By Russell Clark, investment manager of Horseman Capital Management, March 2015 monthly newsletter
I have somewhat depressingly spent most of my time as a fund manager net short. I had expected way back in 2012 that I would move the fund net short, capture a big move lower in markets, look like a hero and go long. To use a boxing analogy, I thought it would be a quick knockdown against an inferior opponent. Mike Tyson versus Michael Spinks in 1988 is what I had in mind.
However after some early initial success, particularly with mining shorts I have found myself in a dog fight. I have found myself using all sorts of tools and tactics to maintain my short position. I have used bonds, currency exposure and a long book designed to make money should my short book come under pressure.
When I started thinking about going short, I recognised that we live in the world where almost all central banks have been pulled into the Bernanke idea of asset bubble led economic growth, and that they would go to extraordinary lengths to keep the party going. Philosophically I knew this was foolish, but more importantly empirically I had noticed that Central Banks and government have a long and inglorious history of achieving the exact opposite of their stated aims. Examples of this include the US policy of promoting home ownership via Freddie Mac and Fannie Mae, has ultimately led to lower levels of homeownership. In the 70s, the authorities believed that higher inflation led to lower unemployment, until it didn’t. In the 1990s, currency pegs in Asia were believed to give macroeconomic stability, until they did not. There are numerous other examples.
Ultimately, the current QE programs will fail. I think most likely through a large devaluation in the emerging market currencies. We have already seen all the members of the BRICS family devalue, except for the only one that really matters, China. Increasingly policy making activity by Chinese authorities, including a recent policy of promoting margin trading by domestic investors to create a bull market in stocks, strikes me as particularly desperate.
So rather than being in a quick knockout fight, these last three years have more closely resembled the “Rumble in the Jungle”. In this fight an aging Muhammed Ali took on younger George Foreman. The bookmakers gave Ali next to no chance of winning, as George Foreman was both fast and strong and had easily beaten fighters that had recently beaten Ali. In the first round, Ali tried for a quick knockdown but to no avail. In subsequent rounds, Ali allowed George Foreman to catch him on the ropes while he leant way out of the ring, trying to limit the damage of the punches. As the fight wore on, George Foreman started to grow visibly tired, and Ali started landing punches. Ultimately, by the eight round George Foreman was spent, and Ali went in for the kill.
I am increasingly finding it easier to short, particularly in the US markets. Having dodged and parried so many blows from Central Bank QE programs, the market is seemingly failing to break higher. Breadth is narrowing in the US stock market, and credit spreads widening. Economic data, with the exception of jobs, which is a lagging indicator, indicate the US economy is peaking. To me it looks like the US and China might go into recession at the same time. For this reason I have been adding continually to the short book since the beginning of the year. The market looks tired and weak. Time to look for a knockout punch. Your fund remains net short equities and long bonds.
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And before you ask, yes: one can make money shorting the "market"