Happy To Be Short

–It’s not just Australia that’s having a bad month/quarter. An index of U.S. manufacturing activity experienced its biggest one-month drop since 1984. The Institute of Supply Management’s index read 60.4% in April and 53.5% in May. Any reading above 50% indicates expansion. And the index has expanded for 22 months in a row. But this is the third month in a row it’s contracted.

–There is something neurotic with this U.S. obsession for monthly data. We believe it goes back to a particular German-inspired school of economic thought that values the accumulation of vast amounts of data. It is economic management by detailed statistical analysis (we forget the precise name of the German origin, but will look into it).

–History aside, it’s hard to believe that in a $14 trillion economy, this kind of detailed reporting (really it’s just a statistical survey) is as precise as the numbers and decimal points would lead you to believe. Is it really that precise? That accurate? But maybe that’s the point of this strange addiction to data; it creates the impression that everything is being measured, monitored, and appropriately treated (or doctored).

–All you really need to know about the state of U.S. manufacturing is that it’s been in decline since the 1970s. This roughly corresponds with the globalisation of labour, especially in China. In real terms, U.S. wages have been in decline ever since. And the entire structure of the U.S. job market has shifted from highly skilled, high-paying manufacturing jobs to lower-paid, lower-skilled retail jobs.

–If you wanted to put it in even simpler terms, there are now a lot more jobs selling things than there are jobs making things. But selling things doesn’t really add much value. So aggregate wages decline. So does capital accumulation. This has been the case in most of the Western industrialised world for the last 30 years. Why would the monthly data suddenly tell us anything different?

–Oh that’s right! A weak U.S. dollar—competitive currency devaluations via low interest rates—was supposed to spur resurgence in U.S. manufacturing and lead the country out of the recession. That and nearly a $1 trillion in Federal Reserve stimulus through asset purchases. Guess what…

–It was an enormous failure. The markets told us yesterday—both the Dow Jones Industrials and the S&P 500 finished down over 2%—that Ben Bernanke’s quantitative easing policy has not jumpstarted the U.S. economy.  Recession looms.  It’s not much of a surprise around these parts. But perhaps the market is just now factoring this failure into second-half earnings.

–None of this would be terribly germane to Australia—except that the Aussie market still doggedly follows the U.S.’s lead. And Aussie investors may be somewhat shocked that the economy here actually shrunk by 1.2% in the first quarter. Even though that shrinkage can be linked directly to natural disasters, it’s still a bit of a shock, and is probably going to lead to a bigger budget blowout than the government has warned of.

–Sure enough, the Aussie market opened down big this morning. Either this is reflexive and stupid…or there is still some strong correlation between what happens in the U.S. markets and what happens in Australia. This is the case even though it is quite obvious now that what happens in the Aussie economy is more driven by China than America. Maybe it’s simply the difference between how the investment market behaves…and what happens in the real economy.

–Either way, Slipstream Trader Murray Dawes is quite pleased. He’s already advised his subscribers  to take one-third profits in a major short, with two-thirds of the position on the table. He’s generally short the banks and a few basic material stocks, and long gold. The gold position hasn’t taken off. But that’s kind of what gold (and oil) are doing right now; holding their ground in the face of a retreat by the rest of the stock market.

–Is this the market correction the Fed needs before it can justify more intervention and asset purchases? It could work. But there is glaring inconsistency here, which we should probably address: if QEII failed and stocks are now acknowledging that, why on Earth would anyone believe that QEIII would be more effective, much less desirable? Will the Fed have any support for market intervention (other than from the financial firms whose profits are subsidised by low interest rates)?

–Stay tuned for more on that tomorrow. For today, we’ll have to leave it at that. Duty calls at the Australian Wealth Gameplan, where we’ve been in a protracted wrestling match over what the developments in the U.S. shale gas and shale oil industry mean, if anything, for Australia. The left-wing Green noise machine is turning up the volume to “shrill hysteria” levels about the process already.

–But the financial markets like what they see so far. U.S.-based Marathon Oil announced today it would pay $3.5 billion for Hilcorp Resources. Hilcorp owns 141,000 acres in the Eagle Ford, the Texas shale precinct that’s seen a boom in shale gas, and lately, oil produced from the same shale. It turns out the very same method for squeezing natural gas out of shales is working for enhanced oil recovery. Oil plays that looked….well…played out…could be back in play…all over the world.

–In fact, it’s looking more and more like the shale gas and oil shale boom is the most important development in the energy market in recent memory. And it would have clear implications for Aussie investors if the industry gets off the ground here. But given the current political climate, new investment in hydrocarbons may not be forthcoming…or very welcome in some quarters. We’ll push on with the investigation anyway.

Dan Denning
Markets and Money Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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2 Comments on "Happy To Be Short"

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Being short and happy? Nah, they’re mostly angry types those little people. couldn’t resist … On the short the market and happy then … One thing I noticed today on my long runing scorecard on the ASX that uses pre GFC at the beginning of May 2008 as its starting date to reflect the current state of the indexes is that the XXJ (financial services excluding Real estate index) is fast approaching a cross over to the negative side of the XJO general index for the first time since TARP turned the show around that October. This arvo it sits… Read more »

To what degree is the fate of Deutsche Bank tied to that of Australian Banks? I’m referring mainly to the outcome of the Greek sovereign default and IMF meddling.

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