War on Short Selling: Price Controls Fail

Prohibition in terms of market transactions or via short selling fails.

From Wall Street Journal’s Real Time Economics Blog

New research supports the notion that instituting temporary short-selling bans during stock market downturns doesn’t do any good.

This might not seem like shocking news to those who believe you have to let market forces play themselves out, even in volatile times, and to those who distinguish between the impact of short selling, the borrowing of shares with the expectation of buying them later at a lower price, and flat-out selling.

Nonetheless, the regulatory bans go on. Just last month, temporary short-selling bans of sorts were put in place in Italy and Spain.

In this latest look at short-selling bans, Federal Reserve Bank of New York economist Hamid Mehran teamed with Robert Battalio and Paul Schultz, both of whom are finance professors at the University of Notre Dame.

Harkening back to the dark days of the financial crisis in the U.S., they studied the two-week ban on short selling of financial stocks that was imposed in 2008 in a futile attempt to stop the massive sector bleeding.

“The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly…and stabilized once it [the ban] was lifted,” the economists wrote in the latest issue of the New York Fed’s Current Issues in Economics and Finance.

And lest you think this tilting at windmills by banning short sales is a harmless sort of regulatory exercise by perplexed officials in the midst of a crisis, the trio begs to differ.

“If anything, the bans seem to have unwanted effects of raising trading costs, lowering market liquidity and preventing short sellers from rooting out cases of fraud and earnings manipulation,” the economists write.

The real goal of the trading bans is to establish price controls.

Regulators pass the proverbial hot potato (shift the blame) of policy failures or has been scapegoating the markets.

Regulators want to project of “do something” actions, no matter how these would only make the matters worse through “unwanted effects”.

“The regulatory bans go on”, is an example where in the world of politics, doing the same thing over and over and expecting different results has been the convention. That’s because political agents don’t get sanctioned for their decision mistakes which has widespread longer term implications.

On the contrary, regulators use market’s volatility as excuses to curb on people’s property rights, and importantly, to expand their control over the marketplace. This is why the idea that crises may have been premeditated cannot be discounted because political agents see these as “opportunity to do things you think you could not do before”

Political authorities also fantasize about using edicts to banish the natural laws of demand and supply to oblivion. Theories, history and or experience seem to have no relevance in the world of politics.

Importantly the tactical “do something” operations have barely been about the “public goods” but about saving their skins and of their cronies.

Of course, price controls can also come in indirect forms like central bank’s zero bound rates, quantitative easing and the operation twist (manipulation of the yield curve) and or other forms of interventionism (e.g. changing of the rules).

Even the classic Pavlovian mind conditioning communication strategies (signaling channel) employed by political institutions have had distortive effects on the marketplace.

The popular attribution of today’s recovery in the US equity markets looks like a nice example.

From Bloomberg,

The Standard & Poor’s 500 Index (SPX) rose for a sixth day, the longest rally since 2010, amid speculation the Federal Reserve will pursue more stimulus measures. Treasuries rose and commodities fell as Chinese and French data added to signs the global economy is slowing…

“The weaker the data, the higher the likelihood of stimulus from central banks,” said Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $47 billion. “The weakness in China is likely to prompt a move there,” he said. “While the Fed has been clear it will do anything to support growth, some people tend to think it’s inevitable.”…

“Whilst markets have recently been rallying on bad news -- in the expectation that it will lead to further stimulus from the central banks -- the deterioration in the fundamentals is becoming a bit harder to ignore,” said Jonathan Sudaria, a trader at Capital Spreads in London. “Traders may be disappointed if their thirst for stimulus isn’t satiated as soon as they expect.”

See bad news is once again good news.

The public’s mindset has continually been impressed upon or manipulated to expect of salvation from political actions.

Central banks of major economies have more than doubled the size of their balance sheets (chart from cumber.com) yet the global debt crisis has not only lingered but has been worsening.

Interventionism through price controls have basically reduced the financial markets into a grand casino, which has tilted to benefit cronies while at the same time has vastly reduced or narrowed people's time orientation.

All these merely validates what the great professor Ludwig von Mises warned, (italics original)

Economics does not say that isolated government interference with the prices of only one commodity or a few commodities is unfair, bad, or unfeasible. It says that such interference produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference.

At the end of the day, economic reality will expose on the quackery of interventionism.

Shoot the Messenger: Spain, Italy Ban Short Selling of Equities

When markets expose on the errant ways of the political system, the mechanical reaction by politicians has always been to shoot the messenger.

