Jailing Analysts Won’t Stop This Bear Market

Under cover of darkness, ASX special operation forces swooped in on a quiet Gold Coast community. Their target? A notorious financial editor whose persistent negative propaganda has caused a run on the Australian stock market. Worse than that, this editor’s bearish views have singlehandedly sent the Aussie economy reeling towards recession.

That man? Port Phillip Publishing’s own Vern Gowdie, pictured below.

At a time when Australia’s leaders are under mounting public pressure to stabilise the plummeting Australian share market, Vern relentlessly published articles pointing out the massively overvalued price to earnings ratios of the companies listed on the exchange. And he warned that ballooning government debt levels alongside swelling unfunded entitlement promises are unsustainable.

As investigators dug deeper, they discovered that Vern may well have played a significant role in causing the Global Financial Crisis. New evidence reveals he began recommending that investors sell shares and take defensive cash positions more than a year before markets crashed in 2008.

Today he still refuses to place any of his own considerable personal wealth into the stock market. And he’s just written a book titled The End of Australia: The Real Story Behind Australia’s Coming Collapse and What You Can do to Survive It.

Where is his patriotism?

OK, I trust you know I’m pulling your leg. Apologies for the misleading text…and doctored photo. Vern is still a free man and living the good life on the Gold Coast. And — as far as we know — the ASX doesn’t have special ops forces.

Where is the outrage

Despite the Aussie government’s multiple shortcomings, we are still a (reasonably) free and fair society.

Not so China, which has seen the Shanghai composite index slump 39% since June.

From Friday’s Age:

Since the stockmarket started melting down in mid-June wiping out $7.1 trillion in shareholder value, the government has tried a series of increasingly desperate measures to halt the slide. The latest looked like an attempt to shift the blame; in a campaign to crack down on alleged market manipulation, it arrested executives at Citic Securities, China’s largest brokerage, an employee of the China Securities Regulatory Commission, and a journalist at a business magazine.’

That journalist is Wang Xiaolu, writing for the business magazine Caijing. Following his arrest he ‘confessed’ that he’d used some of his own subjective judgement when writing his report on the share market.

How dare he?

This is what Ken Wangdong, our emerging markets expert over at New Frontier Investor, wrote to his subscribers last week.

In dealing with the current market crisis in China, the government prompted brokers and funds to support the market. The government banned short selling and banned large scale selling of shares. They also set up margin finance companies to support lending, and allowed pension funds to infuse their capital into the stock market.

Is there anything the Beijing government won’t do? No. There is one more to add to that long list.

As you may have heard, Beijing is starting to crack down on those who are undermining the market by “spreading bearish messages”, “selling and shorting” and “insider trading”.

Isn’t that just outrageous? Is there no human rights and freedom of speech in China?

The answer is a big NO. And this is something investors (and myself) need to accept.

China is an authoritarian state. Its economy is managed by both market forces and government intervention.

As an investor, you need to understand that there is huge political dimension to China’s story. And with China becoming the largest economy in the world, and increasingly accepted by the global market system, this political dimension is going to become ever more important.

Ken has a good point. As investors we do need to accept this. Eventually the Chinese markets will stabilise. And there will be a lot of undervalued assets with huge growth potential available.

But that doesn’t mean we need to like it.

As for Wang Xiaolu, all we can do is hope for his speedy release. And that perhaps he can slip a copy of The Emperor’s New Clothes to the prosecutors.

Speaking of subjective analysis

Getting back to Australia, the latest figures from the Australian Bureau of Statistics (ABS) showed that retail sales in July shrank by 0.1%. That’s the first fall in more than a year. And it came when market consensus expected a 0.4% rise.

Then there’s the extremely sluggish GDP figure. For the June quarter, GDP growth was only 0.2%. That’s the slowest growth Australia has seen in over two years. Could this be the end of Australia’s 25 year recession free run?

Not according to Joe Hockey.

