Teaching the ECB a Lesson

Yesterday’s very limited restriction on bearish speculators by Germany is being met with a harsh object lesson.

The bears have enjoyed nearly unlimited leverage in their bets, something the bulls don’t have.  If only I could buy as much stock as I wanted and pay for it only when I feel like it.  That’s what naked short sellers get to do.

It’s even more extreme in bondland.

CDS buyers (the bears) can create unlimited selling pressure, and do it with huge leverage.  During the heyday of the subprime CDS trade, they managed to buy “insurance” more than 100 times as large as the value of the bonds they were insuring.

Does anyone doubt that the eternal war between the bulls and the bears is skewed toward the bears?

Even with a legitimate borrow and attendant costs (normal short selling as opposed to naked short selling), the bears have fear on their side while the bulls only have greed.  Between the two, fear is far more powerful.

And all the bears really need to do is precipitate fear among the bulls to win the day.

I think that’s what we’re seeing in this market.  The bears are trying their darndest to start a stampede.

They have plenty of money, and they can use all the non-German markets, plus all the more symmetrical short selling tools even in that market to try to start that selling stampede.

At stake is their assymetric capital advantage – naked short selling and credit insurance that can be many multiples of the insurable assets in value.  Preserving that advantage for the future is certainly worth putting some money to work today.

They may well succeed.  The world has plenty of problems left to deal with.

After all, there has been quite a rally.  Markets are overextended (hence my flat results the past six months while I positioned my portfolio for a correction back down to economic reality).

The best part about starting an avalance is that gravity does all the work once you get it going.  What better time to set off a few hand grenades in the snowbanks than when the owners of the Big Game try to take away your advantage?

hh

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