Financial Crisis

[Naam]

That's a huge problem - bigger than Ireland, Spain, Greece and Portugal combined bigger than France or Germany in terms of liabilities.

That could easily push all of the EU into default/quasi default. History would imply that this is almost inevitable - the die may be cast.

Naam will be reaching for his keyboard to except his Fatherland from this but I firmly believe that once the old D-M bloc start to wobble, Germany's fate is also sealed.

reaching for the keyboard is correct, excepting the Vaterland is not. all what i have to say is that too much cheap booze (expensive booze too) may cause prophecies which clearly belong to science fiction.

[BlackJack]

Inflation can be viewed as increasing the amount of dollars by printing more or just raising the level on the banks computer and then taking away from those dollars ie raise tax to pay for the bail outs ect. Therefore the dollars buy less and less. The trillions owed by the USA and other countries have to be paid back and the taxpayers will foot the bill through increasing taxes and other costs. THis is inflation as the dollar and other currencies value are being eroded.

Yes, I appreciate that the US has had a policy of long term slow USD devaluation, coupled with the aim of a 2% inflation rate, a nasty stealth tax. Although both these things are completely entwined in each other, I think they are two distinct processes.

However, I was posting about hyperinflation, and couldn't get to grips with Sokal's

"The first stage for hyperinflation (currency collapse) is a shortage of the said currency"

I dont understand

how can there be a shortage of currency when they are printing like crazy.

Like Zimbabwe hyper inflation was measure each day and the printing of money went from 10's to trillion dollar notes. They increased the amount of notes in the market making too much money and therefore lowering the value of the note. As no one wanted to carry around car loads of money to buy a loaf of bread they simply increased the zeros on the notes.

"Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply" Wiki

[midas]

The spillage assuming it trebles from here will be about 700,000 tons.

In other words it will add one ounce of oil into every 2 trillion ounces of seawater (I think that is right but there are a lot of zeros). In the global scheme of things it amounts to a large fart in a room the size of Bangkok. Not much consolation to a seagull off the coast of Florida, I will readily admit.

Like I said before...I hope for the best but cannot assume things & what X quantity of things that do not belong in an environment not matter how big that environment is ....

Does anyone have any opinions as to how credible Matt Simmons is because he keeps saying the Gulf leak has a damaged casing and that even the relief well will not work ?

So firstly look at this video

Videos Of Oil Leaking Thru Cracks In The Sea Floor

Dailymotion - Videos Of Oil Leaking Thru Cracks In The Sea Floor - a News & Politics video

and then there is this report

Oil Volcano Pressure Too Strong For Containment

The carnage to the United States is so staggering, it will take your breathe away. Should what the scientists who are trying to warn everyone about be even close to being true... all of Florida will be completely destroyed as will everyone and everything on it.

Oil Volcano Pressure Too Strong For Containment

[flying]

Oil Volcano Pressure Too Strong For Containment

The carnage to the United States is so staggering, it will take your breathe away. Should what the scientists who are trying to warn everyone about be even close to being true... all of Florida will be completely destroyed as will everyone and everything on it.

Pretty bad....

I have referred to it as a volcano since the first true pics I saw.

I have also thought it was quite the game changer & its effect on those southern coastal States just the start.

We will see.......

Here are some pics from a Chinese site showing 50 days...

50 days of oil spill

Edited June 16, 2010 by flying

[Gambles]

However a real blow off rally could easily see 1:1 breached for the first time but that's probably a DJIA <5000 and gold >5000 picture which isn't likley to last long - at that level you have very little incentive to carry on holding gold

IMHO

I have said more than once that would be a sell for me...1/1 parity with the DOW

Very wise, Flying

Althoiugh I'd add the proviso that we should never be 100% certain that something which has never happened before will actually happen this time - make a mental note of where the exit is once we get to 5 and make sure that you're positioned very close to it as Gold goes up from there, esopecially if DJIA is falling - shame to spoil one of the trades of the century so far by overstaying your welcome for a few months on a decade long trade

[Gambles]

That's a huge problem - bigger than Ireland, Spain, Greece and Portugal combined bigger than France or Germany in terms of liabilities.

That could easily push all of the EU into default/quasi default. History would imply that this is almost inevitable - the die may be cast.

Naam will be reaching for his keyboard to except his Fatherland from this but I firmly believe that once the old D-M bloc start to wobble, Germany's fate is also sealed.

reaching for the keyboard is correct, excepting the Vaterland is not. all what i have to say is that too much cheap booze (expensive booze too) may cause prophecies which clearly belong to science fiction.

