STREET DOGS: Shorting bubbles
Why shorting bubbles is never a good idea
A bubble will eventually pop. Does it make sense, then, to sell short? Not according to Rob Arnott, Shane Shepherd and Bradford Cornell at Research Associates. "Even when virtually assured an eventual profit," they say, "short sellers risk losing everything in the short run." To illustrate the point they relate what happened in the Zimbabwean stock market as its currency crashed in 2008 and 2009. In August to October 2008, the Zimbabwean dollar plunged from Z$10 to Z$1,000 to the US dollar, a 100-fold currency collapse. At first, the Zimbabwean stock market was unfazed, rising 500-fold in just eight weeks, while the currency fell 10-fold. Thus, in US dollar terms, the stock market rose an astounding 50-fold over those eight weeks. In the next two weeks, however, the stock market toppled 85% and the currency tumbled another three-fold. Adjusted for the plummeting currency, the nation’s stock market plunged 95% in two weeks. Then, both the currency and the stock market ratcheted up vo...
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