The Problem
Do you know why pensions are melting and jobs are disappearing? We entrusted our financial system to banks, regulators and central banks but they (and our political masters) began to manipulate the system to benefit themselves and impoverish the rest of us. Our own financial advisors (shepherds) put us to sleep with lullabies like "buy and hold", "markets create wealth", "don't worry about the short term", and other soothers while they convert our money savings into stocks, bonds commodities, futures, ABCPs and other financial instruments which they load into pools, plans and funds. This assignment of our capital is supposed to benefit both us and the market but instead of sitting quietly, hoping to grow, our new instruments are inspected by shadowy marauders who look for something juicy to "sell short", a favourite game that profits from distress.
In the shorting game, shorters, (I like to call them Jackals) who can be hedge funds, brokers or individuals, borrow or rent our shares (or whatever instruments you were sold, especially those that have done well) from managers of our funds and plans, and then actually sell them to new suckers. Did you know they could do that?! I certainly did not. Now two suckers own the same shares !!! Isn't that DUPLICATION? (8) Duplication, undermines the value of our shares (Jackals profit from the fall, shorting is the inverse of buying a stock or 'going long'). "FRAUD" - we whimper!? Look and you will find fine print about the borrowing, but why did we not understand this was going on? Did you notice anything missing in your account? Did you get a call or a notice? Gee, they don't think to tell us. There are even worser jackals, illegal jackals, called naked shorters (1) who don't even bother renting your shares (whew?) but freed thus of any cost, happily create pure counterfeit shares with abandon, further undermining our shares with unlimited illegal supply of new shares. Maybe your broker bought some for your account. It is a self fulfilling strategy. And what difference does it really make if the shares were borrowed or not, - either way, there are new owners in the marketplace that came in to buy those duplicates or counterfeits or whatever you call them, either way, our assets are undermined. (10) If, like me, you have difficulty getting your mind around all this, please reread or discuss with a friend - you must understand these unbelievable basics.
The process continues, the number of duplicates increases, enough new suckers to saturate the market (10), rumours are spread - by jackals, many falsely, until the shares crash. But real businesses wobble, unable to keep credit lifelines open against a low share/ commodity price, shareholders panic and sell back to jackals waiting to close on their evil profits. Too often, the business collapses, people lose their jobs, all in the name of "oh, well it was bound to happen eventually" (11) But workers got paychecks until that "eventually". Why the rush to destroy? Silly us for thinking the market was an engine of creativity and growth - jackals sing that song to get our plaything assets.
Say it ain't so
Shorters wail their siren song of benefits for the markets, media minions are impressed. Yes they cry, we must have shorters, they weed out the unfit, the bad apples, they deflate bubbles. Broker balladeers, that commissioned band, sing lusty tales of swashbuckling shorters, bravely ignoring infinite risk (shares could go up forever) to grapple valiantly with mighty pump and dumpsters while struggling, dear sheeple, to provide liquidity so you can sell your shares back to them - at a nice low price. Jackal-shorts thank you. Did they mention their "short and distort" fearmongering (Illegal, as if that matters! Google the term for more info) or "Bear Raids"(3) or manipulation (14) or "death spiral financing" (16) or or "Short and Sue" (19)? Delicious! The hype and overstatement of those benefits and the cynical blaming everything on naked shorting, blinds us to how ALL shorting undermines the market, the economy and real employers. (4) The few true crooks they attack, usually small time hucksters, are not worth the millions of jobs lost in the process, for they know not when to stop. Any weakness, like that caused by this genuine market crisis, when even the best wobble, (4) is cause enough to jump on the bandwagon, smothering life, hope, and worsening, not lessening the storm we are in.(13) Volatility(11), the jackals' friend, is increased. It is moral hazard to reward jackals for this - the population of jackals increases in response. Should I fight them ... .or join them?
