Naked Shorts and Present Value

Naked shorts on German banks have been banned to stanch valuation of risk in derivative markets as the Euro undergoes devaluation.

Naked shorts, rather than making the market to provide liquidity, reduce the benefit of the Euro's devaluation (economic growth) and its present value.

The German economy stands to benefit significantly from a weak Euro, reducing the risk of default on loans to other EU members with a higher debt to GDP, increasing the prospect of higher economic growth for the Community.

The differential between the future and present value can be increased by naked shorts on bank equities and credit default swaps. Banks that are short, including European banks, gain capital, yielding a lower probability for economic growth which is, in turn, reflected in the current value, depreciating the positive value of its currency devaluation.

The spiraling depreciation results in the need for an even larger infusion of capital. Derivative markets (naked short interest and swaps) would then be providing liquidity to the marketplace, but by reducing present value.

Capital that operates with an economy of scale, buying insurance on the risk it commands, indicated through the "laws" (the measures) of supply and demand, taking a big short interest indicates a higher risk of default. The result is a capital gain without the growth that would reduce the probability of default.

Proponents of derivative markets posit they act to provide the liquidity for growth. The added liquidity to cover the lost presence of value will cause even more growth than would otherwise occur in the future. The argument fractionates the risk into a highly inscrutible liability with the outcome empirically verified by the debt amortized into equity value which is owned by, and visible to, the public, fully internalizing the risk and the reward.

Although the risk does undergo transference and accumulates in the public sector, derivative proponents argue, it distributes to the public with the reward derived from future fundamental value, present in the more accurate empiric of an oscillating current value representing changing market sentiment.

Rather than being externalized, and subject to regulatory authority, the risk is genuinely authored and internalized by the derivative value.

To the market observer, the argument for a useful derivatives market has a plausibly convincing, if not a forgiving quality.

Flush with liquidity, the lack of growth is then falsely attributed to a lack of economic austerity rather than the gross application of greed at the expense of growth, destabilizing markets and increasing risk to justify making the market for derivatives.

Rather than creating market stability, derivatives are being used to rig the market.

Market rigging is illegal because it is destabilizing. Instead of reducing risk, it increases it.

Being naked short on German Banks is being banned because it is market rigging, supporting speculative demand, resisting the economic growth needed to give real value to the debt. It is a zero-sum detriment that, at this point, has little-to-no risk of liability.

The tendency to short the Euro naked signals the will to deflate the global economy. Capital infusions to liquify markets after the Great Recession have been consolidated. Accumulation of the capital, rather than its benefical distribution, has a deflationary effect; and deflation of commodities, rather than inflation, will then signal a recovery.

The differential is in who controls the distribution of the value on the accumulated risk, which is what "making markets" with derivative, risk-transfer products is all about. (See recent articles about transfer and transformation of risk at griffithlighton.blogspot.com).

If the positive value of devaluation is denuded by a short interest in nothing but the value of the risk as determined by merely having that position, the market is being rigged to cause a loss in zero-sum. It is intended to liquidate the market, not liquify the market for economic growth.

Being naked short is being considered a financial obscenity because it produces a highly restricted value that distributes to too-big-to-fail economies of scale, which includes the banks being protected by the ban.

Ironically, banning naked shorts will do more to prevent nationalizing what is too big to fail than what being too big to fail is intended to prevent--socializing both the risk AND the reward into a present value.