No cheap booze (I'm in Europe right now surveying the mess)

Agreed that you do have to be careful about wild claims - The Telegraph totally fail to make any meaningful analysis in their article about German debt - for me the question is why is household debt on average so high when home ownership remains relatively low - although climbing rapidly - I guess its related to the timing of new entrants to the property market in the last 10 years?

That said, history implies that French and German default in the next few years is inevitable if Italy or the likes of the low countries go

I also have never seen a sensible analysis of what German institutions did with the mountains of sub-prime junk that they were swallowing at record rates just a few short years ago

but anyway The Telegraph piece makes good reading for the chest beaters still sore about the relative footballing performances and the Kaiser's subsequent knife-twisting -

gist is as follows:

Can you guess which is the most indebted country in Europe?

You might be tempted to assume Britain holds the dubious accolade of being the most indebted nation in Europe, when it comes to households. But, in cash terms at least the perhaps surprising answer is that German households owe more than any of their European neighbours. The evidence can be found in this recent European Parliament paper, and the chart which underlines this is this one.

Now, I’m being slightly disingenous here: Germany has a considerably larger population (82m) than the UK (61m) or Spain (46m), so perhaps it’s not a surprise that it has a larger stock of household debt than other nations in Europe.

Nonetheless, even when you compare household debt to disposable income (a pretty good yardstick of how overextended families are), it isn’t as if Germany is a paragon of economic virtue. The chart below shows that Spain has by far the most overextended households, with debts worth over 90pc of their annual disposable income, followed by the UK at around 75pc. But it is striking that Germany actually has more overextended households than Greece, and although its position is improving (while others have seen their indebtedness worsening), it remains severely stretched.

Now, clearly one of the provisos is that whereas Britain and Spain have enormous government deficits as well as their household ones, Germany is less exposed fiscally. Moreover, because of its export industry, it does not have to rely on foreigners to lend it money (it has a current account surplus rather than deficit). But it is worth remembering, if you hear anyone trying to argue that Britain, Spain et al are the worst offenders when it comes to household debt, that even our Teutonic neighbours have their own burden.

[Gambles]

Inflation can be viewed as increasing the amount of dollars by printing more or just raising the level on the banks computer and then taking away from those dollars ie raise tax to pay for the bail outs ect. Therefore the dollars buy less and less. The trillions owed by the USA and other countries have to be paid back and the taxpayers will foot the bill through increasing taxes and other costs. THis is inflation as the dollar and other currencies value are being eroded.

Yes, I appreciate that the US has had a policy of long term slow USD devaluation, coupled with the aim of a 2% inflation rate, a nasty stealth tax. Although both these things are completely entwined in each other, I think they are two distinct processes.

However, I was posting about hyperinflation, and couldn't get to grips with Sokal's

"The first stage for hyperinflation (currency collapse) is a shortage of the said currency"

I dont understand

how can there be a shortage of currency when they are printing like crazy.

Like Zimbabwe hyper inflation was measure each day and the printing of money went from 10's to trillion dollar notes. They increased the amount of notes in the market making too much money and therefore lowering the value of the note. As no one wanted to carry around car loads of money to buy a loaf of bread they simply increased the zeros on the notes.

"Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply" Wiki

The additional money isn't circulating

It's being absorbed into bank balance sheets (to plug hideen holes) like rainfall in the desert

[Gambles]

crisis what crisis

OK so someone tell me how a country thats broke can lend another country thats broke

answer smoke and mirrors

Clarke and Dawe ask the million dollar questions - ABC News (Australian Broadcasting Corporation)

[Abrak]

Can you guess which is the most indebted country in Europe?

You might be tempted to assume Britain holds the dubious accolade of being the most indebted nation in Europe, when it comes to households. But, in cash terms at least the perhaps surprising answer is that German households owe more than any of their European neighbours. The evidence can be found in this recent European Parliament paper, and the chart which underlines this is this one.

Now, I’m being slightly disingenous here: Germany has a considerably larger population (82m) than the UK (61m) or Spain (46m), so perhaps it’s not a surprise that it has a larger stock of household debt than other nations in Europe.

Nonetheless, even when you compare household debt to disposable income (a pretty good yardstick of how overextended families are), it isn’t as if Germany is a paragon of economic virtue. The chart below shows that Spain has by far the most overextended households, with debts worth over 90pc of their annual disposable income, followed by the UK at around 75pc. But it is striking that Germany actually has more overextended households than Greece, and although its position is improving (while others have seen their indebtedness worsening), it remains severely stretched.

