by Bryan Perry
August 16, 2022
Back in the day, when I was working as a broker at Bear Stearns in San Francisco in 1989, well before the fall of that storied Wall Street firm, every morning before the market opened, the entire trading floor would gather at 6:00 am for a pre-market strategy meeting about where to go long and what to go short.
Among 100 or so gathered brokers, if you spoke up from the standpoint of what to buy, everyone would take casual notes amid a lot of side chatter. However, when someone spoke up about a new short idea, the place went totally silent. That was a big deal. This is what made Bear a special place, at least then.
A core short was what differentiated a long-only firm from those that traded both sides of the market.
Fear is way more powerful than greed, so when a highly credible downside proposition comes along – if it looks like a shorting opportunity – investors should pay attention. Remember Blockbuster Video? It had all the earmarks of the ultimate casket company. One broker near me on the trading floor had a massive short position in BBI as he assumed the store that rented DVDs was about to go the way of the dodo bird.
Long story short, the broker we called “The Hall” crushed it for his clients. Blockbuster collapsed by 99%, from $30 to 30 cents. I can think of a number of “terminal shorts” like this that made millions for those that did their due diligence when a disruptive force enters a sector, or a grand experiment goes bad.
Another example of a stellar short trade was when Tokyo’s Nikkei index traded near 40,000 at the end of 1989 and the Japanese were buying up everything in the U.S., from the Pebble Beach Country Club to New York’s Time Warner building. Solomon Brothers brought a 3-year Nikkei put to market, priced at $3 a share. Bear was a big player in the selling group. We stood outside the door of the syndicate manager’s office, bribing her with trips to Hawaii for allocation. Long story short, it was a 7-10 bagger in the end.
We’re coming into hurricane season in the natural world, and perhaps in some sectors of the economy and market as well. Shockwaves were felt around the financial world when Jamie Dimon said, “Brace yourself for an economic hurricane caused by the Fed and the Ukraine war.”
Dimon isn’t the CEO of the most prominent bank in the world because he is careless with his words. If one were looking for today’s hurricane-breeding regions, I would focus on the Category 5 hurricane the European Union (EU) may be facing. What is taking place in Europe is a near-perfect storm of energy inflation, currency destruction, sovereign debt risk, and a leadership vacuum – all converging at once.
When I say, “leadership vacuum,” the term “whistling by the graveyard” comes to mind. That might be a bit extreme, but it’s probably not far from the reality of what is about to hit the eurozone, the third largest economic region in the world. Soaring energy prices, brought on by the cutting off of natural gas supplies from Russia in combination with record drought conditions, are pushing Europe to the edge.
German baseload power prices are now up five-fold from a year ago, to $445 per megawatt hour, with little if any relief in sight. Power prices are heavily influenced by the cost of natural gas – which has more than quadrupled. Low wind speeds and high temperatures have reduced wind power generation. Falling water levels in the Rhine and other key rivers are curbing hydroelectric power output and disrupting the cooling of nuclear reactors to where 50% of France’s nuclear capacity is now offline.
The eurozone is now facing a hyper-energy crisis, a crumbling common currency, and the rising probability of recessionary pressures that could bring that region to its knees. The government of Spain has already outlawed the use of air conditioning in all public places if the temperature outside is under 80 degrees. Does this mean that heating public spaces when the temperature in winter is above 50 degrees will also be banned? This is the stuff of civil unrest, not yet unleashed, but unrest could, in my opinion, begin soon.
I was listening to a Bloomberg radio interview with the German energy state secretary, who opined about how the EU thought that doing a majority-dependent deal for natural gas with Russia back in the 1990s would be a good neighbor, fence-mending, progressive plan to bring Russia into a more-united Europe. Then Vladimir Putin gained power, leaving Europe vulnerable to the Russian natty-gas umbilical cord.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
While Europe is home to some beautiful places, and some fine wining and dining to experience, the current EU economy looks like the rearranging of deck chairs on the Titanic. There are some very basic components that a major economy must have to thrive, and for the most part, in my view, Europe has it all wrong, by a country mile. And this is why, I believe, the U.S. bond market yield is currently inverted.
The woes of Europe, China’s massive property meltdown and capital flight, coupled with Japan’s eye-popping 260% debt-to-GDP ratio and regressive social structure all add up to why the U.S. remains the de facto oasis for oceans of global liquidity seeking a strong currency and stable economy to invest in.
Because the U.S. market has rallied, it has influenced all other markets, even if underlying fundamentals are deteriorating elsewhere. This is also true of the European stock market, which has rallied about 10% off its June low, in tandem with the S&P 500. I believe there will be a serious decoupling of the European, China, and Japan markets from the summer rally momentum led by the U.S. market.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
A view of the one-year chart of the most widely traded European ETF, Vanguard FTSE Europe ETF (VGK), which holds stocks of companies located in Greater Europe (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom) doesn’t impress. As this chart of VGK shows, we’ve seen a nice rally off the reaction low in June, but for going on 15 years (below), this market has been dead money.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Such is true for Japan and China as well, when pulling up the all-data charts. Roughly 90% of all new innovation is born and nurtured in the capitalist-centric U.S. economy. As an investor seeking true return on equity – never forget this point – money never sleeps, and neither should the money in our portfolios.
This recent short-term surge in shares of VGK, I feel, due to world-record sums of central bank QE thrown at what history will cite as a series of extremely poor decisions made by, in my opinion, a very shallow bench of fiscal leadership that could result in a real economic decline for greater Europe and could trigger a full about-face to restarting QE as a crisis management strategy to stave off social calamity. If shares of VGK break $50 to the downside, the vigilante pools of global capital could look to break this market. If so, the U.S. market will struggle to trade up on its own with Europe in the tank. Not a prediction, just an observation.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Inflationary Fallout of the Inflation Reduction Act
Income Mail by Bryan Perry
The European Market is a “Big Short” in the Making
Growth Mail by Gary Alexander
Growth Was Born 200 Years Ago… Did it Just Die?
Global Mail by Ivan Martchev
Here Comes the S&P 500 Line in the Sand
Sector Spotlight by Jason Bodner
Which is More Powerful – Big Buying or Big Selling?
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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