Markets panic but still make money

Across the world stock markets are in panic. Panic is good for business as it creates the high swings in prices that enable dealers in the market to gamble with better leverage. Thus a bet will, if successful, pay bigger than if the prices swings were lower. After a day or two’s worth of panic share prices return, making us all wonder what was the point of the price variation, except to enable the market men to make money. However the problems may run deeper.

Economic experts claim that there are three reasons for the lack of confidence in the stock market; the Korean tensions, the Euro problems exposed by the Greek debt, and the possibility of another banking crisis, this time in Spain. I doubt if the economies of the developed world could afford another banking crisis; is it worth the pain to support the banks if they get into trouble once more, or should we simply let the chips rest where they fall?

In simple terms as the stock markets become less attractive the investors in them sell their shares. If you sell shares the money you get for the sale goes into your bank; if you fear another banking crisis with more bank failures you do not want to keep your money in the bank, because that is worse than keeping the money in the form of shares.

What do you do with the money? Presumably you then buy assets. You can buy gold, a typical safe haven in difficult times, now trading at virtually an all time high price, you can buy other commodities which you can trade or sell, hoping that people will have the money to be able to afford commodities, you can buy land, which is its own hedge against inflation especially in places where land is in limited supply or where the demand outweighs the supply, or you can keep things as they are, at risk from the speculators who may decided that now is the time to put into play your favoured stock, or your bank or commodity.

Given time the tensions in the Korean Peninsula will reduce, the Euro will straighten itself out and economies will recover. That is in the nature of things. Nothing stays the same forever. But we need to consider changing some rules so that barbaric markets cannot wipe out the savings and effort of folk who do not want to play in the casino.

Last week, amid some criticism, Germany banned naked short selling and stock markets feel. Naked short selling is where someone agrees to sell what he has not got. It creates a vested interest in sending prices down, without much of a downside to the short seller, who being “naked” has not borrowed or covered the risk. Central European countries have always been opposed to shorting on moral grounds, and in Germany the ban met with approval, although recognition that it will take more than a ban in Germany to have any effect.

I doubt if Germany’s ban will be copied elsewhere in the world.  Governments, so keen to interfere with the rights of individuals and restrict their freedoms will it seems permit stock and bond market speculators to do what they will, regardless of the damage it causes.

My solution would be a tax, universally applied, on the profits of shorting, so that it barely becomes worth the risk, unless the shorting is done for genuine commercial reasons to cover positions. We are beginning to see a move towards a new European levy on banks, so as to provide a fund against failure, and a similar European wide move on shorting may be helpful in ironing out some of the unnecessarily large swings in market prices, upon which speculators thrive.

2 Responses

  1. Great Post. I have found it very useful!. Keep it up. I also found a way to money money online, feel free to check out my blog

  2. Again all are cautious about this year end 2010
    after two months only markets will boost many are hoping this will happen

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