January 2014 - Richard 'Jerry' Haworth: How to Swim with Sharks

Get out of the water if someone is bleeding. If a swimmer (or shark) has been injured and is bleeding, get out of the water promptly. The presence of blood and the thrashing of water will elicit aggressive behaviour even in the most docile of sharks. This latter group, poorly skilled in attacking, often behaves irrationally and may attack uninvolved swimmers and sharks. Some are so inept that, in the confusion, they injure themselves.
Voltaire Costeau

This is an excerpt from a remarkable document which was a bona fide article on how to swim with sharks with some salient advice. It is remarkable how apt this advice is, not only for swimmers but also for traders, speculators and investors as well.

In the market analogy, the injured and bleeding swimmer is the emerging markets. It is thrashing around in the midst of a pack of frenzied sharks getting seriously wounded. What should investors do in other equity markets such as the developed markets in Europe and America?

Well if Voltaire’s wisdom is to be followed, the best advice now is to get out of the water and wait till it is over. If contagion continues even the most benign market can behave irrationally and attack even the “uninvolved swimmers” in the US and Europe.

The basic problem remains...too much credit …and too much credit means too much trust in the social contract, the trust in the willingness and ability of others to pay on future obligations. We think emerging markets have a much better understanding of trust and how quickly to “get out of the water” when the water starts to turn pink. Central banks in emerging markets don’t seem to have the same conjuring abilities of Carney, Bernanke et al and Argentina is a prime example of a central bank printing trick gone horribly wrong as the economy is sawn in half and only half remains!

Japan’s equity market soldiered on after the crash of 1987 until the early 90’s eventually obeying gravity as it sank beneath the waves for the next 20 years. Any similarity between that and China today after 2008 is purely speculation but we must confess that the allegorical shadows on the Chinese cave wall (which is about all the decent information one can seem to glean on the real situation there) with wealth management products and other nefarious financing tools beginning to look and sound like the movie set of Jaws!

If Chinese institutions begin to distrust each other as European and American Banks did in 2008 it could well be an action replay. From here the water gets murky.

If Chinese authorities get behind the deflation/liquidity/trust eight-ball they may shatter the fragile trust built up so carefully in developed markets. If Chinese authorities get in front of the eight-ball the money spigots will open even wider there than they are already and then we should see some meaningful inflation. And that’s a good thing right?

Yes, that’s just what we need, another central bank thrashing the water emulating an injured fish, unwittingly attracting sharks from far and wide.