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Friday, September 19, 2008

More Looting and Pillaging

In a bizarre move, the SEC outright banned short selling in a huge number of financial stocks. This screws over a whole bunch of market participants, especially options traders.

Suppose you are an options trader who owns a bunch of calls in a financial stock. Your hedge was a short stock position. Due to this SEC rule, you are barred from adjusting your hedge. I also believe that you are forced to cover your short hedge, although it was unclear if previous positions are grandfathered. This means you are stuck with an unhedged position. Normally, an options trader holds his positions until expiration, due to large bid/ask spreads. Under current market conditions, the options trader is unable to hedge and also unable to sell out of his position.

Suppose I knew yesterday that the SEC was going to impose this regulation. I could have bought a bunch of financial stocks yesterday and sold them today, making a huge profit. As usual, most State actions allow politically connected insiders to profit immensely.

Another concern is the law is being enforced selectively. Why do financial stocks get different treatment than the stock market in general? It's OK for naked short sellers to raid non-financial stocks? Most people who naked short sell are working at financial companies!

In other news, the Federal Reserve and Federal government are planning to buy up to $300 billion in shaky debt. The details haven't been finalized yet. This is another outright subsidy of the financial industry. This is 3x bigger than the AIG bailout. The cost of this bailout isn't free. Everyone else pays the cost as inflation.

Again, anyone who knew about the bailout ahead of time could have profited immensely. They could have bought stocks before the bailout was announced and sold them afterwards.

Due to a corrupt monetary system, the Federal Reserve and Federal government have no choice but to perform a bailout. If they don't do a bailout, then there would be a hyperdeflationary crash of the dollar, due to the Compound Interest Paradox. By performing a bailout, the profits of politically connected insiders are guaranteed. The bailout is inflationary, but the extra inflation is not so bad that people start boycotting the dollar.

The only way to protect yourself from these shenanigans is to boycott the income tax and Federal Reserve. You should keep some/most/all your savings in gold or silver.

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