Ban short selling and ban the truth

In the last two months, four major banks have failed because they lost the confidence of their customers, who took their deposits elsewhere. The truth is that many banks thought interest rates would be zero forever, lent long, locking in low yields, and now find themselves unable to pay a market rate of interest on their deposits, meaning they cannot profitably fund their assets.

Now after losing their clients’ money, bank bulls, including bank management want to ban short sellers and even “prosecute” sceptical voices for the crime of making their concerns public. Until recently we have been in a bull market of frenzied speculation in empty business models, fueled by the punchbowl of free money. Now money has been made expensive, it is suddenly unfair that share prices can go down as well as up. It is much easier to blame the pantomime short-selling villains than own up to your own stupidity. 

Every company on the stock market has made a choice to subject themselves to public scrutiny. This “public” includes investors who short stocks to hedge their market risk to differentiate their returns from most funds that are solely reliant on market direction. Assets controlled by short sellers are tiny in comparison with traditional investors, and the failed banks weren’t even popular shorts, meaning that the idea of share prices collapsing under the weight of short selling is a convenient myth.

Companies fail, not when their share price goes down, but when they run out of cash. No government is going to ban savers from getting a market rate of interest on their deposits. Over the coming months, designed only for a world of zero interest rates, many more banks will fail, irrespective of the actions of investors who have seen the future.

The few professional short sellers are uniquely motivated to see some stocks fail, but equally the many traditional investors are solely motivated to see share prices rise. Ludicrously promotional marketing, often masquerading as research, which lures in daft capital to castles-in-the-air business models goes uncriticised, whilst often the only research which constitutes professional due diligence is nowadays carried out by short sellers. Whilst a market price reflects the average opinion, the truth nearly always prevails.

Ban short selling and ban the truth.

Barry Norris
Argonaut Capital