I disapprove of what you say, but I will fight to the death for you to have the right to say it. In the spirit of this famous phrase (which Voltaire never uttered and which Evelyn Hall invented in 1903 to summarize his thought) we would like to spend a few moments defending the rights and image of shorts, the bears who sell what they don't have and aim to a drop in quotations to be able to buy back further down.
Defending bears is especially difficult at times like this. Some of them resemble Attila, Genseric or Genghiz Kahn and seem to ride on the wind from the steppes of Central Asia to set fire to our beautiful cities. They know they will not be remembered for what they built and perhaps not even for what they destroyed, but for something much deeper and that is the raw material they live on, the fear they manage to instill.
Fear explains the speed with which marauding nomads have brought down vast and established empires. The winning system is always the same. After destroying the first city along the way and killing all the inhabitants, the next city is asked whether it would rather surrender or suffer the same fate. The second city surrenders and from that moment on the invader appears invincible and unstoppable. It is the victims themselves who work for him, going over to his side and causing a domino effect.
The second factor exploited by the invaders is the sense of invincibility of the invaders when they have actually stopped wanting to fight and have delegated the defense of their borders to mercenaries in order to live a comfortable and contented life in their great capitals. Neither the Roman limes nor the Great Wall of China, engineering marvels, manage to defend empires when they have already weakened from within. Even without Attila and Genghiz Kahn, Romania and China would have been brought to their knees by peasant revolts and soon splintered into local potentates controlled by warlords.
In the footsteps of the Mongols who razed the great and prosperous Beijing to the ground in 1215, defended unnecessarily by 100 soldiers, and of the Manchus (Tungusi originally from eastern Siberia), who conquered it in 1644 to govern the empire until 1912, Kyle Bass and some others hedge fund managers today intend to bring China to its knees defended by its new wall, the 3.2 trillion dollars of foreign exchange reserves. Their goal is a 30 percent devaluation of the renminbi. Others, following in Attila's footsteps, are turning towards the West and trying to bring European banks to their knees.
Shorts are not born with strange marks on the skin, locks of hair of different colors or fingers joined, traditional signs of the evil one. Many of them are, like the Qing Manchu, nomads who have become settled. They know how to be short warriors and when necessary transform themselves into long farmers who cultivate their gardens to obtain even just a dividend. Between a traditional hedge fund (60 percent up, 40 percent down) and the Kynikos Fund (note the name) of the respected and serious James Chanos (60 short and 40 long) there isn't such a big difference.
But what makes the shorts so agile is the habit of a risky and difficult life. Those who are bullish often tend to put a stock on which they lose on the back burner and think about something else. The loss of a bull, even if leveraged, can in fact be pre-calculated, because his stock, badly enough, will go to zero. The loss of a bearish player, on the other hand, is potentially infinite and therefore cannot be pre-calculated. This accustoms the short to very careful risk management and obliges him never to get distracted and to strike only in precise points and moments. In this the long farmer, accustomed to the slow and regular rhythm of the seasons and the harvest of dividends, has only to learn from the nomadic shepherd short. The farmer is less equipped psychologically for a rare drought (or crash) year than the nomad is for long stretches of years of hard life.
In any case, shorts are socially legitimized exactly like longs. Both, in fact, declare themselves officials and priests of the optimal allocation of capital. Bulls lower the cost of capital for companies they deem worthwhile, and bears raise it for those they deem less deserving.
Eventually a bull buys, sells, buys back, resells ad infinitum. A bearish sells, buys, resells and buys back indefinitely. Apart from the first and last operation of the series, all others are of the same sign.
And just as great empires have often collapsed even without invaders (think of the Soviet Union), many great upswings have often imploded even without bears. Under pressure from producers worried about falling prices, the Nixon administration abolished the onion futures contract, but this did not stop the decline or subsequent rises, in line with those of other agricultural commodities with futures. Iron ore and potash have been in a heavy bear market for three years with no bears ever touching them.