This from ABC.net:

The economy recorded its lowest growth rate in two years of 0.2 per cent in the three months to June.

The Australian Bureau of Statistics said reduced mining and construction activity weighed on growth, along with declining exports.

The Government acknowledges that other countries heavily reliant on their resource sectors, like Canada and Brazil, have fallen into recession, but Treasurer Joe Hockey said Australia would not be next.

“There is no risk of recession in Australia.”

The Australian share market has fared even worse than the gross domestic product figures. August saw the S&P/ASX 200 lose 8.6%. That’s the worst monthly performance since October 2008. And it’s now down 16% since the end of April.

September looks to offer more of the same.

On Tuesday the ASX dropped 2.1%, erasing $32 billion of investor wealth in one day. It took a breather on Wednesday, gaining back 0.1%. Stephen Cauchi over at Business Day was clearly looking to counter Vern’s negativity by running this headline: ‘China, US, help push volatile ASX to another strong rebound’.

If 0.1% is a ‘strong rebound’, I wonder what Stephen would call yesterday’s 1.4% loss?

As I write the ASX is down 0.13% for the day. And as you can see in the graph below, it’s got a lot of ground to make up since 4 August before you can call it a strong rebound.

Source: Yahoo Finance

So what can the government do to turn this graph, and the wider economy, around? What about another round of quantitative easing (QE), or lowering interest rates? Surely that will solve all of our problems.

Here’s what Vern wrote to subscribers of The Gowdie Letter last week:

This week’s news of our sluggish GDP growth, current account blowout, dollar falling briefly below 70 cents, China’s slowing manufacturing sector and continued share market upheaval brought forward the usual news coverage from the TV channels’ resident financial experts

If you’re like me, you probably find these commentaries an equal blend of frustrating, nauseating and entertaining.

These are the same people who, a few months ago, were championing the prospect of the All Ords breaking the magical 6000 point barrier…the “happy days are here again” crowd.

It is as if the US$200 trillion of debt in the global system doesn’t exist.

But what’s their answer?

In the RBA’s statement earlier this week, Governor Glenn Stevens said: “Low interest rates are acting to support borrowing and spending.”

Make money cheaper to encourage more debt and more spending. More toxins.

Unless I am missing something here, this is stupidity on a grand and global scale.’

In his new book, The End of Australia, Vern offers you a number of strategies to protect your wealth  from the coming meltdown.

Part of that strategy involves the relative safety of cash, a strategy that could have saved investors on the ASX from losing 16% of their capital since April. And it’s a strategy that’s finally beginning to catch on in the mainstream. As Business Day reported yesterday:

Australia’s sovereign wealth fund, the Future Fund, has shifted more of its assets into cash as it fears rising investment risks that won’t be matched by higher returns.’

And our old friend Dan Denning sent me this, from Market Watch:

When Mebane Faber talks, people listen.

The chief investment officer of Cambria Investments is a highly regarded independent thinker. He’s among the few people in the investment business smart enough and bold enough to call out the baloney that passes for wisdom on Wall Street. His research papers are essential reading for anyone in finance.

But when his model says there’s a crash ahead, and that we should get out of the market completely, should we follow suit?

That’s the remarkable situation now — as first reported by Julie Verhage at Bloomberg.

Faber tweeted that the model recommended by his “old market-timing paper ends month 100% in cash & bonds.” This has happened less than 7% of the time in the past, he said. “Last time? 2008/2009.”’

Is it time to move all your investments into cash and bonds? There’s far too much involved for me to answer that question here. That’s why Vern wrote a whole book about it.

To find out how you can get order a free copy, go here.


Bernd Struben,

Managing Editor, Markets and Money

Ed Note: This is an extract of the full article first published in Port Phillip Insider

Bernd Struben is a contribution Editor of Markets & Money. He holds a degree in Economics and is a published novelist. Bernd’s career spans multiple countries on four continents. With his diverse background, he brings unique business insight and a libertarian twist to his columns and analysis in Markets & Money.

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