Now, clearly one of the provisos is that whereas Britain and Spain have enormous government deficits as well as their household ones, Germany is less exposed fiscally. Moreover, because of its export industry, it does not have to rely on foreigners to lend it money (it has a current account surplus rather than deficit). But it is worth remembering, if you hear anyone trying to argue that Britain, Spain et al are the worst offenders when it comes to household debt, that even our Teutonic neighbours have their own burden.

Interesting charts.

I know they come from a good source but some of the numbers do seem a bit different to numbers I have seen before particularly....

1) UK total household debt is now lower than it was in 2004.

2) UK debt per household is below average 100% of disposable income per household.

3) The reason that I cant believe the numbers is because if debt has fallen in the UK but it has risen as a percent of income a) it implies that given a fixed number of households, that income per household has fallen or the total number of households has fallen (which was not the case.)

Here for instance are numbers that look very different...

OECD Factbook 2010: Household debt reached more than 120% of disposable income in UK, Canada, US, Japan and Ireland before onset of crisis in 2008

The second chart though illustrates a couple of important points....

1)The problem with say debt to household income is not so much its absolute level but its trend. When it increases it will tend to overstate income and also the value of assets. Germany's household debt to income ratio has fallen.

2) To exclude the public sector is obviously ridiculous. Households are going to have to pay for public debt and to the extent their is a public deficit then disposable income is simply over stated. So say Greece with 120% public debt to 'GDP' implies that total household is say 250% of disposable income and given that there is a 8% to 'GDP' deficit that disposal income is massively overstated.

[12DrinkMore]

Actually it's more complex than that

Shorters are sellers and every market needs buyers and sellers - yes they;'re sellers with a difference but spuriously banning shorting is changing the rules of the game half way through and that damages the integrity of the capital markets (if they still have any). The seminal paper on this, IMHO, remains the first few chapters of Machlup - called something like "On the Formation of Capital Markets ...etc etc " - written the best part of a hundred years ago (obviously read the English translation which came around 20 years later). The copy that I have these days was dowanloaded from the net - can't remember if I paid, might even have been free on an academic or Austrian website

Selling short borrowed stock is one issue, which I can more or less agree with.

However naked short selling is a distortion of the market.

Suddenly, out of thin air, there are more shares in the market than actual shares that have been issued by the company. This is theft. The naked short seller has diluted the real shareholders' capital, reducing the value of all the actual shares and given his "counterfeit shares" the lost value.

Edited June 16, 2010 by 12DrinkMore

[Abrak]

The additional money isn't circulating

It's being absorbed into bank balance sheets (to plug hideen holes) like rainfall in the desert

You make this point which is absolutely correct 'it is plugging holes in balance sheets' 'it is like rainfall in the desert'.

This is why it is not inflationary (you have merely avoided deflation). Still the whole point is that with enough 'rainfall' you can flood a 'desert' and once the hole is plugged enough water will make the bucket 'overflow'.

[Abrak]

However naked short selling is a distortion of the market.

Suddenly, out of thin air, there are more shares in the market than actual shares that have been issued by the company. This is theft. The naked short seller has diluted the real shareholders' capital, reducing the value of all the actual shares and given his "counterfeit shares" the lost value.

Theoretically this isnt quite correct. The naked short seller has not 'created' shares because he has a commitment to buy them back.

You are right that he has distorted the market price but it is to the benefit of existing shareholders.

Ultimately the underlying intrinsic value of the company will not change. To the extent that there are 100m shares in issue and he has shorted an additional 30m, the price of the companies shares are likely to fall because the price of the shares has been 'temporarily' reduced by 'supply'. The short seller has artificially depressed the share price. As a shareholder, who believes the shares are worth Bt100, the temporary fall in price has not affected either the inherent intrinsic value of the company or the number of shares. It has simply given you an opportunity to buy shares in the company below worth due to a temporary increase in supply. So you buy lots of shares at 80, 90 or even 100 and have the opportunity to take advantage of an artificial overvaluation of the price when he has to 'buy' them back. Theoretically 'naked' shorting should involve a transfer of wealth to shareholders.

In terms of value destruction, I would have thought the argument is about the increased underlying volatility in price that it creates.

