Three years ago I used to pen pieces that were tangential to the markets and finance on a regular basis. I maintained a fringe blog, if you wanted to call it that, on a trading forum that has now gone dormant. But that was way before this.
So much has happened within this hiatus of the pen. I've been through multiple smaller and shorter cycles in my career in finance that have shaped the cornerstone on while I currently stand. I've learned that to be good at something, we've got to be willing to spend a good deal of time and effort in learning that craft; luck is occasionally involved but I wouldn't count on it every time. Rome wasn't built in a day, folks.
After being exposed to the unmerciful roughness and mental totem that is the financial markets for over more than half a decade, and despite having made and lost exorbitant amounts of money, this is in and of itself already a litmus test. A test of commitment, and the manifestation of passion for the trade; I'm very glad to still have my skin in the game.
In any trade as uncertain and tricky as being a self-directed trader and investor, where you are solely responsible for the results, or any sales-commissions based job in property or financial advisory services for the matter, there will be many new entrants and just as many who throw in the towel. Turnovers may vary in accordance to the specifics of the trades; but one this is certain: Many give up along the way.
This is a tricky thing to even opine on because everyone's circumstances do differ to some extent. The fact is that we could speculate on the what ifs and the permutations of could haves/would haves/should haves, but we never know, because there was only one terminal outcome after all was said and done. It is only in retrospect that we will have the faintest clue to the correctness or wrongness of our decisions; but that's besides the point.
This is the main reason why I titled this space "The Business of Finance". Yes, this space does deal a lot with the financial markets and the likes but nothing can ever escape the gravity of Business. In fact, I believe that there is a Business to everything in life, including life itself; and I would not hasten to junk these into the cliche bin. Successful individuals tend to conduct their lives in a certain manner, which explains their state of accomplishments.
Finance and financial planning can be very flummoxing and dreary topics to think about, this is why I think a good majority of folks shun this aspect of their lives. But there is also a certain group of like-minded fellows who tend to take this topics seriously because they understand the value of the future by investing time, effort, and resources in the present. I want Business of Finance to reach out to this specific group of people.
After more than 6 years of practical experience in the markets as a self-directed discretionary trader in the FX and US equity and equity options markets, I have found the journey to be extremely worthwhile thus far. I have garnered a lot of information and applied them to my knowledge base. I've learned from painful mistakes that have both stabbed the heart and broke the bank. Business of Finance is merely an avenue for me to make the lexicon of knowledge available to the sincere and willing. This is not a fast-money blog, nor is this a space to share punts; those were the heydays but I don't have fond memories of those times, strangely enough.
The once glowing vacuum tubes have gone cold and frigid. It is high time I warm them up again, this time with a greater purpose. To educate, to share, and to grow. After having written hundreds of pieces back in the days, I found the act to be self-beneficial. I would have my thoughts streamlined - something my neurons would never naturally do. I developed the habit of conceiving ideas from the many trains of thoughts that emanated from tunnels of the void, and I subsequently transferred those ideas from paper to the markets through structured positions; some were winners and others not so. Once I got the hang of that, it became a very fun thing to do with regularity.
My expertise is obviously in the domain of trading and investing. I have more knowledge and know-how working with certain markets and financial assets, and less with others. I'm not setting any limits to what Business of Finance will encapsulate because I will write on whatever I feel has the inertial to propel my interest beyond the superficial. If past is indeed prologue though, whatever that is going to transpire should span a wide spectrum. For instance I have written a missive on the revelations of American cyber espionage ala Edward Snowden when the story was still in its infancy; and a 28-page paper on the misunderstands of monetary finance and the delusions surrounding gold.
Of course, being a licensed Financial Adviser in Singapore does give me broader reach and insight into financial planning on main street, and also on high street as I deal with clients from many walks of life. Insurance and wealth management is not discussed broadly, as such I will occasionally share about these topics in a format the layman would appreciate.
Ultimately, Business of Finance wants to empower individuals to make their own informed decisions and develop tool sets that will remain with them for life. Systematic solutions amidst chaos indeed!
This coming Thursday, 23 June 2016, the United Kingdom will vote on a historical referendum deciding on the status of its European Union (EU) membership. For the last 2 years since 2014, the UK parliament, led by acting Prime Minister David Cameron have promised a public referendum on Britian's EU membership. Britain's relationship with Europe has always been one of contention, and many have long been awaiting this once in a generational lifetime opportunity to voice their opinions through the democracy of a vote.
The global financial markets have also been eying this key event risk for some time, and since events have heated up recently as we enter the final week before the ballots are cast, there has never been a more important 4 days for English markets (that's including the pound sterling, GBP) since the "Black Wednesday" of 1992 , the day the Bank of England was broken by the markets.
We are not usually pessimists but when we see the writing on the wall getting bold redder each week that passes, we can't help but to take serious note. Just last week, we warned readers that markets might be about to get nastily volatile during the summer. So far so bad. May hasn't started well at all. The S&P 500, as of the week ending this past Friday, posted its first 3-week losing streak since January.
Recent macro developments both in the U.S. and elsewhere have however strengthened the bearish case for risk, in our opinion. It might have reached a point where downside skews in risks make a derisking maneuver potentially more rewarding than chasing beta.
As such, we have shifted our bias to the short side of risk. The positions in our portfolio (which we keep private) have partially reflected this change in view and will continue to do so as the situation evolves.
It is a known fact that credit cycles often lead business and economic cycles. It makes sense on paper and even more sense in practice. This is a subject that we havehardly yet touched on, but will be doing so in this piece. For a majority of the investing community, the topic on credit cycles remain much of a novelty.