From the Bloomberg,

Spain and Italy moved to ban short- selling of stocks as prices dropped and the euro traded below its lifetime average against the dollar on concerns about the European Union debt crisis.

Spain’s stock market regulator, the CNMV, said it was banning short selling of all stocks for three months, amid “extreme volatility.” Italy’s Consob said its ban, scheduled to last a week, was introduced on some banking and insurance shares because of the “recent performance of stock markets.”

Today’s bans echoes decisions in August of last year by France, Belgium, Spain and Italy to temporarily ban short selling of financial stocks in an effort to stabilize markets after European banks, including Societe Generale SA (GLE), hit their lowest levels since the credit crisis of 2008…

The Spanish prohibition also covers over-the-counter derivatives, the CNMV said. Market making activities are excluded from its measures.

The underlying hope of politicians has been to reverse the lessons of the famous legend of King Canute who commanded sea waves “to advance no further”. King Canute tried to show “his flattering courtiers” that his power meant “nothing in the face of God's power”

The modern version is that politicians hope that by pinning or diverting the blame on the markets, and through edict or fiat, the basic laws of economics can be overturned.

Spain’s Bolsa de Madrid Index

Dow Jones Italy Stock Index

Note the article says, “Today’s bans echoes decisions in August of last year by France, Belgium, Spain and Italy”, yet both the charts of Spain and Italy, in spite of the last year’s ban, has been trading much much much lower than when the attack against the markets had been implemented.

As I previously wrote,

1. Bans hardly have been effective. Instead they are mostly symbolical as the “need to be seen as doing something”

2. Regulators react almost always too late in the game (which means that their markets may be at the process of nearly bottoming out.)

3. I would further add current policies have clearly or overtly been in support of the banking system and the stock market.

4. This only validates the theory that the policy direction of governments and global central bankers has primarily been anchored upon the Bernanke ‘crash course for central bankers’ doctrine of saving the stock market.

5. Importantly, applied policies have been meant to preserve the tripartite cartelized system of the welfare state, central banks and the crony banking system.

Except for #2 which does not seem to apply today as events seem to exhibit accelerating deterioration, everything else seem pertinent

I would further add that such bans are, in reality part of the price control mechanisms employed by desperate and frantic politicians that only aggravates the imbalances of the system.

Doing the same thing over and over again and expecting different results has been the stereotyped reaction by political authorities everywhere. Yet as one can observe, politicians never really learn, which is why we should expect the crisis to worsen. Also, this shows how politics has been mainly about short term fixes and the struggle to preserve of political entitlements. Someone once defined this as “insanity”.

War against Short Selling: France, Spain, Italy, Belgium Ban Short Sales

Regulators/Policymakers maintain a delusion of control.

From Bloomberg, (bold highlights mine)

France, Spain, Italy and Belgium will impose bans on short-selling from today to stabilize markets after European banks including Societe Generale SA hit their lowest level since the credit crisis.

“While short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive,” the European Securities and Markets Authority, which coordinates the work of national regulators in the 27- nation European Union, said in a statement after talks ended late yesterday. National regulators will impose the bans “to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field.”

The watchdogs are trying to stem a rout that sent European bank stocks to their lowest in almost 2 1/2 years and quell concern that European lenders may be struggling to fund themselves. Banks’ overnight borrowings from the European Central Bank jumped to the highest in three months yesterday, a sign some lenders may have need for emergency cash. Regulators imposed similar limits on short sales in September 2008 following the collapse of Lehman Brothers Holdings Inc.

Politicians and regulators want you believe that prices can be fixed by edict or fiat.

They make you believe that a worthless or junk piece of security should have value because they say so.

The countries planning to impose the ban on short sales have all seen their stock prices crashing.

Essentially France (CAC; orange), Spain (MADX; green), Italy (FTSEMB; light orange) and Belguim (BEL20; red) have been in bear market territories. The performance or % yield from the above chart is seen from the year-to-date perspective. This means that the above does not reflect on the peak-trough returns, which should amplify the degree of losses.

As I pointed out in the same recent case as Korea:

1. Bans hardly have been effective. Instead they are mostly symbolical as the “need to be seen as doing something”

2. Regulators react almost always too late in the game (which means that their markets may be at the process of nearly bottoming out.)

3. I would further add current policies have clearly or overtly been in support of the banking system and the stock market.

4. This only validates the theory that the policy direction of governments and global central bankers has primarily been anchored upon the Bernanke ‘crash course for central bankers’ doctrine of saving the stock market.

5. Importantly, applied policies have been meant to preserve the tripartite cartelized system of the welfare state, central banks and the crony banking system.