[12DrinkMore]

Now the French have entered the Austerity Challenge

The French will have to work beyond the age of 60 in order to get a full pension after President Nicolas Sarkozy's Right-wing government raised the retirement age to 62

But they are still well behind the UK and Germany

In Germany the retirement age has been raised from 65 to 67, while Britain may increase it to 68. But polls suggest the French are loath to work longer

mais il ne suffit pas, mes amis.

[Abrak]

Now the French have entered the Austerity Challenge

Actually I think it is cheating to include pension benefits in the 'austerity challenge'. The numbers are so horrendous that it is clear that pensions 'implied' now cannot be paid in the future by any developed country. (Well there are things like euthanasia which help make the numbers add up.) I think somewhere like Greece the estimated contingent liabilities are like 600% of GDP. (And they average about 350% in the developed World.)

The real question is going to be more about how much countries are willing to spend to keep you alive rather than pay you to not work. Pensions/medicare is an impossible equation to resolve in any case - 50 years from now we will all live to 120 if they spend enough on us.

But of course you are right about the French. They dont like working and to the extent they do work I am totally mystified what they actually do.

[12DrinkMore]

Theoretically this isnt quite correct. The naked short seller has not 'created' shares because he has a commitment to buy them back.

But from the time he sold the shares to the time he buys them, they are certainly counterfeit and diluting the shareholders' holdings of real shares.

You are right that he has distorted the market price but it is to the benefit of existing shareholders.

Ultimately the underlying intrinsic value of the company will not change. To the extent that there are 100m shares in issue and he has shorted an additional 30m, the price of the companies shares are likely to fall because the price of the shares has been 'temporarily' reduced by 'supply'. The short seller has artificially depressed the share price. As a shareholder, who believes the shares are worth Bt100, the temporary fall in price has not affected either the inherent intrinsic value of the company or the number of shares. It has simply given you an opportunity to buy shares in the company below worth due to a temporary increase in supply. So you buy lots of shares at 80, 90 or even 100 and have the opportunity to take advantage of an artificial overvaluation of the price when he has to 'buy' them back. Theoretically 'naked' shorting should involve a transfer of wealth to shareholders.

At this point the argument gets a little hypothetical, and we are in the realm of psychological economics, both of which contain of a lot of airware and cannot provide precise answers.

But you suggest that once the shorter has been in and out of the market the price will be back to the original 100, sort of a perpetual money making machine, with the same procedure repeated day after day. Maybe that is part of the success of GS.

However whether the shareholders will rush in a buy more at the lower price because they think the share is worth 100 is open to debate, as it implies they have the funds and want to invest more. However, I suspect rather that the "attack" by the naked shorters will cause a certain measure of concern and reluctance to buy more, and maybe even cause a few nervous holders to sell.

But this is all now psychology. And I do not believe for one second that anybody believes that share prices reflect 100% the actual value of the share calculated to the penny with future earnings all priced in through some complicated algorithm. Nope, there is a lot of optimism, pessimism and herd behaviour built in the price.

I don't think you have argued me out of the position that during the period that the counterfeit shares exist that is still somehow a form of theft from the holders of real shares

But

In terms of value destruction, I would have thought the argument is about the increased underlying volatility in price that it creates.

yes, I agree, that is also a major problem, and a reason in itself why naked shorting should be banned outright.

And to move on to the borrowing shorters.

There are a few aspects here that sound very questionable. Mr Shorter rings up his investment bank and asks to borrow a bunch of shares for some amount. Now, at this point, when the bank says, "yep, no problem", whose shares and what shares are they lending?

There seems to be a nasty little practice of lending out clients' shares and not telling the clients, so the bank effectively pockets the "borrowing charge".

And presumably there is also the possibility that the investment bank can also take a position and lend out counterfeit shares that they are not holding and just cash in the fee. How is this policed? I suspect here is a lot of monkey business in this area.

BUT! YES! I have the solution.

Now, the "markets", this amorphous load of neurotic financial wheeler and dealers, like to bullshit us by saying that all current knowledge is embedded and represented by the current price. Now this is a total and blatant lie. There is one key piece of information that is impossible to find out. And that is

Who own a particular share.

Now, today my little computer is capable of processing zillions and zillions of bits of information every millisecond, the vast array of computers out there are orders of magnitude faster. So how about if every single share in existence is given an electronic identifier and this identifier has to be associated with an owner? And all this information is made public?

I wonder indeed how the Emperors of Finance would look in their new robes.