As for the damage caused by bearish predators to large masses of innocents, let us recall that even the bulls, occasionally prey to rash enthusiasm or foolish political choices, produced disastrously suboptimal capital allocations, which were then paid for with waves of bankruptcies and job losses. Work. The end of the tech bubble in 2000 was not caused by the bears, but by the fact that many companies flooded with capital only produced losses. The end of the real estate bubble in 2008 can be traced back to the political decision to give everyone a home of their own, prompting the banks (which then put their money into it) to lend money to anyone. The bears pricked the bubble with their pins, but everything would have burst anyway.
That said, 2016 is shaping up to be a year controlled by the bears. This does not yet mean (or does not necessarily mean) that it will end with who knows what discounts. It simply means that bears control the game, sell when they want and buy back when they want. The others are passive spectators. Last August it wasn't difficult to meet some buyers, today no one buys (except the American companies that do buy backs) and no one says they will buy.
In 2016, bears have an exceptional set of bogeymen to wave. The hikes by the Fed (in theory eight, between 2016 and 2017), Brexit in June, the US elections in November. As a basso continuo they have at their disposal the (less and less) high valuations, mysterious China on which the most improbable legends regularly flourish from Marco Polo here, oil which will drag mourning and ruins behind it and the European banks, whose regulators (except the ECB) only seem eager to devour the money of shareholders, bondholders and account holders.
Despite this, the world seen by central banks is not so worrying. 2015 as a whole saw US growth of 1.75 percent compared to 2014 as a whole. 1.75 is exactly the level of potential (ie non-inflationary) growth calculated by the Fed for the US. The goal is, for the next few years, to stabilize growth at this level and reduce the number of new jobs per month to 100, so as to avoid wage inflation. For this reason, the Fed intends to raise rates gently.
Even with the euro temporarily recovering, Europe should still be able to grow a little more than last year. China certainly does not seem oriented towards restrictive policies. As for capital outflows, an important part appears increasingly to be made up of the early repayment of corporate dollar debts. Every dollar that flows out of China for this is one dollar less in reserves, sure, but it's also one dollar less in foreign corporate debt. Whoever shakes the bogeyman of declining reserves should also consider the positive side in fairness.
And now a point-blank question. What is the name of the United States Secretary of the Treasury? Does anyone know how he spends his days? There was a time when the Treasury secretary was very powerful and designed fiscal strategies and currency agreements with the whole world. Today everything seems to have withered. As optimists, however, we do not exclude the possibility that a mini Plaza (the Plaza was a historic agreement, it was in 1985, to weaken the dollar) has already been in force for some time, even if only secretly.
A modest weakening of the dollar gives oxygen to the emerging economies, to China and to America itself which, we recall, acts as the pivot of the world and cannot slow down too much if a general tailspin is to be avoided. Since the blanket is tight, pulling it from the Chinese and American side means leaving Japan and Europe uncovered. This leads us to think of even more aggressive monetary responses from the ECB and, hopefully, words and actions of support for European banks.
The time has come for the banks to put an end to the destructive fines with which the United States holds Germany (Volkswagen, Deutsche Bank) by the neck and thus obliges it to align itself with Ukraine. The time has also come when the innumerable European bureaucracies should stop thinking about preventing the next banking crisis on paper and causing one in reality. Strengthening capital is fine, involving bondholders in bailouts may be right, calculating sovereign risk in bank portfolios may make sense, imposing the valuation of non-performing loans at the sell-off price with a gun at the temple may be suggestive. Doing everything together and everything immediately at a less than brilliant moment and seasoning it with the relentless application of VaR and the closing, one after the other, of the desks that generate risk, but also profits, means working day and night for the bears.
Who put their finger in the wound and infect it, but always taking advantage of the fact that the wound was already there. Now, with a minimum of political will and vision, the wound can be healed, but it is good to show this will, at least once in a while.
We conclude with the latest American data, just released, on claims for unemployment benefits, the weekly indicator for getting the pulse of the economy in real time. This is very good data and certainly does not suggest an economy in recession. Let us think of these things before we become more frightened by Attila and his Huns.
