The Market Finds a Way

Tuesday, 4th August, 2015
Melbourne, Australia
By Kris Sayce

  • My most bearish report yet
  • One hour, 19 minutes
  • No cut

How do you stop a market from falling?

China tried to stop its market from falling by telling broking firms to buy billions of dollars-worth of stocks…and then forbade them from selling those stocks.

At one point, 70% of the stocks on China’s stock exchanges were suspended from trading.

But that didn’t stop the selling. Investors just sold all the other stocks.

The Greeks went one step further. They just closed down the exchange completely.

That worked. Stocks couldn’t fall. They couldn’t go up either, of course. But then, there wasn’t much chance of that happening over the past few months.

Last night, the Greek stock exchange finally reopened after being closed for five weeks. As the Financial Times reports on this momentous occasion:

The index was 22.8 per cent down in early trading before recovering a little to be 16 per cent down at 670.26 in mid-afternoon trading. The capital markets committee, the bourse’s watchdog, announced a ban on short selling.

Ho-ho, ban the short sellers. That’ll fix it.

In the short term it will anyway. But regulators banned short selling in 2008 too. That didn’t stop the market from sinking to a new low in 2009.

But if that keeps them happy, so be it.

Of course, there’s all sorts of ways for short sellers to get around this little problem.

The easiest way is to build a ‘net neutral’ position in stocks by buying index futures, or buying shares in stocks they’ve short sold. That creates a neutral position. They then hold on to those stocks as the market bounces for a period.

But short sellers are generally short for a reason. If the economy is still structurally unsound, they’ll just wait for the enthusiasm to die down, sell the recently acquired stock, and then return to a net short position as the market falls.

To paraphrase Jeff Goldblum in Jurassic Park, ‘The market finds a way.’

My most bearish report yet

As I write, the S&P/ASX 200 index is up.

That’s appropriate, on a day when I’ve just about written my most bearish research report ever.

I’m nothing if not contrarian.

Tactical Wealth subscribers (including Alliance members) will get access to the latest report at around 4:30pm this afternoon.

If you subscribe, I recommend you check it out. If you don’t subscribe to Tactical Wealth, you can do so by going here.

However, if you’re one of the folks who have written in complaining about the length of our research reports, then don’t bother. It comes in at 5,000 words.

You’ll never finish it. If only I could summarise it in a handful of words…but I can’t.

Never mind. For some people, making and protecting their wealth apparently just isn’t worth the time.

One hour, 19 minutes

To prove the point about why I don’t buy the idea that people don’t have time to read our indepth reports…

This morning it took me one hour and 19 minutes to read the final draft…mark-up changes on paper…(make a cup of tea)…transfer those changes to a word document, and then send it off for copyediting.

Just reading the final report would take no longer than 30–40 minutes by my estimate…and I’m a terribly slow reader. You can see my lips move when I’m reading!

I guess some folks just have different priorities.

No cut

The market was up.

Then the Reserve Bank of Australia (RBA) announced its interest rate decision.

Stocks fell.

Interest rates will fall further in Australia. But not just yet. It will take a stock market crash first.

Pencil in the RBA’s November meeting as the date of the next rate cut.

In the mailbag

After being quiet for a few weeks, the mailbag is bursting at the seams. Was it something we said?

One reader writes in response to the comment about the ‘End of Australia’ in yesterday’s Port Phillip Insider:

Yeah & Argo [Investments] just posted a 16% improvement in earnings, inc their div. You see Kris you guys don’t know a lot about long term investments, you want people to stress & panic at all the noise that the media thrive on. You should be able to look a bit further than the end of your nose, the world goes on, stocks will rise & fall but good companies survive & prosper. Check out the Argo philosophy. It’s all about hanging in there & guess what, their results speak for themselves.

Subscriber, Mike

Hmmm. I could swear I’ve spent the past seven years telling subscribers to ignore the noise that Mike writes about.

Maybe Mike is a new subscriber. But perhaps he should check the Port Phillip Insider and Money Morning archives as far back as, oh I don’t know, about two months ago.

I told investors to ignore everything going on in Greece. I told them that the European Union wouldn’t throw Greece out of the euro. I even predicted that whatever deal they struck wouldn’t go through until the eleventh hour.

And what happened? That’s right, an eleventh hour deal.

I told investors to just carry on investing, and to ignore the noise. I’ve done that year after year since late 2008. I told investors to ignore the noise about the EU, the Fed, China’s debt problems, terrorist attacks in the Middle East…everything.

Now I get folks telling me that I’m a scaremonger! It’s a funny old world.

The good news, Mike, is that I agree wholeheartedly with you. Good companies will do well over the long term.

However, that doesn’t mean problems don’t arise. Australia is in a huge mess right now. Earlier this year I released a report warning of the federal government’s plans to confiscate private superannuation savings.

As part of the report, I explained how the federal government debt was around $342 billion. Today, the government’s debt is $379 billion.

Source: AOFM.gov.au

The Aussie economy has no alternative industry to speak of other than the resources sector.

Last year, of Australia’s top 20 exports, 19 were natural resources (including agricultural products). The one that wasn’t in natural resources?

Have a guess.

It was car exports. And if you need any reminding, the Aussie car industry is on the fast road to terminal death.

Do I need to go on? Do I need to point out that after the resources slump, Australia’s biggest industry is now housing and construction?

The major issue that sent the US economy over the edge in 2007 and 2008 was that its economy had become overweight due to consumption rather than production.

What is a house if it isn’t a high-priced consumption item? Housing certainly isn’t productive. If I’m being cold about it, the reality is that any level of housing that exceeds basic shelter and sanitation is more unproductive — the bigger it is and the more resources it consumes.

Now, I’m not saying that everyone should live in tiny houses. I happen to like my big house in the suburbs. What I’m saying is, don’t mistake a booming housing market for a booming economy.

One is not necessarily the other.

Remember that Australia has gone 25 years without a recession. That isn’t normal. The US economy tends to suffer a recession on average every seven years.

The bottom line is that Australia is long overdue for a downturn. The federal debt continues to grow, and budget deficits will only get bigger and bigger…adding more to the debt.

Why else is the government and pressure groups talking up the idea of raising the GST from 10% to 15%? A report in the Australian Financial Review suggests that those on the top income tax rate should pay 51 cents in the dollar in tax.

Not to mention the latest idea about capping superannuation balances. Take this report from today’s AFR:

Peak bodies representing retail and industry super funds, actuaries and the Grattan Institute have backed a call to limit retirement balances to no more than $2.5 million.

It’s another blatant attempt by the government and pressure groups to transfer wealth from the private sector into the public sector.

Of course, the report doesn’t mention what would happen once your super balance hit $2.5 million. Would you be able to stop contributing to super, and get the money as wages from your employer?

If that’s the case, I’m all for it. But I doubt it. Instead, this is more likely to be a step towards transforming superannuation into a tax or the Medicare Levy.

Rather than the money going into an account in your name, the cash will go straight to the government. In return you’ll get the promise of a government pension in the future.

I’ve warned about this for years. Has it happened yet? In bits and pieces it has. The government routinely swipes the super funds of foreign temporary workers and so-called ‘lost super’.

In short, I’m not in the habit of scaring people without reason and without thought. I leave that to the goons in the mainstream.

When we warn you about something, it’s because it’s something you need to know about. Australia’s economy is facing a dire future, and that’s something you can’t ignore.

Cheers,
Kris [+]

PS: My colleague Vern Gowdie has his own warning to issue. In fact, his warning is so dire he’s written a book about it. The working title is End of Australia. More details soon.