastes of time is not really relevant if we need non-market approaches to energy. I'll buy that it could be a problem for the normal functioning of a normal market to ban short selling and the issue you raise could be disruptive. But, we're already looking at mandates for ethanol and there are other mandates being discussed. At some point, it does not matter how well capital markets are working if we are going to make the transition at a faster pace. Maybe this rule does not matter to energy all that much?
Chris
I see it is limited to financials in any case.
Chris
Memmel: It certainly looks like a made in America version of the creation of the Russian billionaire elite (steal the money directly using the power of the state).
I disagree I think we invented it during the Texas oil boom the russians learned from us :)
Seriously though your exactly right the state is now blatantly transferring real wealth directly to the top and manipulating the curriencies and laws openly to do it.
Welcome to the new world order and watch the gloves come off. This removal of the gloves if you will was one thing I've predicted. We can expect the public press to become increasingly distorted and turned into a pure propaganda machine. I hoped that the internet and blogs would serve to keep people informed but now I think that the problem is the sheeple simply don't look at the information available on blogs to create informed opinions in total. Not that we don't server a useful purpose but the ignorant masses simply don't want to know the truth and don't look. However if we see a crackdown on blogs you can bet I'm running for the hills !
Exactly. An the oligarchs all ended up either in Israel with their loot, dead, or in Siberia.
Problem is we have not found our Putin yet.
A large part of my and my wife's relatively meager IRA's are in SKF tonight. Boned again, I assume. Good thing I'm not materialistic. Reckon my wife will be p*ssed, though.
But looking at the larger implications, it would seem that this is a huge perturbation to an evolved system that is packed with hidden criticalities. It smacks of desperation, of things already well out of control.
Theoretical wealth will have to largely unwind one way or another, and we're starting to see that the way it happens may not be predictable even in principle. As the rules start haphazardly changing by fiat, the emergent properties will change as well, and quickly. Those too may be unpredictable even in principle.
Tomorrow will be interesting, and the tomorrows after that. G'nite Nate, G'nite gang.
edit: my wife pulled this from the SEC site: http://www.sec.gov/news/press/2008/2008-211.htm
For all those who don't understand that the financial wizards are providing a public service read here about one of their creations, the "Synthetic CDO investment"
http://www.businessspectator.com.au/bs.nsf/Article/Liquidity-not-the-ant...
Where were all those selfless, public spirited, investigative 'shorters' when they were needed years ago?
SEC bans short selling of 799 names for 10 days - SEC press release at 2AM, no less
wow!
Just 10 days, and just financial stocks. UK and US both.
OMG! The old saying is true:
Buy Rosh Hashanna, sell Yom Kippur ;-)
for the big players, its all stocks. there will be no shorting from the big boys next week, as starting monday they have to report any short on ANY company immediately to SEC which is made public on their website. So any shorting in non-financials will occur today, or after the presumed 10 day period when these rules take place. There are over 1000 hedge funds that fit the over 100 million threshold that short selling is part of their strategy. This includes all the market neutral pair-trade crowd (long GM short F, long XOM, short BP, etc based on fundamentals). This is going to be a mess....
Why no shorting? Why can't they just report it to the SEC? Isn't the point of "cleaner fish" that everyone knows the stock is being shorted?
"Why can't they just report it to the SEC?"
Because they don't want to be seen to be speculators who bankrupt businesses when the search is on for scapegoats.
How many people admitted speculating when oil was rising?
Just about everyone here, it seems.
http://sec.gov/news/press/2008/2008-211.htm
This is actually the most important part not killing the shorts. These guys can borrow from the feds and use that money to buy back most of their stock.
Probably the Fed is going to even let them use the stock for the loan.
WOW !
They can already use equity for collateral for the Fed. They can print their own money!
Could one not let a put expire and short a stock that way?
It's a 10 business day ban, until early October. They can then extend it for 30 calendar days, which conveniently puts them pretty much through an early November event. Can anyone name the event? Anyone? Anyone?
