With all the economic gloom around, it may seem difficult to find some good news. But this week there was some. Further it looks as though events have killed off some the leaches that have been feeding off the poor.
The people I am talking about are the Hedge Funds. Unlike normal stock brokers, these leaches, place bets on rises and falls in a particular stock or commodity. However they don't do this with their own money but with others. They are highly leveraged that means they borrow wast sums of money, or borrow stocks and shares. When you hear about short selling it is these people that are doing this.
Short selling is where shares are borrowed from an institution for a fee, the short seller sells them in the expectation of the price falling. Because of the vast numbers of shares involved it becomes a self fulfilling prophesy, the greater the volume of shares in the market the lower the value. Thus by this manipulation of the market, they make their money on the difference between the higher price they sold the borrowed shares at and the lower price they bought the shares back at.
While it may seem a great way of making money, the losers are the pensions of normal people. As it is the institutional investors, that's the pension funds, the banks the insurance companies, are the people that are lending these shares. While their businesses benefit it is their clients that loose. All very sleazy, unethical, immoral but legal.
Equally it is these Hedge Funds that were heavily speculating on the oil price this year, as well as other commodities such as wheat. This gambling on price rises is again a self fulfilling prophesy as it forces up the price of food for ordinary people, and to my mind is the rich stealing from the poor.
So now the good news. This week the Hedge Funds decided that Volkswagen was their next target and started short selling their shares. However, unknown to everyone Porsche had agreed to buy a seventy five percent stake in Volkswagen. Therefore just as all these borrowed shares appeared on the market Porsche snapped them up. The price didn't fall as the hedge funds expected either. But, this meant that the hedge funds had to buy back the shares as they still had to return them to their owners. With so few shares in the market the share price hit one hundred Euros per share. All this cost the Hedge Funds twenty-two billion Euros. That is a loss to the hedge funds of twenty-two billion Euros.
This will remove the worst type of investment companies. People that will make money from the most vulnerable, the people that least afford to pay. When people see how little money their pensions hold these are the people that were the ones to blame.
As least there will be far fewer of these leaches now, not least because the banks no longer have the money to lend to them to carry out their vile trade.
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I think your post reflects the popular mood at the moment. However, popularity doesn't necessarily equate with "correct".
Hedge funds indeed invest and trade with other people's money, although they often include substantial sums from the management. Mutual funds also use other people's money but I don't see you attacking mutual funds. Why?
Shares for short selling are borrowed from, and the fees paid to, institutions such as pension funds and mutual funds. Pensions and mutual funds have been earning money for decades from this practice. Fee estimates for annual earnings by these investors suggest that somewhere between $16 and $20 billion dollars goes into their funds. Each year. Hardly chump change.
There has been plenty of evidence from academic studies that make it clear that short selling is beneficial to the performance of equity markets. Most recently Credit Suisse showed in a research paper that the prices that investors paid when buying stocks in short-sale restricted markets or sectors were subject to wider spreads. That means that buyers paid a higher rate, and that sellers got lower proceeds. The "normal person" paid the price for the restrictions.
I want to make it clear that I do not support naked short sales as these add risk into the system, have no positive benefit and can be used to manipulate share prices.
However, please don't mix up valid short sales and securities lending with these manipulative practices.
The evidence shows that it adds value.
Hello Zedman, as I studied Economics at university, I can see the illusion that practices like short selling creates benefits. But what the mutual funds and all the other institutional funds fail to see, is while they earn additional funds for their insurance or pension pots, by allowing Hedge Funds to manipulate the market in the way that short selling does, means that the original asset becomes devalued. Thus loosing the pension pot much more than is ever gained in fees.
As for any study by Credit Suisse or anyone deeply involved in such a practice is likely to come out in favour of the practice. It is like asking a tobacco company doing a study on lung cancer, that is no joke as for twenty years that happened. Equally the many academic studies that argue that short selling benefits the equity markets pre suppose that driving businesses to wring every last cent of profit out of what ever their trade is. This is an Environmental Web Log, and there are many incidents that I could have posted a commentary, where the drive for short term profit damages the environment, creates pollution and costs for others, and damages the wider economy. We only need look at the current economic problems to see these very effects.
The problem with the current economic practices is that it ignores the many for the benefit of the few. Further, many of the economic practices are directly and deliberately meant to impose costs upon the wider community. I doubt that you and I will ever see eye to eye on this, but the fewer people that there are involved in the vile practice of short selling or speculating on the commodity markets the better.
I have no problem with any business activity that is fair and equitable, it just that avarice has driven the markets for years with no regard of the lives that are ruined by what people assume are just abstract trades.
I certainly understand your point of view, as I said, it is certainly the one that has had a lot of coverage. Your point on the Credit Suisse research is well made, but again the evidence is there for others to challenge.
There have been many academic studies from universities that are not affiliated to investment banks that underline the value of short selling to an efficient market. My problem is that people just dismiss these without any evidence backing up their contrary position. This is why I don't generally comment on these issues.
There is no way that you will be able to have your mind changed, and as you note, this is an environmental blog, so I wouldn't expect you to be in a position to refute the evidence presented by others. So it remains a populist theory that short selling is unremittingly a bad thing.
We will have to agree to disagree and I will follow your blog for your area of expertise.
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