Fundamentals. They are an extremely important analysis for any investor or trader. At MatrixChart Systems, we are huge advocates for fundamentals. After all, before you park your hard earned money in a stock, you should want to find out if that company has been making good profits, and if there are significant growth opportunities in the foreseeable future. Ignoring fundamentals because of laziness or ignorance is usually costly.
What has this got to do with greater fool theory? Well, sometimes if you’re not careful, or perhaps get too taken in by a certain rhetoric, you could fall prey to being the greater fool, and buy something that has no fundamental value, at a ridiculous price.
What is Greater Fool Theory?
Greater Fool Theory essentially says that is possible to make money by buying something regardless of its fundamental value or if it is clearly overvalued, because there will usually be someone (a greater fool) who is willing to pay a higher price. This applies not just in the stock market, but in any market, from automobiles to real estate, limited edition toys, and Cryptocurrencies especially. As long as there is another buyer out there willing to pay more, you can make money.
Morality aside, almost nobody turns away a greater fool, because if they did, then they would be the one stuck with something that they overpaid for, and will have to stomach the loss.
Take real estate for example, if you sink $600,000 into a property, and later find out its worth only $550,000 after a few months, you would begin to feel a little uneasy. But what if suddenly, due to a government announcement that you know will not make much impact in the long-term, manages to convince other speculative buyers who have short-term views to rush in, and a buyer now offers you $1 Million for your property? Would you say no? Of course not, that sudden short-term boost that has caused possibly uninformed or greedy speculative buyers to rush in, is your chance to exit this investment with a 66% gain, instead of an 8.3% loss.
Now of course, there are plenty of other ways in which the price of something can be boosted. Take for example a ridiculous valuation of a start-up, based only on rapidly growing revenues founded on hype and marketing but with no stable fundamentals, and yet plans to IPO.
WeWork’s IPO – An Exit Strategy For Initial Investors
Remember, when you want to cash out of something that you bought, you need to find a willing buyer, and preferably at a price point that is higher than what you paid. For start-ups, after the founders and key investors have built the company as best as they can, they might consider an exit strategy that involves growth, or to just exit completely. If they were to exit completely, then they would look to get acquired by a larger company that buys them out totally so they can collect the cash and walk away. However, an exit strategy that involves growth, is an IPO (Initial Public Offering), as the early backers and founders can cash out a sizeable amount of shares for phenomenal returns, but still retain some of their holdings with the intention of seeing how much further they can grow the company. Let’s take a look at WeWork in this regard.
For WeWork, it has become fairly obvious that their big investors, like Softbank, are looking to use the IPO to exit with huge returns by offloading their investments to ordinary retail investors who will hopefully be greater fools. Softbank has sunk a significant amount of money into WeWork, and owns close to 30% of the company at this point. Having invested at a valuation of $47 Billion in January 2019, Softbank clearly overpaid. And now, given their total investment in WeWork, Softbank cannot suddenly appear to walk away anymore. Softbank is “too far down the rabbit hole” so to speak. If Softbank were to walk away now and show their lack of faith, nobody is going to touch WeWork even with a stick, and WeWork will certainly file for bankruptcy.
When WeWork filed for IPO, they had to make the necessary filings with the SEC, and this also opened up the company’s books, after which WeWork had to shelve its plans for their IPO. Namely because public capital markets set off the alarm bells after properly scrutinising all of WeWork’s filings. All is not as it seems.
The Business Model for WeWork = WontWork
WeWork is in the business of providing co-working spaces. It doesn’t matter how fancy or high-tech those spaces are, it is still office space. And to put it simply, they have long-term liabilities and short-term revenues. All this points to WeWork’s business model being fatally flawed. WeWork locks in long-term leases with landlords of properties and this loads WeWork with long-term lease obligations along with debt from all the expensive renovations and technology that they want to put in place to make themselves a cut above the rest.
However on the revenue side of things, WeWork operates on giving sub-leases to very short-term tenants who can come and go with as little as 1 months’ notice.
To put things in perspective with numbers, WeWork’s property lease obligations are almost at a staggering $50 Billion and have an average period of 15 years. When looking at their tenants, WeWork’s committed and contracted tenant base works out to only about $4 Billion with an average period of 15 months. If that sounds insanely risky, that’s because it is.
