Praying for a Dead Cat Bounce

An old phrase has taken on new life lately as the millions of us who rely on the flows of capital and stock markets around the world for our basic well-being study what’s going on in bewildered despair. None of us who has money in a pension fund – which is more or less everyone that ever had a job – or is reliant on the conversion of capital into profits – which is definitely all of us, no exceptions – can have failed to notice that stock markets around the world have crashed over the last few weeks.

While this was happening, some investors will have made millions through short selling, which basically means they profit through the falling stock prices of our companies. They bet that some companies will be on a downward trajectory, and when they’re right they can make millions and convert these profits into a new yacht. There’s a downside for short sellers, of course, which is that potential losses are unlimited if suddenly a company lifts off like a Changzheng rocket, but on the whole, when China sneezed and the world caught a cold, the short sellers were out looking for victims. So vicious can be the hunt for victims that stock exchanges sometimes step in and ban the short selling of certain stocks, usually temporarily, to protect the prey from being eaten alive by the pack. It seems such a shame though, that these investors aren’t able to have their fun while the rest of us watch our pension funds fall through the floor.

Which brings me back to dead cats. If you’re one of the many small investors that sold your investments just as the market was reaching its apparent nadir driven by an obvious collapse in the world economy due to a little spikey thing from the East , you’ll be a little irritated to discover that the markets have taken off and are now rewarding the ‘dip buyers’. These people are exactly the opposite of the short sellers – buying cheap and hoping to sell later as the market reaches a new peak, at which point the profits will be converted to a new yacht. Simples, yes?

So now we’re back on an apparently upward trajectory. It seems perverse, but many investors are hoping this won’t last. There’s a principal at stake, which is that if you drop a dead cat from high enough it will bounce, and start dropping again to new lows. When it does, the short sellers will rake in more profits, the dip buyers will be buying new Ferraris, and millions of pensioners will close their eyes and hope!

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