What about the government referee, the Securities Commission... the SECsnakes that slithered out of the bankster bushes (20)(21), to run the joint? Does the duplication or destructive volatility bother them? Where are they when the jackals run rampant? While The SECsnakes piously crow about the illegality of naked shorting (1,14) , we are left with three ugly choices: either they can't stop it or they wont stop it or we accept the proposition that it makes no difference if shorts are naked or legal. Snakes revel in mayhem, not caring that sheeples' savings are the base of our economic pyramid. As Cramer says, (5) they rig the game for their friends - its not a level playing field (8): Uptick rule(12), the old game controller, is gone. No trading limits on shares as there are for companies (5). Turning a blind eye is much easier than the dreary business of doing what governments ought to do - discover and punish wrongdoing, setting limits. (6) Recent rule changes (14) are a joke. Salting the wound, ask yourself how both sets of shareowners can vote at the AGM as does happen (ie. more shares than the float shows up)? (17) No serial number? No problem, you can still vote, just fill in the form. Few are interested so all can be accommodated. Services exist to ensure this. You must conclude that the game is now rigged. Our broker shepherds are co-opted. We cannot win. Flee the markets.
II How did we come to this?
For a long long time the market operated to create wealth and prosperity. Sensible rules were in place, advice and overheads of paper certificates imposed stiff transaction costs and kept markets relatively slow and boring but easily spawning new factories and jobs. Slowly, ties to paper were lost, the investing world dematerialized, our shares reduced to mere blips, perfect cover for jackals. Safeguards were lost22): merchant banksters marry investment whores so our advisers are compromised to say the least. Despite the meltdown, precautionary rules have still not been reinstated!!! Duh! New technology brought new horizons: cheap trades, instant blips, ETFs, short ETFs, double up/down ETFs, structured investments and much more. Hedge funds, now comprising about 1/4 of the entire market, are the ultimate expression of this lunacy - all long positions are balanced by short positions (hence the term hedge). Bottom line, shorting is so easy. Anyone can do it from the kitchen table. Jackals in training. Fun and games with our blips.
The cause of our distress at present is in the changed nature of the bubble and its more devastating aftermath. Without shorts, stocks might indeed rise high above fair value. It only takes a few excited buyers on the margins to drive prices up. Imprudent people become the final suckers, sensible people recoil at the price. This bubble may be high but it halts of its own accord (at least without Greenspan around). Late buyers have to wait a long time to recover value, but if the company survives, even this is possible. This Darwinian lesson is beneficial.
With shorters in the picture, Jackals recognize overpricing sooner and the game begins. The price suppression effect means this bubble does not grow so high, but it grows very F A T as even sensible people buy the more reasonably priced duplicates. Shorters like fat bubbles (7), the fatter the better. The price suppression may be called "consolidation" and is said to be an ideal buying point, something you might recognize. More people pile in - buyers getting used up. Huge Hedge funds can really blow bubbles up FFAATT. They hardly bother with mere companies, they operate at blowing up whole sectors like the North American auto industry, or even entire nations (currencies). The phantom float can grow by 50% or even 95% (17,9)! Did you realize the market cap listed in those nice (free) information pages does not reflect these trillions of phony shares? Short data is slow to reach the market, is hard to find, is unreliable and therefore not incorporated in our calculations. They really don't want us to know, especially the Toronto exchange. The downslope is devastating as all those extra 50% plus the original 100% head for the exit (14). Buyers got used up, none left. No wonder shorted stocks fall to the sub-sub-sub-basement, much more devastating than a gradual unwinding of a simple overbought stock. More wealth is transferred from the investing public / wealth creators to destructive jackals than with simple bubbles (price lost x [all shares floated PLUS QUANTITY SHORTED]). The extreme volatility /decline affects the company's financing in a vicious cycle. Many companies cannot recover - The process is too fast to allow businesses to reformulate themselves. The lost jobs are real even if the shares were not. This lesson is simply destructive - no Darwinian benefit.