Edited June 16, 2010 by 12DrinkMore

[12DrinkMore]

But of course you are right about the French. They dont like working and to the extent they do work I am totally mystified what they actually do.

And they are right up there in the list of major exporting countries.

All that comes to mind are temperamental cars and a large agricultural industry producing milk, cheese, wine and chickens funded by EU subsidies.

Edited June 16, 2010 by 12DrinkMore

[Gambles]

Interesting charts.

I know they come from a good source but some of the numbers do seem a bit different to numbers I have seen before particularly....

1) UK total household debt is now lower than it was in 2004.

2) UK debt per household is below average 100% of disposable income per household.

3) The reason that I cant believe the numbers is because if debt has fallen in the UK but it has risen as a percent of income a) it implies that given a fixed number of households, that income per household has fallen or the total number of households has fallen (which was not the case.)

Here for instance are numbers that look very different...

OECD Factbook 2010: Household debt reached more than 120% of disposable income in UK, Canada, US, Japan and Ireland before onset of crisis in 2008

The second chart though illustrates a couple of important points....

1)The problem with say debt to household income is not so much its absolute level but its trend. When it increases it will tend to overstate income and also the value of assets. Germany's household debt to income ratio has fallen.

2) To exclude the public sector is obviously ridiculous. Households are going to have to pay for public debt and to the extent their is a public deficit then disposable income is simply over stated. So say Greece with 120% public debt to 'GDP' implies that total household is say 250% of disposable income and given that there is a 8% to 'GDP' deficit that disposal income is massively overstated.

agree with all your comments except calling the DTs a good source....

[Gambles]

The additional money isn't circulating

It's being absorbed into bank balance sheets (to plug hideen holes) like rainfall in the desert

You make this point which is absolutely correct 'it is plugging holes in balance sheets' 'it is like rainfall in the desert'.

This is why it is not inflationary (you have merely avoided deflation). Still the whole point is that with enough 'rainfall' you can flood a 'desert' and once the hole is plugged enough water will make the bucket 'overflow'.

yes but once the flood starts it becomes almost impossible to control in the real world (don't tell Ben)

[Gambles]

Actually it's more complex than that

Shorters are sellers and every market needs buyers and sellers - yes they;'re sellers with a difference but spuriously banning shorting is changing the rules of the game half way through and that damages the integrity of the capital markets (if they still have any). The seminal paper on this, IMHO, remains the first few chapters of Machlup - called something like "On the Formation of Capital Markets ...etc etc " - written the best part of a hundred years ago (obviously read the English translation which came around 20 years later). The copy that I have these days was dowanloaded from the net - can't remember if I paid, might even have been free on an academic or Austrian website

Selling short borrowed stock is one issue, which I can more or less agree with.

However naked short selling is a distortion of the market.

Suddenly, out of thin air, there are more shares in the market than actual shares that have been issued by the company. This is theft. The naked short seller has diluted the real shareholders' capital, reducing the value of all the actual shares and given his "counterfeit shares" the lost value.

some good points here guys but I have to dash now and this will take a while to type a reasonable answer

I'll try to be back later

but you have to look at the market overall

[flying]

In terms of value destruction, I would have thought the argument is about the increased underlying volatility in price that it creates.

Volatility in price due to fraudulent valuation caused by fraudulent inventory is a destruction of value IMO

After all how is price determined if not by valuation.

If there exists less of anything versus demand does the value/price not rise?

How then does the creation of shares that do not actually exist not change/decrease the value?

That it is even allowed is like saying the roulette wheel is rigged & the operator not only openly shows the switch but allows others to buy into it too.

Edited June 16, 2010 by flying

[flying]

Very wise, Flying

Although I'd add the proviso that we should never be 100% certain that something which has never happened before will actually happen this time - make a mental note of where the exit is once we get to 5 and make sure that you're positioned very close to it as Gold goes up from there, especially if DJIA is falling - shame to spoil one of the trades of the century so far by overstaying your welcome for a few months on a decade long trade

For sure I agree & have eyes & ears.

Although so far these eyes & ears have not shown or told me any valid reason to exit.

If anything I only wish I had more to invest back when I started.

So far all I see is Humpty Dumpty when I look at fiat/markets/govt's .Although there is nothing that would please me more than to see strong healthy fiat/markets with strong healthy govt's backing it.

Seems it has all caught up with them & sovereign debt is the new catch phrase.

The system is beautifully broken.

Add to that the atrocities like the Gulf oil & Iraq/Afghanistan/GAZA & you have to wonder at times.

