I guess I’ll cover this morning and lock in some profits. China has threatened to physically beat short sellers of stocks in an attempt to arrest the tide of panic selling. They can’t beat me up, those bastards.
Short selling is actually balancing for the market because, as Murray Rothbard not so famously said, because virtually nobody knows anything he ever said, “For every short seller there is a buyer”.
If someone sells a stock short, someone has to buy the stock from that short seller. Otherwise he cannot sell it short. He has to sell it short to somebody. And that somebody has to buy it. Short selling sounds mystical and magical and confusing, but it is very simple. You put in an order to borrow shares from somebody else who is willing to loan them to you. You sell the borrowed shares at their current price on the market. And then, if you are successful, you buy them back at a lower price and give them back to the guy you borrowed them from. That’s pretty much it.
Short sellers must buy shares back in order to return them. The more short sellers there are in a market, the more people are forced to buy shares because they have to by contract. That supports declines when they do happen. By banning short sellers and threatening to beat the crap out of them, all China is doing is ensuring that there will be no support for future collapses.
It will stem the tide for now, so I’ll cover the short, but the decline will continue in a few days, and there won’t be any short sellers who must cover in order to support it.
Thanks to Bill Gross, I now know that the better ETF to short is the ASHR rather than FXI. It’s more concentrated on Chinese development banks and other speculative stuff rather than large cap established Chinese companies.