Committing to a fixed stream of debt and lease obligations while having an unstable and risky revenue stream has never worked out well. Look no further than Hyflux in Singapore for a similar example.
To add to their woes, WeWork reportedly only has about $2.5 Billion in cash currently, and in the first 6 months of 2019, has already burnt through $1.5 Billion. At that rate, WeWork will be out of cash by around May 2020 if nothing changes.
Further compounding their problems are the fact that ex-CEO and founder Adam Neumann has had some questionable dealings with the company and has in fact already cashed out $700 Million personally, apart from also owning some of the properties that WeWork leases. Next would be the fact that WeWork doesn’t really offer anything special other than hype and marketing. Competitor IWG is in the same space with similar capacity and is actually profitable, but IWG is valued at approximately $3.7 Billion, more than 10 times less. And lastly, what’s stopping some of the landlords themselves from converting their own properties into co-working spaces on their own?
A Lesson In Fundamentals
What we have here then, is a lesson in fundamentals and prudence. WeWork received huge backlash for even thinking about an IPO given their spiralling losses and that they’ve been mostly cash negative long before the IPO filing. But the truth is Uber and Lyft could be lumped into that same category, and yet those 2 unicorns have made it to the IPO stage and have since fallen far below their IPO price. Yet another recent unicorn that made it to IPO and sunk is Peloton, with a ridiculous valuation that when based on forecasted revenues, really doesn’t make any sense, and yet, Peloton cleared the IPO hurdle.
Just because a company is allowed to IPO, doesn’t automatically make it a great company. Some companies start off great, like Microsoft, and some companies take a fair amount of time to become great, like Apple. But those companies listed in a different era, when times were different. Either way, you should only ever consider investing in the company when the signs for greatness finally appear. If those signs appear at IPO, fantastic, and if they don’t, just stay out. Always remember that patience is a virtue.
Conclusion – Caveat Emptor (Buyer Beware)
To wrap up, beware of all the hype surrounding these unicorns. Clearly, the venture capitalists and early investors are more than happy to push through ridiculous valuations based on rapidly growing revenues with no fundamentals. Early backers and VC firms stand to make huge returns if a start-up can make it to an IPO, as an IPO means that there is variability and “wiggle room” for them to inflate and anchor the price of the stock when it is sold to retail investors. These early backers will reap fantastic gains selling their holdings to greater fools like uninformed investors, reckless retail investors who fall for the hype and marketing, or greedy investors who want to gamble and try their luck.
Don’t be the greater fool, do your homework on the stock, and trust in the fundamentals you have researched for yourself.
To quote the greatest showman, P.T. Barnum, “There’s A Sucker Born Every Minute”, don’t let yourself be one of them.
Knowing thyself, how you feel, and how you act based on your thoughts and emotions is a critical component of being a good trader.
In my previous post, we examined the 4 Pillars of a Good Trader. I illustrated the key points that were crucial in either making, or breaking a trader’s success in the markets.
One of those points was Psychology and how it was critical that you understood yourself above all. Finding yourself, and understanding how you feel, think, and act when trading is truly a journey of self-discovery.
There is no coach out there who can tell you about yourself with such depth because only you experience your own thoughts and emotions. Instead, what we as coaches do, is help you to observe your behaviour and actions, and then we try our very best to categorise you into the most ideal trading style that suits your personality. In short, it is still a journey of self-discovery, but one that can be made easier with a coach who guides you, since they can observe and act as an external voice.
At MatrixChart Systems, there are 3 types of traders that we have defined. This list is not exhaustive by any means, and there are certainly other types of traders that you could categorise. But broadly, what we have below is from the model developed by our senior partner and co-founder, gleaned from his 28 years of market experience, and 10 years of coaching.
1) The Cheetah
Number 1 is the Cheetah. Why the Cheetah? The Cheetah is the fastest animal on land, and it comes down to how the Cheetah hunts. The Cheetah spots its prey, and slowly stalks it, planning well in advance its moves, so that with explosive reaction timing and rapidly quick sprints, the Cheetah can hunt down what is usually another fast running prey such as the Gazelle.