[Naam]

But of course you are right about the French. They dont like working and to the extent they do work I am totally mystified what they actually do.

And they are right up there in the list of major exporting countries. All that comes to mind are temperamental cars and a large agricultural industry producing milk, cheese, wine and chickens funded by EU subsidies.

gentlemen,

are both of you participating in the competition "who has no bloody idea about France" ?

p.s. France's agricultural share of GDP is around 2 (two) percent.

[Gambles]

Very wise, Flying

Although I'd add the proviso that we should never be 100% certain that something which has never happened before will actually happen this time - make a mental note of where the exit is once we get to 5 and make sure that you're positioned very close to it as Gold goes up from there, especially if DJIA is falling - shame to spoil one of the trades of the century so far by overstaying your welcome for a few months on a decade long trade

For sure I agree & have eyes & ears.

Although so far these eyes & ears have not shown or told me any valid reason to exit.

If anything I only wish I had more to invest back when I started.

So far all I see is Humpty Dumpty when I look at fiat/markets/govt's .Although there is nothing that would please me more than to see strong healthy fiat/markets with strong healthy govt's backing it.

Seems it has all caught up with them & sovereign debt is the new catch phrase.

The system is beautifully broken.

Add to that the atrocities like the Gulf oil & Iraq/Afghanistan/GAZA & you have to wonder at times.

for now, sure

Totally agree

[Gambles]

Theoretically this isnt quite correct. The naked short seller has not 'created' shares because he has a commitment to buy them back.

But from the time he sold the shares to the time he buys them, they are certainly counterfeit and diluting the shareholders' holdings of real shares.

You are right that he has distorted the market price but it is to the benefit of existing shareholders.

Ultimately the underlying intrinsic value of the company will not change. To the extent that there are 100m shares in issue and he has shorted an additional 30m, the price of the companies shares are likely to fall because the price of the shares has been 'temporarily' reduced by 'supply'. The short seller has artificially depressed the share price. As a shareholder, who believes the shares are worth Bt100, the temporary fall in price has not affected either the inherent intrinsic value of the company or the number of shares. It has simply given you an opportunity to buy shares in the company below worth due to a temporary increase in supply. So you buy lots of shares at 80, 90 or even 100 and have the opportunity to take advantage of an artificial overvaluation of the price when he has to 'buy' them back. Theoretically 'naked' shorting should involve a transfer of wealth to shareholders.

At this point the argument gets a little hypothetical, and we are in the realm of psychological economics, both of which contain of a lot of airware and cannot provide precise answers.

But you suggest that once the shorter has been in and out of the market the price will be back to the original 100, sort of a perpetual money making machine, with the same procedure repeated day after day. Maybe that is part of the success of GS.

However whether the shareholders will rush in a buy more at the lower price because they think the share is worth 100 is open to debate, as it implies they have the funds and want to invest more. However, I suspect rather that the "attack" by the naked shorters will cause a certain measure of concern and reluctance to buy more, and maybe even cause a few nervous holders to sell.

But this is all now psychology. And I do not believe for one second that anybody believes that share prices reflect 100% the actual value of the share calculated to the penny with future earnings all priced in through some complicated algorithm. Nope, there is a lot of optimism, pessimism and herd behaviour built in the price.

I don't think you have argued me out of the position that during the period that the counterfeit shares exist that is still somehow a form of theft from the holders of real shares

But

In terms of value destruction, I would have thought the argument is about the increased underlying volatility in price that it creates.

yes, I agree, that is also a major problem, and a reason in itself why naked shorting should be banned outright.

And to move on to the borrowing shorters.

There are a few aspects here that sound very questionable. Mr Shorter rings up his investment bank and asks to borrow a bunch of shares for some amount. Now, at this point, when the bank says, "yep, no problem", whose shares and what shares are they lending?

There seems to be a nasty little practice of lending out clients' shares and not telling the clients, so the bank effectively pockets the "borrowing charge".

And presumably there is also the possibility that the investment bank can also take a position and lend out counterfeit shares that they are not holding and just cash in the fee. How is this policed? I suspect here is a lot of monkey business in this area.

BUT! YES! I have the solution.

Now, the "markets", this amorphous load of neurotic financial wheeler and dealers, like to bullshit us by saying that all current knowledge is embedded and represented by the current price. Now this is a total and blatant lie. There is one key piece of information that is impossible to find out. And that is

Who own a particular share.

