Hello Kitty. We just went full-on Pakistan style capital markets.
The SEC just made it's worst move ever, surpassing it's second worst move ever, which only occurred a few years ago when it let banks lever up 40 to 1 and sell awful mortgages.
Yes, tonight they did it. Tonight they have banned short selling. This is not a joke. For those that are already puking, and understand how awful this is, please carry on vomiting, and move on, because I'm gonna try to explain this to everyone else.
Okay, not getting into the mechanics of it, short selling is simply a bet that a stock price goes down. Now, you might be saying, why would anyone want to do that? Or how is that a good thing? Or even, good riddance! I'm very happy they banned that evil-doer practice!
Okay, easy, just give me 5 minutes, Mrs. Holyer Than Thou.
Short sellers do their thing for the same reason that you buy a stock, the profit incentive. Bulls make money, bears make money and all that. Also, short sellers do their thing to hedge their portfolio, (hence the term hedge fund). Hedging is hugely important to protect one's wealth.
For example in today's market, a properly hedged portfolio might only be down 5-10% year to date, instead of 15-20%. Hedged portfolios will never do as well in a bull market, but they will save you a lot of volatility and help you sleep at night.
Hedging is better than just diversification because, as we've seen, most asset classes move together in lockstep when, not to get too technical, the shit hits the fan. Just about anyone with a lot of wealth is hedged, bc they are concerned with preserving their abundance, not just growing it.
Also, although short sellers make up a small fraction of the market, they act like the market policemen, sniffing out awful companies that don't deserve their lofty share price. This is amazingly important because it allows you to get the closest thing to a fair price when you buy a company.
People lost a boatload of money during 2000 dot.bomb. It can be argued that if there was a more active hedge fund community in the 90s, shares would have never reached those peaks, and never crashed as hard. In other words, most people would have been waaaaay better off, because no one was selling at the top.
Even more hugely important, due to the mechanics of the short trade, short sellers at some point need to buy the stock to book their profit. This is HUGE. Huge, because it puts a floor on stock prices. Without shorts, no floor. Once the selling gets going, and it always does, no natural buyers and you have the mother of all crashes.
Hey, but China does not allow shorts! And guess what, they're down 60%. Yes, SIXTY percent. That's like Dow 6000, or complete anarchy, or both.
Yeah, it gets better. Hedge Funds are a huge part of the economy. These funds are enormous, like massive beyond even the banks, which all just went out of business btw. As these funds blow up, and they will blow up at lightening speed now, they will need to liquidate, and this unwind will make the last week seem like a walk down Main Street Santa Monica -you know, like after yoga class you float over to the vegan cafe, have an elixir, jump in the ocean, fly your new kite, but i digress. . .
Finally, well not finally, but we're both exhausted, the actions of the last few months make us full on Communists, no hyperbole. Free Markets only work when markets are allowed to correct, and when bad companies are allowed to fail (for our new analog, see Japan zero growth going on 30 years).
And Democracy only works with free markets.
So, the good news is the Market will rally hard, I mean hundreds, maybe a thousand points. This will be followed by lethargy.
Which will be followed by the biggest crash in the history.
Have a nice day!
