Shorting will be banned

It is almost official shorting will be curbed in short order.

Of course commentary falls on both sides of the coin with regulators accusing hedge funds of bringing down solvent institutions like Lehman to its knees in matters of days (and next Morgan Stanley and Goldman?) and them replying that it wasn't them that created the mess in the first place and don't shoot the executioner.

Shorts as feedback loop on trend: emergence of non-linear failures

After some thinking I am more on the side of curbing short selling in this period. Short selling should be allowed during "calm storm" as they reflect analytical views on a company. During panic, they add to the fire.

I understand the current situation through the analytical framework of "monetary delevering", that is what I mean when I talk of M4 going down, monetary mass going down.

That trend is almost inevitable, see discussions on inflation/deflation/US Treasuries for a counterpoint in this blog. But the problem is not the trend, it is the feedback loops on the trend, what is commonly known as "death spirals". In mathematical terms a linear decline is tough enough, but it is be manageable, the time frame is known, usually mid-term, people have time to liquidate their assets raise cash etc. But a feedback loop leads to non-linear behavior (usually exponential) with rapid dynamics. Time phases contract and you do not have time to respond, you get caught off guard.

In physics, phase changes for example are catastrophic events. By catastrophic, physics means one-way, out of equilibrium, rapidly accelerating dynamic events. Many of these are well understood and documented.

In finance, during good times a feedback loop pushed to its extreme means "bubble", or momentum investing, in bad times a feedback loop going on in earnest can mean "death". Here is how it works with Shorts. Naked shorts is a financial trade where you borrow a security from a long term holder, typically a investment fund, you SELL it on the open market (keep that part in mind), collect the cash. When the stock goes down you buy the stock back give back the security and you pocket the difference. You have made money on the stock going down.

The problem with this scheme is the SELLING part. A down trend is re-enforced by the selling. That is a feedback loop. In fact, given enough size or coordination, it is not hard to do market manipulation this way. By betting on a downtrend and selling the stock you fullfil you add pressure to the downtrend. This feedback is what brought a Lehman or an AIG to its knees in less than a week.

Clearly what is going on right now is not good, but should we allow rapid liquidation of a Lehman, whom according to many reports was not insolvent but temporarily illiquid and saw its equity wiped out in less than 3 days??? When regulation takes equity as a variable for debt ratios and said equity is volatile and can be wiped out in bad times in short order, you have bred instability. Something has got to give, and something is giving: equity.

Therefore I see the rational for cutting out feedback loops in desperate times. There is a middle ground between the Japanese head in the sand approach where write-downs were drowned out for 10 years and the current bazooka-UZI violence in the street treatment of US corporate institutions like Lehman and AIG.

Buy puts, sell calls

There are many ways to play a down market that do not create such a violent feedback loop. Buying puts if you own the stock, means you can keep the stock (no selling) and protect your position. This does not add to the stock pressure. Selling calls, is another way of creating a synthetic dividend on the way down as you get the premium up front and don't get called if the stock goes down. You can even do both, sell calls to buy puts and create what is known as a "no cost collar".

Derivatives are in fact a lot more safe as they do not participate in first order to the movement of the stock. There is no first order feedback loop.

Blame the shorts
In short, no pun intended, the shorts cannot be blamed for the trend, as they correctly point out. The trend is the trend, but they can be blamed for accelerating the trend. Just like the govt turned the 1929 recession into the great depression, are the shorts creating more harm than good? I do believe so.

Comments

I liked this article http://money.cnn.com/2008/06/27/news/economy/The_onion_conundrum_Birger.fortune/?postversion=2008062713

even though everyone agrees that the 'onion market' is very different and probably most any way. Still food (haha) for thought..
Daniel Brum said…
This is the best article i've seen yet on the whole mess: http://freakonomics.blogs.nytimes.com/2008/09/18/diamond-and-kashyap-on-the-recent-financial-upheavals/
Anonymous said…
Anonymous said…
視訊交友網 080視訊聊天室 ※免費視訊聊天室※ ※免費視訊聊天室※ 視訊聊天室 成人影音視訊聊天室 ut影音視訊聊天室 ※免費視訊聊天室※ 視訊ukiss聊天室視訊ukiss聊天室 視訊交友90739 視訊交友90739 情人視訊網 168視訊美女 168視訊美女 168視訊美女 視訊美女館 視訊美女館 免費視訊美女網 小高聊天室 小高聊天室 aio交友聊天室 aio交友聊天室 交友聊天室 交友聊天室 線上a片 線上a片 線上a片 線上a片 線上a片 免費線上a片 免費線上a片 嘟嘟成人網站 成人漫畫 情色文學 嘟嘟成人網 成人貼圖區 情色文學成人小說 微風成人區 情色貼圖區 免費視訊聊天 免費成人圖片區 愛情公寓 愛情公寓聊天室 寄情築園小遊戲 免費aa片線上看 aa片免費看 情色SXE聊天室 SEX情色遊戲 色情A片 免費下載 av女優 俱樂部 情色論壇 辣妹視訊 情色貼圖網 免費色情 聊天室 情人視訊聊天室 免費a片成人影城 免費a片-aa片免費看 0204貼圖區 SEX情色 交友聊天-線上免費 女優天堂 成人交友網 成人情色貼圖區 18禁 -女優王國 080視訊美女聊天室 080視訊聊天室 視訊交友90739 免費a片 aio 視訊交友網 成人影城-免費a片※免費視訊聊天※85cc免費影片日本線上免費a片 免費色咪咪影片免費色咪咪影片aaa片免費看影片aaa片免費看成人影城情人視訊高雄網sex520免費影片080聊天室080聊天室aa的滿18歲影片免費av18禁影片免費av18禁影片免費av18禁影片aa的滿18歲影片聊天室ut愛情公寓尋夢園聊天室

Popular posts from this blog

The Dollar is an Asset Backed Token.

The Brotherhood is Displeased

I visit ApacheCon.