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25th May: There’s trouble at Mill….

Hello trader,

On a day when the S&P500 and the Nasdaq were pushing to all time highs you might think I am barmy to suggest that things are not as rosy as they may seem.

Of course when markets are hitting all time highs no-one wants to look at the downside, or the cracks appearing……and once again that’s when people least expect the Spanish Inquisition. But as you’ll know our chief weapon is surprise. Surprise and fear. Our two main weapons are Fear and surprise. You get the gist….

So most of my apprehension has come from a series of articles, comments, insights and thoughts that I have read, seen and discussed over the last few weeks with other traders, clients and interested parties.

I am not a strategist, nor am I a fundamental analyst (if you read this entire article you’ll come to that conclusion pretty swiftly yourself). I am merely a trader who likes the big-picture and views the markets through the lenses of fundamental, technical, sentiment and geo-politics. Allied with a healthy amount of discussion with engaged parties I’m starting to build a picture that there is indeed ‘Trouble at Mill…’

Where shall I start? How about China?

So this week we had the first downgrade of China by ratings agency Moodys since 1989. Yes, it’s 28 years since they had any sort of downgrade. Moodys believe that their financial strength will erode as debt mounts. I am no China specialist in any way, nor have I tried to be, namely because the data (to my very un-educated eyes) appears to be opaque and, at times, a carefully constructed pack of lies. I have no doubt that people far smarter and better educated than I will be able to provide better insight on the China situation – however most of us have been ignoring it since the mini- crash/episodes in August 2015 and January 2016. As Brexit, Trump and the EU have been filling our headspace China has just been pootling along under the radar without any real interest from the rest of the world. I think that maybe about to change. I don’t trade USDCNH but I always take a look at the chart now and then. Here is the present monthly chart – its been one-way traffic till the start of this year. (And there was a pretty strong sell-off today if you care to take a look). What we saw today was the Chinese selling Dollars and buying Yuan – was that an effort to paper over the cracks and demonstrate some strength in China? A case of ‘move-along, nothing to see here….’? I’m sure smarter folks than I can provide clearer fundamental insight than I. You can read a Zerohedge piece on the Chinese intervention here.

Furthermore we have also seen the suspension of shares in Noble Group – a major Singapore based commodity trading house. Their share price is down 82% in the last year. (As an aside I have always kept an eye on this stock after reading the epic book The Noble House by James Clavell. One of the great books on business, trading and Asia. Well worth a read. Though the Noble House was more loosely based on the history of Jardine Matheson – a Hong Kong based Trading House – I am sure finer brains than mine can correct me on that.)

So most of my readers will have no exposure or inclination to trade China – so how can they turn this into an opportunity? Well lets take a look at the Commodity based dollars, or ComDoll countries, of Australia, Canada and New Zealand.

The ComDolls

The ComDoll countries of Australia, Canada and New Zealand did well for a good time off the back of the Chinese commodity driven demand of the last 10-15 years. However those happy days are coming to an end.

In discussion with clients either in, or exposed to, those three countries they all talk about the property bubbles occurring in Sydney, Vancouver and Auckland (and elsewhere). Prices for both purchase and rental have hit eye-watering levels, at a time when their economies are starting to come off the boil.

In Canada, who escaped mostly unscathed from the 2008 GFC, we have seen a bank run recently and one of the countries major banks/mortgages providers Home Capital Group require a bail-out, in order to just be mothballed. (A Canadian Northern Rock?) This has helped start the bursting of the bubble.

In Australia there has also been a housing bubble however recent residential construction recently fell at its fastest pace in 16 years. It was hoped that construction would help off-set the slow down in the commodities/mining industries….but in fact their slowdown appears to be having a negative knock-on effect to the construction industry.

I will do a separate piece on these three ComDoll currencies tomorrow. Makes for some interesting insights.

My, admittedly simplistic, view of all this, and how to play it is through the prism of Gold. Take a look at this monthly chart of Gold.

This is the monthly chart of Gold and I see price as starting forming a triangle – as it starts to coil-up.

Now in my simplistic trader view of the world I believe that should price break strongly to the downside then my fears are un-founded as the world breathes a sigh of relief and the whole charabanc continues.

However if price breaks to the North and continues then that tells me that people are worried and running for cover. Remember capital is a coward, it will run and hide somewhere safe at the first sign of danger.

The best of the rest part 1: Art

Why am I talking about Art in a traders blog. Well I have done it before – but also I think it gives us some insight into where we are in the cycle. Here is a photo of a recent piece of art sold at auction.

This piece of art is Jean-Michel Basquiats painting ‘Skull’ which recently sold for $110 million at auction (yes that really is $110 million) making it the most expensive painting to ever sell at auction. It has been described as a ‘powerful’ work of art – I shall let you the reader make your own mind up about that.

(Personally it looks like the kind of painting my 6 year old nephew brings me from school and I have to put it on the fridge whilst feigning surprise and wonder at their artistic talent. I wouldn’t pay $1.10 for it, let alone 110 million. However I am a trader not an art-critic. I’m not yet wanky enough for that role. But I am working on it.)

My point is simply when such bombastic spending of money on art reaches new highs and hits the headlines it’s normally a good indication that we’re in a bubble and a market top is near or already upon us.

The best of the rest part 2: The US and Trump

The Trump reflation trade is well and truly over – and now we’re in a weird no-mans-land. Yes, markets have been hitting highs…..but underneath it all there’s a great deal of uncertainty about the state of the US economy. I am not going to even touch on the bubble in auto-loans (and the rise in delinquency rates) or the struggling US commercial mortgages market (US Shopping malls are emptying fast and owners struggling to make repayment.) I have gone on enough already in this piece.

I read two articles which raised my eyebrows (in the style of Roger Moore – RIP). The first one was about the SkyBridge Alternative (SALT) Conference in Las Vegas where the underlying tone seemed to be one of nervousness at the biggest conference for Wall Streeters and Hedge Fund types.

The second one was on ZeroHedge (yes I know the guys a mega-bear and also is very hit-and-miss however with experience you’re able to filter out some of the better pieces.) A recent piece on his blog was about setting the framework for Trump to become the scapegoat for the coming crash. Which would probably please most people – he has made himself an easy target.

So there you go, some of my own personal insight into why am I feeling apprehensive and bearish. So would I be advising you to just sell everything? Well, no. Just because I am nervous doesn’t actually mean anything. Part of it is because I know myself – I know that I am mostly a bear (2/3rds of my trade are to the short-side). I wouldn’t describe myself as a perma-bear, but I know I have that bias and I have to be careful. That doesn’t mean I have been trying to load up shorts – what it means is that I have an idea that the global economy maybe about to take a rest/retrace/reverse and if that follows through onto the charts then I shall be looking to participate and take advantage. Remember part of the reasons for writing the blog is to help me clarify my own thoughts and ideas.

Its perfectly possible that markets could continue north for another 3-12 months. It could do that very easily. What I have learnt over the years is that things tend to happen slowly, and then they happen very quickly. It’s the same with markets. Whilst there maybe strain and cracks they can still continue trudging north until something triggers a melt-down. It’s when the real signs of that melt-down occur that I will start to prepare to attack. Until then it’s business as normal. Keep your powder dry.

I hope you found that interesting and provides some insight. As always I caveat it with the fact that I am a trader. I have no doubt that finer brains than mine will read this and disagree, or be able to provide better examples/data. I always welcome such debate.

Trade well!


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