Now, today my little computer is capable of processing zillions and zillions of bits of information every millisecond, the vast array of computers out there are orders of magnitude faster. So how about if every single share in existence is given an electronic identifier and this identifier has to be associated with an owner? And all this information is made public?

I wonder indeed how the Emperors of Finance would look in their new robes.

With apologies to Fritz Machlup who told this story much better than I ever will - think of the raisons d'etre of capital markets. The first public companies were Dutch expeditions to the Indies whereby collective investors could spread risk while raising extremely substantial capital. However the profits for the venture were intended to be distributed to the investors. This was limiting. Being able to sell these rights to new investors broadened the capital base encouraging more investors into the market and broadening the capital base. Therefore the trading of securities for profit is essential to encourage maximum capital to the markets and onto new businesses. The profiitable discrepancies between the original issue and subsequent trading prices are not therefore dead loss as far as invested capital are concerned but the neccessary cost of capital markets. The more efficient the capital markets the greater the volume of capital that should eb attracted. In which case the relevance of naked shorting should be how well it contributes to the efficiency of the markets. Some activities (insider dealing for example) generate profits but only for an unfairly priviledged minority. Is naked shorting restricted? No- because anyone can. Is it efficient from a market point of view? If not why would it happen - it exploits inefficiencies in the markets and ultimately investors want to see more efficient markets - this is ultimately the way to broader, more efficient capital markets. Therefore short selling is in the broad long term interest of all market participants. Banning it promulgates inefficiencies in security prices and therefore ultimately has a negative effect on the longer term attractiveness of capital markets.

But, if you get a chance, please, please read Machlup.......

[BlackJack]

Oil Volcano Pressure Too Strong For Containment

The carnage to the United States is so staggering, it will take your breathe away. Should what the scientists who are trying to warn everyone about be even close to being true... all of Florida will be completely destroyed as will everyone and everything on it.

Pretty bad....

I have referred to it as a volcano since the first true pics I saw.

I have also thought it was quite the game changer & its effect on those southern coastal States just the start.

We will see.......

Here are some pics from a Chinese site showing 50 days...

50 days of oil spill

its a bit off the subject however i look at the picture 44 of the cap and cannot believe that they cannot put another cap on it. I look at my water tap and i can put another cap over it with screws on the side and it works! Why cant the same principle we used. They put a man on the moon and cant cap a well? something very very wrong here!

[badge]

The additional money isn't circulating

It's being absorbed into bank balance sheets (to plug hideen holes) like rainfall in the desert

You make this point which is absolutely correct 'it is plugging holes in balance sheets' 'it is like rainfall in the desert'.

This is why it is not inflationary (you have merely avoided deflation). Still the whole point is that with enough 'rainfall' you can flood a 'desert' and once the hole is plugged enough water will make the bucket 'overflow'.

yes but once the flood starts it becomes almost impossible to control in the real world (don't tell Ben)

I concur.

No signs of water yet.

[flying]

its a bit off the subject however i look at the picture 44 of the cap and cannot believe that they cannot put another cap on it. I look at my water tap and i can put another cap over it with screws on the side and it works! Why cant the same principle we used. They put a man on the moon and cant cap a well? something very very wrong here!

Not really...If instead you say...Look they put a man on the moon why cant they stop the Icelandic volcano.....Now that would be a closer match

[midas]

Oil Volcano Pressure Too Strong For Containment

The carnage to the United States is so staggering, it will take your breathe away. Should what the scientists who are trying to warn everyone about be even close to being true... all of Florida will be completely destroyed as will everyone and everything on it.

Pretty bad....

I have referred to it as a volcano since the first true pics I saw.

I have also thought it was quite the game changer & its effect on those southern coastal States just the start.

We will see.......

Here are some pics from a Chinese site showing 50 days...

50 days of oil spill

its a bit off the subject however i look at the picture 44 of the cap and cannot believe that they cannot put another cap on it. I look at my water tap and i can put another cap over it with screws on the side and it works! Why cant the same principle we used. They put a man on the moon and cant cap a well? something very very wrong here!

I have read so many resources now and everyone is saying the same thing

- the entire oil well is disintigrating through erosion and the hole is getting

bigger which is why the estimates are being revised up- even so way way understated.

But the government would never hold anything back now would it?

[12DrinkMore]

The problem with discussing naked short selling is that it is a bit like a religion.With its high priests shouting, "If you ban it, the capital markets will cease to exist". But there is no smoke without fire, and because the discussion about banning naked short selling exists there is almost certainly a bit of a fire burning there.

