Summary:
John Kay in search of a word to describe the opposite of a bubble, i.e. when prices become disconnected from values because short-sellers believe that, whatever the fundamentals, they will soon be able to buy back at a lower price what they have sold earlier. Short positions called immoral. Why is it more immoral to speculate by selling something you do not have than by buying something you do not want? Much of the objection is fuelled by resentment that the market is not as susceptible to spin as spin doctors would like. Influence of hedge funds spreads bad and good news through the market more quickly. (Published: 24/06/08)
Notes:
- bubble
- prices become disconnected from values because purchasers believe that, whatever the fundamentals, they will soon be able to sell what they have bought at a higher price
- bubble must burst eventually because the supply of new people willing to buy at ever higher prices will be exhausted
- generally bursts sooner than that because people come to realise this
- inverse-bubble
- prices become disconnected from values because short-sellers believe that, whatever the fundamentals, they will soon be able to buy back at a lower price what they have sold earlier
- anti-bubble must also eventually collapse because the supply of new people willing to sell at ever lower prices will be exhausted
- in the world of perfectly efficient markets
- everything that might be known is already in the price
- but: there is a difference between the way good news and bad news affects prices.
- long positions are easier to acquire than short
- companies are anxious to get good news out, while bad news has to be dragged from them.
- however: this asymmetry between ups and downs is less than it was
- even for the small investor, short-selling is now easy and common.
- short positions still carry some opprobrium:
- somehow, it is more immoral to speculate by selling something you do not have than by buying something you do not want.
- But: much of the objection is fuelled by resentment that the market is not as susceptible to spin as spin doctors would like!
- managers fume as their share prices display the truths they did not wish to acknowledge
- analysts are less relentlessly upbeat than they used to be
- companies are under more regulatory pressure to give up-to-date trading information
- influence of hedge funds spreads bad and good news through the market more quickly
- the very speed with which the market assimilates information creates problems and paradoxes
- both the bubble and its opposite gain momentum from the difficulty of believing that everything that is expected is already in the price
- Surely the announcement of a new product will lift the value of a start-up company?
- Surely a terrible trading statement from a housebuilder will depress the share price?
- Paul Samuelson proved that perfectly anticipated prices fluctuate randomly, but less than perfectly anticipated prices may fluctuate wildly.