As of March 2016, total default volumes on HY bonds (high yield) and institutional loans in the U.S. hit a 6-year peak of approximately $16.2bn, almost half that seen in the entire of 2015. Just this past week alone, we saw at least 4 corporate defaults with 3 in the energy sector.
So far in 2016 (Jan-Mar) default volumes have reached a jaw dropping $32.4bn. To put this in context, 2015's default volume (which was already abnormally high) stood at $37.7bn. If this trend were to continue through 2Q and beyond, we are talking about a full-fledged wave of defaults.
For the first 3 and a half months that have already elapsed in 2016, no asset class has seen the consistent volatility that currencies have. Central banking has been busy, almost too busy, all while the macro fundamental landscape has hardly moved an inch. With all that drama, noise, and play in monetary policies throughout the global economy, one would expect sizable trends in FX. But that hasn't been the case.
For instance, when the ECB first lowered its deposit rate to zero back in the first half of 2015, that sparked a major bear market in the euro, and a bull market in risk assets including euro bonds. When the Fed announced it planned to gradually taper QE3 and eventually end it late in 2014, the U.S. dollar began building up into what we now recognize as one of the most fervent dollar bull markets ever.
Monetary policy divergences used to herald the alpha and omega of huge trends. But not today.
Now, thanks to a comprehensive piece by Bank of America Merrill Lynch, we can provide readers with a glimps of what might be the next big trend in FX.
Last week, Bloomberg broke a story which greatly fascinated us. It involves a mysterious "specter", one which we have no clue about, flooding the Turkish stock exchanges with massive buy orders, massive to the tune of some $450mn in a single day.
Turkish locals refer to this entity (whoever or whatever it is) as "the dude", crowning the figure with an amphibious demeanor worth of a chapter in Slenderman. We have no idea, absolutely no idea who or what "the dude" is, how it specifically operates, and what its motives are for slamming a relatively illiquid market with order sizes so large, they scare the living daylights out of even the staunchest of permabears.
All we know is that local authorities have been rattled, investors shaken off to the sidelines, and a stock market that is now a stellar outperformer in the emerging market (EM) space. Even with the gruesome terror attacks in Istanbul over the weekends, an attack which has killed at least 37 people the last we checked, the Borsa Istanbul Index has now rallied for the 9th straight day.
That's right, we need the U.S. dollar to be BOTH strong AND weak at the same time for continued upside in equities. Much has been said about the greenback ever since the end of the Fed's QE3 program in late 2014. It was then all about king dollar leading up to the Fed's first (in a decade) rate hike in December 2015. Speculators kept piling in on the the freight express train that was the long dollar trade du jour, creating what has become one of the most crowded trades in modern history.
It's likely going to be a tug of war between these forces we've highlighted in this piece. Again, we make no predictions as to direction. We do however expect this conundrum to continue until a novel catalyst emerges that alters the way market participants trade and position. What this novel catalyst is, we don't know.
This conundrum is big, as we shall explain below.
The top 0.01% of the erudite elites control more than 60% of the world's wealth, while the 80% of us have a collective net worth less than the top 1% of society. In a world decorated with such gaping inequalities, risk and opportunities present themselves. While problems may be plentiful, there are also long term opportunities to capitalize on the mother of all trends: A globally aging demographic.
Which is what Janus Capital's Bill Gross, well revered as being called the "Bond King", is driving at in his latest investment outlook. In the race between the tortoise and the hare, the former analogous to a gradually aging population, the latter to technological advancements, the tortoise eventually catches up. Time isn't on our side, and we're sitting in a ticking time bomb.
It's a known fact that a large majority of the world's baby boomers are not adequately primed for retirement, lack the financial resources to meet mounting healthcare and insurance obligations as they further age, and are more dependent on the state's hospitality than ever before. But who pays the ultimate price?
The prospect of $20 oil prices has been raised thanks to this one Black Swan. A Black Swan is also known to statisticians as tail risk, or events that are highly improbable but are of great significance. One can liken such an even to a large meteoroid making its way through the Earth's protective atmosphere and impacting land or sea; an extremely unlikely event but if actually true, mankind's existence would be threatened.
Low oil prices have been the bane of many oil producing and export nations, whose currencies and economies have taken incessant hits every cent crude continues to plunge. The ruthless combination of a huge supply overhang and waning global demand has led to a deadly concoction oil producers and exporters have no choice but to drink. What other choices would they have anyways?
Whatever we said on 5 November came true. For the first time in 9 years, the Fed hiked the Fed Funds target interest rate by 25bp to 0.25-0.5%, ending an eon of zero lower ground rates and marking the start of a new paradigm. A paradigm that is, much as most would hate to admit, unprecedented in terms of scale and bredth.
As we approached 16 December, markets had increasingly discounted a Fed liftoff, but there was still some element of uncertainty. That uncertainty now shifts to what the Fed will do in 2016. Will it continue to gradually hike rates? Will it reverse on its path of monetary tightening and start to ease? These are but a multitude of questions that everyone is asking, but no one can really answer.
Does dovish rhetoric from Europe's ECB, continued stimulus from China's PBoC, the reluctance of Japan's BoJ to step up QQE despite headwinds, New Zealand's RBNZ policy being put on hold signal a soon imminent Fed rate hike?
While correlation might not necessarily be causation, especially in the ubiquitously tangled web of central banking, we believe this development is too significant to turn a blind eye on. Ironically, market-based odds for a December Fed rate hike have never been higher.
Do central bankers know something about the Fed's near term actions which the general market doesn't? If anyone knows what the other will do, it's probably them.
We'll leave this up to you to decide. The proof is in the pudding, and this one's pretty dense. So take it for what it is, we're playing it cautious but not holding our breaths.