The presentation of the Thanksgiving White House Turkey?
How about a Thanksgiving goose that lays a golden egg? Or is that a goose egg?
Does it rhyme with "Barbara Ann"?
Liquidity trap is necklacing them.
Como se dice "NO BID" en ingles?
Pendejos.
I hope the UK gov does a better job of wording this legislation than usual..they might just accidentally ban fractional reserve banking and currency trading simultaneously! What the hell is money except a gov issue beer share?
Can anyone (attempt to) explain why there is this focus on short selling, as opposed to other financial instruments which bet on the down direction? For example, options: writing a call option, or buying a put option are both bets that the price will decrease. Unlike shorting, there is timing component to options (i.e. options expire at a certain date), but I fail to see the fundamental difference why shorts may be cosidered "distorting" and options not.
Also, can anyone illucidate the problem with "naked" shorts vs. covered? There can obvoiously be an unlimited number of naked shorts on a limited number of stock, whereas covered shorts (like longs) are limited by the number of stocks - is this the fundamental problem with naked shorts? I would guess both types of shorts would count as a liability and need a margin account with (partially) offsetting assets, so I fail to see the difference in terms of margin requirements. Number of options are also unlimited (but to my understanding amount to a zero-sum game, ignoring commissions).
I'm a little confused here,
No short selling, OK, I can live with that.
Now, tell me how I'm going to make any money on a stock that is going down, and why should I buy a stock that is going to zero.
Basicly I feel that shorting is a way to make money on stocks that are falling. Or to put it another way, It's a way for the seller to find a buyer for a stock that is expected to fall in the future. Without short selling we may have no buyers for some stocks and they may go to zero overnight.
Then again I have no idea what I'm talking about, having lost a little change this last few weeks.
Ed
You are correct mips. You can accomplish the same thing (short selling) with writing calls and buying naked puts. The risk rewards would be somewhat different, but effectively achieving the same goal.
Denninger made this comment as well a day or so ago.
How long do you think this short covering will last? I assueme much of this rally is just that - short covering as opposed to sidelined cash re-entering the stock market. Probably hard to tell.
Is there a way to gauge an increase in calls and naked puts besides their effect on the stock price?
Gotta wonder if naked puts will be "outlawed" eventually.
Pete
I recommend the latest (at the time of writing this) Denninger video on short sales ban and it's possible consequences:
http://ca.youtube.com/watch?v=ivaXMEB6HzE
I have an even better idea.
Long positions for commodities (especially oil) should be banned too.
Come to think of it, just ban all "positions". No more phony paper promises, if they want to sell the oil they can just bring it to the bazaar and trade it for spices or opium or pumpkins or copper.
Just wheel in that big ol' rusty drum of black stinky stuff and see if anybody wants to buy :)
I personally think that profiting from the demise in value of a company is morally unsound regardless of whether more liquidity is injected into the market or not. In any case I think this extra liquidity mainly only serves to make the wealthier more so.
Now it could be argued that the gains by big financiers, individual short traders, hedge funds etc pump that wealth back into the economy via spending but I know for a fact that [in the uk anyway]they are running offshore for the exit big time in an exodus of tax avoidance.
Furhtermore I do not see how it is possible so separate legitimate (ie not on false rumour) trades from non-legitimate trades as everybody on that short position will gain anyway!
Marco.
What about all the exchange traded funds that are 'reverse shorts' of various sector indexes. Take for example the SKF which is double the reverse return of the XLF (banking and finance sector ETF)? How many people, as a HEDGE, own SKF or similar securities because they are afraid of the whole market going down led by banks. What about futures markets - where a farmer sells short a futures contract to lock in a price for his/her crop? What about an oil producer that sells an oil contract to guarantee a certain price for oil in the future? Where do you draw the line between hedging and speculating? The futures industry is going to freak out this morning. I would expect moves in all markets towards equilibrium (meaning netting of shorts and longs). The rules have changed and many are going to take their chips, and leave.