In trading terms, the Cheetah trading personality suits anyone who can excel at fast, rapid, intense, and high-stress situations, and still come out a winner. This type of personality is better suited at scalp trading which requires you to be fast, and have good reaction timing. When a trade comes, you’ve got to be able to immediately take action, and not second guess yourself. Once in the trade, you’ve also got to handle the emotions of seeing a low-timeframe chart such as the 5-Minute (M5) chart which forms a new price candlestick every 5 minutes.
So imagine watching prices move rapidly up and down, and seeing new candles every 5 minutes. You could be making money one moment, then losing the next, and it could be anywhere from 5 minutes to 30 minutes or more, before the overall trade does go in your favour (or maybe it doesn’t). If you can keep calm in these type of trades, think clearly, make the best decisions, and most of all, stomach the emotions that come with seeing prices move in mere minutes, then you have more of a Cheetah trading persona. To be fair, the vast majority of traders that have passed through us do not identify with the Cheetah persona, given that it is indeed one of the toughest styles to learn, and then master.
2) The Eagle
Next is the eagle. So what are the special traits about the Eagle that we can identify as good for trading? Again, the way it hunts. An Eagle doesn’t burst onto the plains and give chase at top speed like the Cheetah does. Instead, the Eagle flies high in the sky, observing and watching everything that goes on, and critically, waiting patiently for the right prey. When the Eagle spots the right prey, it swoops down, gliding effortlessly with confidence, and snatches its prey with its talons.
Relating this to trading terms, the Eagle personality suits anyone who prefers to have a more calm, lower stressed approach to trading. You can take the time to analyse the markets, plan the trade and the risk management accordingly, then just wait patiently for your trade strategy / setup to appear. When your trade setup does appear, you swoop in with confidence, and take the trade.
The Eagle persona is more calm, and precise, constantly watching from above, before swooping down to snatch the best trades possible. If there are no trades to be taken, they stay out of the market and continue flying high, watching, waiting, biding its time until the right trade does appear.
This trading persona is best suited for Swing trading, where positions can last from days to weeks, and maybe longer if the trend is strong and the trader is willing to trail it. Being swing trading, the chart timeframes that you would look at range from 4-Hourly (H4), to Weekly (W1). Swing traders may even go as high as the Monthly (1M) chart if the trend reversal seems significant enough.
No surprise, it is the Eagle persona which the majority of traders identify themselves with. Whether it is Forex or Stocks, swing trading has, and continues to be the most preferred method of engaging the market. You have ample time to analyse the markets, plan the trade + the risk, and then set alerts for those key price levels you are looking for. Some traders may even go straight to setting pending orders if they feel the chart is showing a really solid trade setup approaching.
The Eagle persona is the best one to master, as we feel it has the best blend in terms of action and patience, meaning you do not need to wait too long before a trade comes along, nor is it too fast and chaotic that you might just panic and run away. So if you’re feeling a little lost in terms of trading personality, or you are new to the markets, learning to be an Eagle is your best bet.
3) The Tortoise
Finally, we have the Tortoise. So you might be asking at this point, how and what exactly do we have to learn from a Tortoise? I can definitely tell you it’s not about hunting, because Tortoises don’t hunt, they’re not a predator. But, there are 3 very important traits about a Tortoise that are indeed vital for traders, and even more so for investors; Patience, Prudence, and Longevity.
i) Patience (Extreme)
A Tortoise is naturally slow, but that does not make it a disadvantage, as slow and steady is what wins the race. Exercising extreme patience is difficult to do, but when mastered, can be hugely rewarding in the markets.
Waiting patiently for the best possible entry price when a stock is massively undervalued takes self-control, and then, after entering the trade/investment, you would need to have that same patience to hold for as long as possible to maximize the return and make big money.
In some cases, if the company invested into is one of those major cash cows that are stalwarts in their industry and therefore a “dividend aristocrat” (e.g. P&G, Unilever), then obviously you would never sell. After all, if you were patient and savvy enough to pick up those stocks at rock bottom prices, why exit? Just hold, earn the dividend, and compound.