The more efficient the capital markets the greater the volume of capital that should eb attracted. In which case the relevance of naked shorting should be how well it contributes to the efficiency of the markets.

Some activities (insider dealing for example) generate profits but only for an unfairly priviledged minority. Is naked shorting restricted? No- because anyone can.

Is it efficient from a market point of view? If not why would it happen - it exploits inefficiencies in the markets and ultimately investors want to see more efficient markets - this is ultimately the way to broader, more efficient capital markets.

Therefore short selling is in the broad long term interest of all market participants.

Banning it promulgates inefficiencies in security prices and therefore ultimately has a negative effect on the longer term attractiveness of capital markets.

1. Just because anyone can, does not been that the practice should not be controlled for the health of the rest of us. Anybody can smoke, but that does not been they should be allowed to smoke everywhere at any time.

2. I don't think that you are drawing a logical conclusion in that just because something happens it is efficient from a market's point of view.

3. Also I would disagree that all investors are interested in efficient markets, in particular the big guys are much more interested in the creation and exploitation of inefficiencies.

4. And the last two conclusions, based entirely on the premise that "because naked shorting exists it must be beneficial", IMO are also false.

But, if you get a chance, please, please read Machlup.......

The closest I've found is

http://mises.org/books/Machlup-Stock.pdf

Which will join the queue of things to read.

But amongst the myriads of stuff on this subject, here is an excerpt from

http://www.cato.org/pubs/regulation/regv31n1/v31n1-6.pdf

Current security owners’ objection to short selling is easy to see, and such objections are not wholly without merit from their perspective. Short selling, after all, does affect

the price at which existing security owners can sell today. If demand curves for securities are downward sloping, then short selling generates prices that are lower than they would be if only the outstanding securities were available for trade in the market. As long as the current demand curve Do reflects existing demand for the security, the amount of the short selling will depress the price by virtue of the “as-if” increase in quantity. This price decline has a real impact on the ability of existing share owners to sell their shares. The short selling has already satisfied the latent demand of all the marginal buyers from Po to Po+s. The marginal seller among existing security owners is clearly worse off after the short sale than before. Before the short sale, the marginal owner/seller would be able to sell at a bit below Po. After the short sale, the marginal owner/seller would have to sell at a bit below Po+s, which is less than Po. Short selling allows a non-owner to satisfy demand from Po to Po+s.

Short selling also generates trading prices that do not reflect the willingness of existing owners to sell at the prices generated by the short sales. In securities markets, a sale price conveys socially valuable information about the minimum value that the marginal buyer places on owning the security sold. If the seller is an existing security owner selling from his current holdings of the security, the sale also reveals that the new buyer values that security more than the selling owner (setting aside liquidity needs that may require a seller to sell despite his or her valuation). But if the seller is a speculative short seller, the sale reveals something different. In particular, a speculative short sale generates the minimum value that the marginal buyer places on the security, just as would be the case in a sale by an existing security owner. But although the speculative short sale allows us to conclude that the speculative short seller values the security less than the new buyer, we cannot conclude that any existing security owner values the security at less than the price struck in the short sale.

Of course, this is why speculative short selling is risky for the seller. The speculative short seller must, at some point, find a current owner willing to sell at below the price struck in the speculative short sale to cover the short. Otherwise, the speculative short seller will incur a loss.Finally, and perhaps most relevant from a social cost/benefit perspective, short selling will generate price volatility even when short sellers are incorrect about future demand for the security. If demand stays fixed at demand curve Do, then short selling can generate price changes from Po to Po+s at the short sale, and then from Po+s back to Po when the short sale is unwound. In this manner, short sellers can bounce the price back and forth. Because they only lose transactions costs in the process, short sellers can — innocently or deliberately — induce heightened price volatility. Importantly, that volatility is unrelated to any changes in economic fundamentals of the economy at large or the security in isolation. Just as society benefits when short sellers generate prices better reflective of rational demand, some parts of society may lose when short sellers generate price volatility unrelated to fundamental valuation.

So who has the greatest right? The short term naked short speculator making a quick turn in the market through increasing volatility and causing prices to be below their fundamental valuation set by the long term holders, or the long term holders right to not have this froth and instability?

And I take the side of stability and the rights of those who actually own the asset.

[12DrinkMore]

Duplicate post deleted

Edited June 17, 2010 by 12DrinkMore