Musing 3 of the Day: As they taught at J. Aron (Goldman’s commodities arm), the cure for high prices is high prices, and vice versa. Cont’d.

Squeezes can be nasty when supply is super inelastic, but inevitably the squeezes fall apart as new supply finds its way to market, thereby creating more elasticity.

The Hunts learned this the hard way in 1980 when after they thought they had cornered the silver market and drove the price to near $50, unexpected supply from folks melting down their candelabras and silverware came to market.

There is a simple “safety valve” that could prevent the difficulties of shorting from spilling over into forced long liquidations of less liquid securities that can no longer be effectively hedged.

The squeezed candidates need to come to market with secondary equity offerings to satisfy demand. In most cases, the reason why these stocks were heavily shorted in the first place was due to their elevated bankruptcy risk.

By coming to market with equity offerings, they solve two immediate problems: 1) they immediately increase the borrowable float, 2) they take advantage of the price spike to issue equity to delever.

From a systemic perspective, any “financial plumbing” issues become moot. But more importantly, money managers and asset allocators can regain faith in their ability to effectively hedge and manage risk.