Consequences
Even worse, the destructive volatility (12) erases smaller, weaker players which in turn concentrates activities in fewer hands (jackals lovingly call it "industry consolidation" - think commissions) which in turn concentrates control. The rich get richer and more powerful as the increasing numbers of poor have less and less leverage. Unfortunately, concentrated control, instead of leading to stability, eventual leads to instability as we have seen both recently in the financial meltdown, and before in the breakdown of Communism. We should take our cue from the natural world which favours the existence of more, not fewer, species (businesses).
The fix
This deplorable situation is easily salvaged. Simply abolish shorting (especially in bear markets and during this time of decline relative to other nations). Jackals should not be free to attack savings of individual sheeple (as is the case in some markets). Ruination only makes for enslavement, not productivity. Fortunately, a safe parallel system already exists - our sophisticated options marketplace that has merely to be expanded to provide options for all stocks. Thus, skeptics, cynics and even addicted jackals can play to their hearts content in a "fenced in" area without disturbing the underlying shares or companies involved. Markets, freed of the machinations of shorters, will become more boring but ultimately more productive of true wealth. Despite anticipated howls of protest, price will be discovered anyway - just more slowly.
Of course, taking away rape and pillage profits is sure to outrage the present crop of Jackals. Expect protest that this cannot work. Hold firm if you value your future and that of our children. Make no mistake, the stakes are the continued wellbeing of America and other democracies, all dependent on the creativity of capitalism/ markets to best provide for our future. Please note that while this article has only described the action of shorters in the stock market, all financial markets are similarly affected (futures, commodities, precious metals, even sub-prime mortgages).(7)(18) There no hiding from these jackals
Be warned that any legal shorting creates a vicious paradox. Imagine wanting our drinking water laced with e-coli in order to kill off the unfit among us. Legal shorting virtually guarantees the existence of illegal (naked) shorting, and all the attendent manipulation (14), destructive volatility, etc. Naked short selling destroys companies (3) which in turn destroys the resources required to investigate illegalities. End shorting completely*. *Note: A few forms of forward selling such as hedging by farmers and miners pose no problem to the market provided all players are treated honestly.
In the meantime, investors can try to protect themselves by regaining control, favouring (honest) brokers over mutual funds and then designating their accounts as "non-margin" (cash /segregated account) which will hopefully discourage the borrowing of your shares. (Disclaimer - obtain the advice of a professional.) The other protection, obtaining a physical certificate, is terminated in the US as of Jan 2009. (15) Talk about the chickens being outfoxed. Its about time the chickens-sheeple got mad.
Note, endless numbers of sites or comments exist (including some of the above) that promote, defend or whitewash shorting and even naked shorting. Too many to list, just Google to find them. I hope I have succeeded in disproving the assertions they so crassly, thoughtlessly and cynically make to defend their lifestyle.
I also ask forgiveness for my abuse of nature's creatures in ascribing their zoomorphic qualities to the evil among us. I hope it brings them no harm.
--
Bio, Robert Innes
Robert Innes, Retired Engineer, individual investor, former wannabe shorter, now a
sheared sheeple like everybody else which made me wonder what happened.
Visit my faceboook page (Hamilton, Ontario) for other interests.
Disclosure: Despite the above argument against the ownership of stocks (until the problem is fixed), this is as difficult for me as for most, especially those with pensions. We must do what we must do but we must be vigilant as to the real numbers of shares that may exist and be prepared to exit when the music appears to be stopping (if that is possible). This is a very difficult time when all classes of assets are under attack. Only physical PMs are immune to complete collapse (confiscation maybe!) but holding these are also difficult for the ordinary person. It really seems that civilization is about to forget why it existed.
Finally, please get involved. As Plato said "Your silence gives consent." A modern expression says "The only thing necessary for the triumph of evil, is for good men to do nothing." Speak up --- :-
If you are NOT in agreement with the above, but still feel there are problems in the regulation of shorting, you may wish to visit
http://www.petitiononline.com/mrktrfrm/petition.html
While there is no harm signing this petition, we believe the measures recommended will not actually solve the problem due to basic unenforcablity and its non-recognition of the immoral / unacknowleged duplication involved in legal shorting.