A Tortoise is not a hunter, but it still needs to exercise prudence in not venturing off the beaten path, or trying anything too risky. This is a good trait for any investor to have, because it means you would never park your money in anything that isn’t tried and tested. So IPO’s are a big No-No. You would only look for companies with years of stable, solid earnings, and with a healthy balance sheet to go with it. After which you consider growth prospects, future developments, R&D, and positioning. By being prudent, you are shielding yourself from potential calamities and ensuring you can hold out and survive, whatever the market conditions may be, because you’ve picked rock solid companies. You’ve essentially built a protective shell around your portfolio, just like a tortoise’s shell.
Once you have your list of such companies, you develop an investment plan to enter at good entry prices based on criteria such as technical analysis from charts, book value, and price-to-earnings (PE) ratio. You then stick to your investment plan to steadily acquire more shares of these companies, slowly but steadily. You do not always need to wait for a market crash to enter, as you can still use Dollar-Cost Averaging (DCA) to your advantage when growing your portfolio in normal market conditions.
Now imagine growing your portfolio over years, then decades. Just like a tortoise, with a protective shell, you are climbing the mountain slowly, steadily, and in a safe, well-shielded manner.
Through their patience, and prudence, Tortoises are amongst the longest living animals in the world. Tortoises can live from anywhere between 80 to 150 years, with the oldest Tortoise reportedly living up to what was estimated to be 255 years at its time of death.
As it is with markets, you want to be able to stay in the game for as long as possible. For some, maybe even leave behind a legacy (and inheritance) for future generations. With extreme patience and prudence, it is almost a given that you can last very long in the markets, catching opportunities, growing your portfolio, and of course, shielding it from calamity. If you picked companies patiently, and with prudence, there is also a very high chance those companies will remain gems in your portfolio. And given the time scale, patience, and strict prudence that comes with a Tortoise persona, it is likely your portfolio consists only of gems and nothing else.
Naturally, the Tortoise persona is best suited for investors as opposed to traders. The tortoise persona is more common than you might think. From experience, we do have a significant number of clients and students that wish to continue working in their full-time job because the salary was hugely generous. However, they wished to invest a highly significant amount of that salary into the markets to grow their capital while earning steady recurring income from those investments. And so, slowly but steadily, the Tortoise persona continues acquiring shares of the best performing stocks, but at price levels they know are reasonable. Just imagine the kind of portfolios and returns they will reap decades into the future.
Of course, an investment with both Capital gains + Dividend yields is the best type of investment, and this is what we at MatrixChart Systems strongly advocate as well.
What We Can Learn…….
The takeaway here, is that it is not easy for anyone to figure out their most ideal trading/investment style. This has been, and always will be, a journey of self-discovery for the individual, and it takes time. But it is a journey made easier with a coach who can observe from the outset and be an external voice. Once you find your preferred style however, you should stick to it, and continue to find ways to improve so you can be a master of that persona. Once you have mastered one style, you can consider venturing out to try the others, but continue to do more of what works, and less of what doesn’t.
Many people make the mistake of trying to find the best trading strategy. But in reality, it’s about knowing yourself, so you can find the best strategy that suits you…..
I have been a coach in the markets for almost 4 and a half years now, and in that time, I daresay I have likely encountered every type of trader and/or beginner out there. I’ve seen their psychological states, which in turn dictates EVERYTHING else that follows after.
There’s a reason Psychology is ranked #1 on my list of the 4 pillars, and that is because after 4 and a half years meeting all kinds of traders and clients, I have come to the conclusion that everything starts with your psychology.
Your psychology will influence your attitude. Your attitude will set your expectations. Your expectations will determine the emotions you will feel while trading. Your emotions and how you handle them while trading will determine your overall success as a trader.
Your psychology will also give rise to other very critical traits that a trader should have, such as:
How you feel when you’re trading and how you control it is the art of trading psychology. And that, as it often does, can singlehandedly determine your success.
Some common traits / habits I have encountered or get asked about are below:
- Do you feel the need to close out a position because it starts losing a little?
- Do you feel you want to close a trade because you’re finally making a small profit?
- Do you feel the urge to trade big position sizes just to feel the “thrill”, cause it’s “fun”?
