Via Kevin Muir of “The Macro Tourist” fame
Trading is difficult. If anyone tells you differently, they are either new (and haven’t been hurt yet), or just plain stupid. You are competing in the greatest game out there, against some of the smartest people on the planet.
Even when you do your analysis and get the call right, it is no guarantee you will make money. The Market Gods have a way of making sure that being right is way easier than stuffing dough in your pocket.
The perfect example of this is my call from early in summer regarding China. In May, Moody’s downgraded China, and everyone got their knickers in a knot predicting the collapse of the world’s largest economy. The guru type hedge fund media outlets were filled with grim forecasts of a spiraling 2008 type crisis. These hedge fund managers sure sounded smart, and they all definitely have a lot more money than me, so I was a little timid when I wrote a piece called China Downgrade- Buy the news?.
The gist of my argument was that China would stimulate to make sure their economy was humming along when the hugely important 19th National Congress of the Communist Party was held this Autumn. Proving that a stopped clock is right twice a day, I managed to get this one right.
The trouble was, I didn’t buy the right stuff. I should have loaded up on copper and the other China centric commodities.
Have a look at the copper chart.
China was downgraded, and then copper ran like it stole something.
Same deal with iron ore.
There is no doubt China put the gas pedal down this summer, and it affected capital markets throughout the world.
None more so than the Chinese Yuan. Although most hedgies were all betting on a massive decline, the Yuan has been strengthening like Lance Armstrong after visiting his bio-chemist.
This massive strength has forced at least one prominent China bear to throw in the towel. From Bloomberg:
Mark Hart spent seven years and $240 million waiting on a crash in China’s currency.
He lost sleep. He lost clients. He damn near lost his sanity.
And now he’s lost his conviction: Hart, who called for a more than 50 percent yuan devaluation last year, has turned bullish on China and its currency.
His reversal hasn’t come easily. From his base in Fort Worth, Texas, the hedge fund manager spent countless nights on the line to Hong Kong, parsing market news and exchange rates. At times, the stress took a toll on Hart personally and left his employees demoralized.
“I always thought we had a good risk-reward trade on, but we made a number of mistakes, including being way too early,” Hart, who started the yuan bet after predicting both the U.S. subprime mortgage bust and the European debt crisis, said in a telephone interview. “And now the world has changed.”
In cool hindsight, the 45-year-old founder of Corriente Advisors sees last year’s Group of 20 summit in Shanghai as a key turning point. Like many investors, Hart suspects the meeting resulted in a tacit agreement among world leaders to prevent the yuan from tumbling. He calls it China’s “whatever it takes” moment — when policy makers resolved to prop up the currency at any cost.
“China now has the breathing room it needs to either temporarily stave off a slowdown with fiscal and monetary stimulus, or reform, grow and upgrade itself into the world’s largest developed economy,” Hart said.
Whether or not China got help from other G-20 nations, the government has clearly succeeded in stabilizing the exchange rate. The yuan ended a three-year slide in late December and has rallied almost 7 percent in 2017, including a 0.5 percent increase on Thursday. It’s now trading at the strongest level in more than a year versus the greenback.
Even at its weakest point, the yuan never dropped enough to move the needle on Hart’s wager, which started in 2009. His dedicated China funds, which had fixed lifespans, bought options that were designed to deliver one of two outcomes: a massive payoff in the event of a currency crash, or a near total wipeout if a major devaluation failed to occur.
The trade went against him almost from the beginning. After holding steady for the first six months of 2010, the yuan strengthened for the next three and a half years. It eventually reversed course, but the sharp devaluation that Hart had anticipated never materialized. His second China fund shut in December. All told, he lost between $240 million and $250 million.
When long time bears finally cry Uncle, it’s most likely a short term top. These trades are taken off at a point of maximum pain, not in the midst of a cool, well thought out, investment decision process.
This morning copper is unexpectedly down 1.5%. Gianclaudio Torlizzi, an LME Metals Trader, has posted a couple of terrific longer term charts of Iron Ore and Rebar that show potentially bearish developments.
I know the Chinese have not had their big assembly. But it sure feels like we are close to the point where many of these trades are about to roll back over.
Right now everyone is all bulled up on gold, and extremely bearish on the US dollar. No one can imagine any of the short term trends stopping. I wonder if copper is the canary in the coal mine that a turn is at hand.
Here is another thought. If China has been goosing their economy for their plenum, then could market strategists be misreading the recent economic global strength? Did China create a false positive for world growth?
I am not sure, but it is worth considering. I have long said that what happens in China is by far the most important determinant of financial asset prices. We all sit staring at US economic releases, but we should really be spending more time trying to figure out what China is up to.
If a turn in the US dollar is indeed close, then take a look at the Eurostoxx chart.
With EUR screaming higher, it is no wonder that the Eurostoxx has been declining. Yet what happens if USD gets a bid? A break in the Eurostoxx downtrend line could be explosive to the upside.
To say the Chinese system or the PBOC has a modicum of integrity is nonsense. Suppose you could short Bernie Madoff for his first ten years. How would that have worked out relative to horizon or evaluation interval? A lot of the pursuit of success in finance is intrinsically empty and dehumanizing, and not just to market participants.