Ok now its personal! I have been short US financials via SKF over the last 9 months and have rode a roller coaster up and down. Today the SEC announced the temporary banning of short selling of 799 financial stocks. Since when do authorities prop up markets? I knew that this might be a possibility but because SKF used leverage and derivatives to replicate the inverse of the DJ financial index, I thought it maybe safe. (never mind that any instrument that uses derivatives is questionable at this time) There was an announcement by Proshares today that SKF could no longer create new shares and thus the market price of the units may not accurately reflect the purpose it was created for. This may not be a big deal if this ban is indeed temporary.
The larger issue is that banning short selling won't work. Short sellers provide liquidity and are sometimes the only market makers. Without short sellers, if a stock were to fall on its on accord, the potential exists that without short sellers, the market for said stock could go "no-bid". This may increase the volatility in the very same stocks!
The level of government interference and stupidity is unprecedented. We all know about the recent bail-outs and liquidity measures, but just the day before the bailout of AIG something illegal may have occured.
AIG asked NY state insurance regulators to allow a few of its subsidiaries to transfer up to $20 bil. to the parent company AIG because of their liquidity problems. Now these subsidiaries were insurance companies (operating in NY state) that were completely solvent and going concerns. However, after this transfer of funds, these subsidiaries would have been financially much weaker and this was all OK'd by even the Governor of NY! Policy holders and annuity holders were not asked. I believe this borders on theft.
The reason Morgan Stanley (previously thought to be immune from this credit crisis) is actively seeking out a savings bank like Wachovia Bank is because it needs the deposits of WB to count towards its capitalization levels. Its not like WB is in good health, but I somehow doubt that their customers and depositers will be asked about a potential merger with MS. Where are the authorities that are suppose to be protecting depositers and holders of insurance policies?
Where were the regulators when FRE and FNM leveraged themselves into oblivion?
The reason gold was up sharply the other day was partly because the Fed's balance sheet is now strained with toxic debt and now even equities! The Treasury department is issuing $40 billion in new debt to help shore up the Fed's books. This is a blatant expansion of the money supply. The gold market has voted that these measures cannot be good for the $US or inflation.
Can a depression still happen with an expanding money supply? Perhaps - if credit destruction occurs faster than the authorities can expand the money supply (printing, bail-outs, resolution trusts). We know that gold is seen as a hedge against inflation in general but what about deflation? All asset classes usually fall in deflation except for cash. Gold being a currency tends to hold its value better than most other assets in this situation.
So there you have it, my call on gold. Deflation - gold holds it value or goes down less than other assets. Inflation - gold goes up. Hyperinflation - you know the rest!
