You know who has been hurt the most from these Chinese sanctions?
Hedge funds.
Okay, I am being a tad facetious. But, come to think of it, maybe I am not, because hedge funds manage hundreds of billions of dollars and a sizable chunk has been incinerated on the short side since the trade war began in earnest.
Why is that?
Because the headlines from China are not producing what should be the rational results in the stock market. They are not producing the "cutting numbers XYZ because of trade wars" commentary that one would expect. Or they are not producing the shortfalls that, theoretically, should have kicked in this quarter.
I will go a step further. I bet there was the greatest mismatch of percentage longs versus shorts we have seen since right after the 1987 crash, when the economy diverged from the stock market but hedge funds decided to press their short bets thinking that the stock market had to be an accurate predictor of the economy. It was anything but.
This time, the hedge funds are confounded by the notion that tariffs have to be an accurate predictor of the future -- because hedge fund managers, at least all the hedge fund managers who open their mouths, know a bit of history. They know that "the ghost of Smoot-Hawley seems to haunt Trump" as columnist Robert Samuelson wrote at the end of June in the Washington Post.
Here's the hedge fund credo in a nutshell: "You will recall that Smoot-Hawley was the sweeping tariff legislation that Congress passed and President Herbert Hoover signed in 1930. Most economists have exonerated the legislation as a major cause of the Great Depression, but it certainly didn't help. It contributed to the deep economic downturn," Samuelson continues, "and fed the public's fatalistic mood. Trump is falling into a similar trap."
Who can blame these poor hedge funds. Isn't history about to repeat itself in a farcical fashion. Don' t you want to short the S&P 500 because of it? Don't you want to bet against the Chinese stocks in a visceral and declarative way?
Sure, they, as a contingent, do.
But consider the reality, the boots on the ground. Let's take just the last 48 hours. China's about to slap some tariffs on our engines and our trucks. Holy cow, that's right in Cummins' (CMI) breadbasket. Let's short that puppy, no? Be my guest. The company just announced a $500 million accelerated buyback, in large part because there is so much demand in this country.
The Chinese are going after our new-found, gigantic industry of exporting liquefied natural gas. Shouldn't we be banging down not just Tellurian (TELL) and Cheniere Energy (LNG) , but also so many companies that are in the business of constructing these facilities -- including the infrastructure stocks that have gone parabolic of late?
Wait a second. Co-founder of both Cheniere and Tellurian, Charif Souki -- the man who pretty much "invented" our export market -- would tell you that the world, not just China, is starved for our incredibly cheap natural gas, and a spot market has developed to make it so those who need it more than the Chinese -- and that's pretty much a lot of Asia -- will just sop it up at high prices. He tells me the only loser in the fracas are the Chinese, who will have to pay far more than the world price for their liquefied natural gas.
Or how about Emerson Electric (EMR) ? So much of its new growth comes from China. It was such a natural short -- and it indeed was heavily shorted -- but it blasted the shorts with an unbelievable set of figures that caused the stock to rocket almost four points, which is huge for an industrial.
Sure, maybe the farmers will get hurt by tariffs. But the farmers are in key states for the 2020 elections. You think the Republicans are going to risk defeat, do you think President Trump is going to risk defeat for a measly $13 billion, the amount of aid the farmers might need? And what will they do? They will buy equipment from Deere & Company (DE) , which reports next week. I wonder how that short will do.
And I am not even counting companies like Roku (ROKU) or Yelp (YELP) , companies with massive, accelerated revenue growth -- with Roku, of insane proportions -- that, while they have nothing to do with China, can play havoc with the short mentality, the "fatalistic mood," that Samuelson talks about.
So, remember that. Remember that the linkage has hurt more hedge funds than companies, and that's why shorting's been such a bust, and a natural accelerant to the upside since the U.S.-Chinese conflagration first flared six months ago.