- Do you want to suddenly jump into a trade because you feel you missed the entry?
- How come the return from Forex / Stock trading seems rather “low”?
All of these are traits and habits I have encountered before, and to be fair, they were mostly from beginners.
It is these initial bad habits, traits, and misconceptions that need correction early and properly for new traders to eventually become profitable.
You NEED to master your own psychology to control your emotions and to think clearly. As I said previously, your psychology will determine everything else that happens, from risk management to trade management, and how you handle winning and losing trades.
Some of the best quotes on trading are actually from Sun Tzu, and here is the one that best sums up trading psychology:
2) Risk Management
No doubt, risk management is the next most important pillar for anyone to be a profitable trader, and it ranks #2 on my list. Even a simple basic trade strategy can be profitable when used with proper risk management. To quote George Soros, “It is not about being right or wrong, but how much money you make when you’re right, and how much money you lose when you’re wrong”.
That quote makes a lot of sense. It really doesn’t matter whether you got it right or wrong. What matters is how much profit you squeezed out of your winners, and how small your losses were with the losers.
There are only 5 possible outcomes when you choose to look at any chart:
- No Trade
- Small Win
- Big Win
- Small Loss
- Big Loss
I will only highlight 2 of the above that are most important.
The first, is “No Trade”. Many new traders and sometimes even veteran traders underestimate the power of just not doing anything. Sometimes, the best thing you can do for your account, is to sit on your hands. Staying out of the market when it is too choppy or volatile can do wonders and keep you out of trouble. Even if you trade and come out with an acceptable outcome, ask yourself if it was worth the emotional rollercoaster, because most often it is not, even if you win. Never underestimate the power of staying out.
The second, and most crucial is “Big Loss”. This you must avoid at all costs. A big loss is the only one that can really hurt your trading account (and your emotions). All the other 4 outcomes do not significantly hurt your trading account. Taking a big loss is never acceptable as a trader. It usually means risk management was totally poor or there was no risk management to begin with. Also, do not blame the broker, the platform, or the market, as these are all factors you should have been aware of. Markets do gap up and down, and big news will always move the market strongly, and you need to anticipate these things.
- Use a GSLO (Guaranteed Stop-Loss Order) if you have a sizeable position on an instrument that is known to gap up/down. It is worth the premium if market gaps against you.
- Use an Options account instead of a SPOT trading account if choosing to trade “black swan events”, since you’ll only lose the premium of the option if market goes against you.
And of course never forget the cardinal rule for the stop-loss: Never move your stop loss wider. Every big loss was once a small loss.
When in doubt, practice the first point. Don’t trade. Stay out of the market.
What happens if you did lose though? Well let’s now take a look at the Drawdown table, and how much % return you will need on your remaining account balance to breakeven.
As you can see, the bigger the drawdown, the larger the % return you need on your remaining balance to breakeven and get your capital back. It gets worse exponentially. This is why, you must always protect capital, and why you absolutely always avoid big losses.
Remember, between Risk and Reward, the only thing YOU can control is the risk. You cannot control the reward, no matter how good you are at charting, analysis, or crafting trade strategies. There will always be losses in trading, and what matters is how much you lose when those losses come.
Gamblers focus on the reward. Traders focus on the risk…then manage it accordingly.
3) Adaptation & Skill
The third most important pillar as a trader, is your ability to adapt and hone your skills.
You need to understand the game of trading fully to know how best you should approach different instruments and markets. There are some pretty significant differences in trading across stocks, forex, oil and other commodities.
You will need to adapt yourself to each market and instrument, and also pay attention to how the market operates. Remember, markets can, and do, evolve. What worked before, may not work now. As traders, we adapt and continue to develop our skill.
Now the instrument you use to make those trades also matters. Are you going through the cash market? Or using CFDs, Options, or Futures? The dynamics of each type of instrument varies, and so does the risk, which is what you need to constantly manage.
After understanding the bigger picture, you will need to be highly skilled at the two main types of analysis. Fundamental Analysis (FA) and Technical Analysis (TA).
Contrary to what many retail traders say, you should not focus only on one. You need BOTH those analyses to be a truly complete trader and even investor.
