Although on vacation, the markets have been moving apace and I have been watching in between the sun, beach and pool. One item I noticed has compelled me to type an observation.
I never fail to be amazed at the reasoning of politicians and market regulators. I hear that short selling has been banned by Belgium, France, Italy and Spain.
Do they not realize that the process of making a short sale be it “naked” or “hedged” is an essential element in the functioning of markets. It is as though politicians and regulators believe that the chaos in the Euro Zone has been caused by markets and wicked parasites that dare to sell assets.
The market does require regulation, but even post 2007′s financial crisis the touch should be as light as possible. The market is the one place where capital can be raised quickly and efficiently and it is by far the best manner of establishing a fair value for any asset be it a corporate stock or a government bond.
Why have market participants unloaded exposures to struggling nations government debt or severely exposed banks, simply because governments have not managed their economic houses well and racked up far too much debt. Similarly, banks that armed with sophisticated risk control and book limit systems should have known better.
If ”CAVEAT EMPTOR” means anything it is that market participants go into investment decisions with their eyes wide open. Surely the folly of acquiring an asset without appreciating the mechanism and risk was learned in 2007-2009. Sadly it looks as though it was not because for too long European banks have continued to snap up debt from bankrupt nations whose national economic accounting is not to be trusted.
In the case of SocGen, they themselves issued a warning some weeks ago that they would struggle to meet street expectations. Clearly such a statement would warrant a reaction i.e. to sell off the shares…if the last few days have been tainted by unfounded rumour mongering then who ever has opened a short will have to buy paper back PDQ if the rumour is proven to be wrong. I agree that the spreading of falsehood is ndesirable and should be investigated. However, to announce a blanket ban of shorting is the wrong strategy.
The process will make the market less efficient and not permit a true and fait value to be established. Afterall if a bank such as SocGen has had the capital to stupidly invest in distressed periphery debt then why not buy up cheap shares on the CAC 40 and make a very public statement about doing so.
Next it will be that a European regulator decides that a crazy idea once floated by Barney Frank in the US has merit and that whenever an investment is made…the investor should state how long they intend to hold the position for.
When that happens, we may as well all pack up our portfolio’s.
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