Gone Fishin'

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As most of you who have read a newspaper, or have caught a TV or radio news bulletin, will know by now, Friday’s eagerly-awaited US employment report further shook confidence in the solidity of the recovery process.

With a total estimated gain of only 32,000 jobs — the weakest such number so far this year — the upset meant that financial markets were immediately engulfed in yet another nasty burst of turbulence.

Incidentally, in this same report, the Bureau of Labor Statistics itself revised almost twice as many poor unfortunates (61,000 in all) back on to the welfare rolls in an admission that they themselves had overstated May and June’s combined job gains by more than a fifth.

Given that slippage, we might just begin to suspect that the whole charade of mainstream economic prognosis makes Madame Wanda’s palm reading business look the height of scientific respectability by comparison.

In fact, it’s not the actual number that matters to the trading-desk Top Guns or to the hedge fund hot-shots — much less the revisions — but rather the divergence from the finger-in-the-air consensus, for that — supposedly — is the number the "efficient" market has come to "discount" in advance.

Thus, one of the reasons for the size of last week’s "shock" to the Street was that, of the 72 firms polled by Bloomberg, the lowest u2018forecast’ for the data was for a gain of 180,000 (an error of a mere 462%) and the average call was for a 240,000 addition (650% too high, it transpired), while the wild optimists at ING Bank and at an outfit called — with an irony no script editor would allow — "Insight Economics" were out by a mere factor of 10 or so with their 325—350,000 high bids!

This laughable failure of the whole, expensive, rent-a-comment panoply of bank, brokerage, and third-party research talking-heads to point their rules in the right direction on the graph from the last known data point duly had the following effects:

  1. the 30-year Treasury bond future jumped a tick or two shy of 3 full points, dropping back a touch later, taking the yield on the underlying cash instrument from 5.15% to 4.95% in a matter of a few, scream- and expletive-filled minutes, down on the floor of the Chicago Board of Trade;

  2. the 2-year Treasury simultaneously shed 0.32% in yield to touch 2.32%, its lowest in three months (and a good 1% below the official rate of consumer price increases);

  3. Eurodollar futures for June 2005 — which are a gauge of where prime banks will lend each other 3-month money next summer — shed 0.40% in yield almost instantaneously [Traders have now gone from expecting six hikes of a quarter of a percent in the succeeding five Fed meetings (sic) to just four, including the one we’ve already had];

  4. the Nasdaq 100, already in something of a swoon, was sandbagged, shedding 2.8% to close at its lowest since last October, thus giving up fully half of its rally from the lows of the Fall of 2002, as its "breadth" hit a 14-month trough;

  5. the Dollar, in barely 5 minutes, surrendered half of all the gains eked out on its trade-weighted DXY index over the previous three weeks;

  6. Gold shot up the thick end of $10/oz, bursting through the $400 level, once again, before easing back a touch to the high $390s;

  7. the stock of Manpower, the recruitment agency, fell more than 6% on record volume to hit a 10-month low — yet the firm’s quarterly survey of 16,000 employers, conducted in June, revealed the best results since the peak of the Boom, as fully 30% of the respondents said they intended to add staff in the third quarter, compared to a lowly 6% planning job cuts.

At this point cooler heads and those who make a living out in the real world, rather than in the casino-crammed, concrete canyons of Lower Manhattan, will be asking themselves: could just one, highly-erratic, frequently-revised, heavily-massaged datum — just one brief phrase in the statistical fable which is the "macro-economy" — really be so filled with so much significance that all those billions of dollars of flows and trillions of dollars of notional values be so sizeably altered?

A dispassionate analysis clearly leads us to doubt this, and leads us to conclude that the world will be in need of just as much oil as it was the minute before the data were released; that prospects for corporate returns are broadly unchanged (even those for Manpower, a firm directly involved in the business!); that the trade gap will loom just as large; that government budgets will be just as strained and that, in any case, 32,000 Americans — while each worthy of our consideration as sovereign individuals — don’t actually amount to much of a fraction of what a nation of 290-odd million souls will get up to, much less when compared to the seething human seas of Beijing or Bangalore, of whose multitudes they represent barely more than one-thousandth of one percent!


But what all this violence once more underlines is how far divorced from the production of physical wealth and the generation of real income have become the hot money speculations of high finance.

With, for example, some 7,000 hedge funds commanding $1 trillion or more in assets (many of those, by their very nature, highly leveraged and non-linear in their response to events), with US primary dealers alone funding nearly $800 billion net and $5 trillion gross in speculative bond positions, with outstanding derivatives around the world amounting to $260 trillion — around 22 years of US national output for 2004 — perhaps we should not be too surprised to see in this buffeting glimmers of what the Bank for International Settlements’ Claudio Borio recently called the "potentially increase(d)… costs to economic activity of market malfunctioning and of episodes of severe market distress."

To conjure up a plainer image, the fact that every time someone spots a ripple in the water, every last fisherman — each complete with his multi-billion dollar rod-and-line — goes rushing from one side of the boat to the other, means the skipper has a very hard time of it keeping things on an even keel.

One day, the old sea dog at the helm is going to misjudge his response, or the throng will move a little too quickly for him to correct in time.

On that day, an awful lot of folks will get very wet, indeed, and, sadly, a good many will find they can’t swim, laden down, as they are, with all that fancy tackle they’ve accumulated.

When and if that happens, we’ll be watching from our vantage on our own, less-crowded and more seaworthy craft, a good way to windward of the Ship of Fools.

There, while our survival gear might suffer a good dousing, we certainly shall not be in any danger of capsizing alongside them and what’s more, that’s when we’ll be ready to make our own catch, unimpeded by the throngs of weekend sailors who are presently muddying up the waters.

Chances are, the fish we land then, when few others are able, or willing, to put to sea, will include a number of really fine specimens, such as will provide a rare feast for our customers for quite some time.

Sean Corrigan [send him mail] is the Investment Strategist at Sage Capital Zurich AG and co-adviser to the Bermuda-based Edelweiss Fund. The views expressed are, of course, his own.

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