Fundamental Analysis tells you WHAT to trade/invest in.
Technical Analysis tells you WHEN you should trade/invest.
FA will serve to keep you out of potentially dangerous trades. For example, something we always advocate at MatrixChart Systems is to stay out of penny stocks as they can be manipulated. FA will also serve to help you weed out what are truly good companies and those that are not. If you take the time to read financial reports and understand how financial ratios work, you can spot good companies to invest in and trade. More importantly, FA will also show you which companies you should stay away from because the numbers either do not make sense or are not healthy.
FA also helps craft your directional bias. For example, if you know a country’s economy is getting weaker, and their central bank is planning an interest rate cut, then you can anticipate a weakening of that country’s currency. For Stocks, if you anticipate more competition for a certain company and that competition will erode market share, then you know that company’s stock is set for a correction or decline. With a directional bias from FA in mind, your next question should be, “precisely WHEN and WHERE on the chart will the move take place?”
This is where Technical Analysis comes in. You need to be skilled at reading the charts. Specifically, you need to be skilled at reading candlesticks, market structure, patterns, key support / resistance levels, and other relevant indicators only if they add value. And of course you need to be skilled at doing all this, across multiple time frames.
Once you have your strategy, determine its accuracy to calculate the win rate, which is the probability of this method giving you winning trades. If the % is greater than 50%, you already have an edge.
The only question now is, can you manage the risk for the times this method loses? And can you manage your psychology to stay in the trade to maximize the profit when it is correct?
The trick here is to trade like a casino…. You have an edge, so just trade, and let your edge play out.
4) Growth Mind-set
The last pillar every trader should have, is a growth mind-set. This means, when things go wrong, or you are on a losing streak, do you feel sad, anxious, and annoyed? Or do you stop trading for a while, relax, review, and learn?
Every loss or mistake is an opportunity to learn. What went wrong? What did you miss out? Is there a way to enhance the trading strategy?
This kind of mentality can also help you at your day jobs in the office. When things happen that you cannot control and/or do not like, you can complain, whine, and sulk about it, or you can take a moment, let the annoyance fade away, then see how you can make the most out of your situation and learn from it.
As you can see, growth mind-set stems from psychology. However I put it here separately because even if you have good trading psychology, you might have overlooked the concept of having a growth mind-set.
Always learn, always read, and always keep growing.
Using fitness as an analogy, you don’t keep fit and stay in shape by going to the gym once a month now do you? It is an ever improving process where you grow with consistency and discipline.
It is the same with trading.
No, we shouldn’t be. Not yet at least.
Granted this whole issue does have our attention now, given that “fear” and “turmoil” were the words used to describe markets this last week. However, I believe the game has changed since the subprime financial crisis, and I’ll get into that shortly.
But first let’s get right into the action: The Dow sank 3.1% on Wednesday, along with the S&P 500 dropping 2.9%. The Straits Times Index hit 3084. The Hang Seng Index has dropped for a fourth straight week and briefly fell below 25,000 for the first time since end 2018. China, Germany, and Italy have all reported poor economic data, and of course, the most critical element in all of this, the U.S. and U.K. Yield curves inverted.
2y10y Yield Curve Inversion: Why It Matters
The yield curve we are talking about looks at the 2-year and 10-year treasury notes of any government’s bonds. Why? That’s because it is a gauge of investor sentiment and also critical to the model of banking. If investors are bullish on the long-term outlook, the 10-year term premium will be greater than the 2-year premium since investors expect to be compensated according to the greater risk they face when holding a longer-term bond.
When the yield curve inverts, it means investors expect greater compensation for shorter-term bonds than they do for longer-term bonds. US 30-year bond yields have also dropped significantly and this shows that there is a flight to bonds by investors. Throw in a Gold rally and a clearly strengthening Japanese Yen, and we are definitely in Risk-Off mode now.
A yield curve inversion is also critical to banks. Banks lend long-term and thus earn on longer-term rates while paying out on deposits on short-term rates. Therefore, a bank’s profitability will be crimped by a yield curve inversion. If the yield curve stays inverted for an extended period, expect bank lending to slow significantly.
Singapore: Don’t worry, we’ve been here before, from 2011 to 2012.
Yes, Singapore’s NODX (Non-oil domestic exports) data is down, and most recently dropped 11.2% in July. Add in a bleak GDP outlook from MTI, and it seems like we’re headed for rougher times ahead. Singapore Markets reflect that sentiment. But if memory serves, we’ve seen this before, sometime between 2011 and 2012. Just look at this article from SBR in 2012. Let’s also look at some of our own economic data, from NODX to Unemployment.
As you can see from the NODX data above, we’re not really in dire straits. We’ve seen worse NODX data along the way since the end of the subprime crisis in March 2009.
The same goes for our manufacturing PMI. Nothing too much to worry about just yet.
Lastly, our unemployment rate looks pretty decent given the current issues surrounding our economy. Of course, unemployment might go up slightly as a result of the economic headwinds but unless it really starts to tick up towards levels not seen since 2009, we don’t need to be too concerned.
U.S. : The economy is healthy but Trump wants his big rate cut.
As per my previous article on “Trump and The Orchestrated Market Boom”, I mentioned that the FED had no business cutting rates. The anticipated slowdown is mostly artificial as a result of the trade war, and Trump’s desire for a more substantial rate cut. 3 days after I published my article theorising what Trump was really up to, he states his intentions loud and clear; Trump wants a bigger rate cut from the FED. Hence, nothing really changes the U.S. outlook at the moment. The US Economy is healthy and slowly improving or at the very least reaching steady state. Only until we see economic data and corporate earnings sliding drastically do we need to worry.
Eurozone: Germany and Italy, basically more of the same.
Italy has far more serious issues that run deep, beyond simple economic numbers. Italy has had nearly 20 years of non-existent economic growth, and are facing a demographic crisis with an ageing population. They are also facing an erosion of their cultural heritage and immigration, and this could hurt their tourism revenue. Critically, Italy’s banks are in very bad shape, and coupled with a flat economy and high debt-to-GDP ratios, Italy could very well be one of the triggers of the next great crisis, and may well be the cause of the EU collapsing. But this talk has been going on for the last 3 years, so until something finally gives way, we’re just going to have to bide our time.
Germany’s economic slump is largely down to the US-China trade war. Looking into the numbers with greater detail, Germany’s economy isn’t in a recession yet, but teetering on the edge of it because of the poor sentiment being felt in the German economy as a result of the trade war fallout. What that means is, Germany’s economy is, like China and Singapore, being artificially strangled by the trade war issues. Until the trade war eases up, or disappears, Germany will likely stay depressed, maybe enter a technical recession, but overall should not spiral into a steep fall.
Hong Kong and China: Of Protests and Trade Wars…..
Hong Kong is currently experiencing violent protests and rallies, so expect Hong Kong’s markets to be slow and flat for the near-term until their political issues get resolved.
China is basically facing the same issue as Germany as the US-China trade war takes a hit on the Chinese economy. Recent economic numbers showed a significant drop, and it seems that the pressure is mounting for them to find ways to keep their economy in good shape. All this could force China’s hand in striking a win-win deal with Trump, which is of course what Trump will want, but only once the FED cuts rates to a level that Trump is happy with. So until then, we’ll wait.
Yield Curve Inversions? Not when the game has changed…..
A yield curve inversion has for the longest time, been thought of as an indicator that a recession is looming, with all 9 previous inversions preceding a recession that came anywhere between 6 to 24 months later. However, over the last decade since the subprime crisis, central banks have undertaken mass bond purchases. Most notably the ECB and the Fed. Such methods have likely dampened, if not completely discredited yield-curve inversions as a reliable predictor.
All the economic data we are seeing looks more like an economic slowdown instead of a full-blown recession. With this latest market selloff more than likely a result of artificial chokes on the global economy (see Trump and US-China Trade War).
The current selloff is based on the FEAR that a recession is looming ahead, but the recession is not here yet, and until the data starts to show it, we do not need to worry too much, other than managing the risk in our portfolios, taking profit when necessary, and finding opportunity in a market dip.
Above all, investors and traders need to be aware of this: markets evolve.
And I do believe the game has changed….