Free Video Tutorials | Riding the Big Market Cycles – 2(c) The Top 3 Economic Indicators

In collaboration with TradeHero & SGX (Singapore Exchange), we have developed a series of video tutorials that will make learning fun & easy for all beginners!

I have been tasked as the mastermind behind the content, drawing from my knowledge of the 200+ books I have read and 10,000+ hours of professional market experience as mentioned in the video.

For more free lessons, you can check out http://synapsetrading.com/free-lessons. Enjoy! :D

The Big Short – Is Something Brewing in China that is “Much Larger than Subprime”?

Last Saturday, I watched the movie “The Big Short”, which was an interesting documentary + comedy + drama about the crash of the US housing markets, which sparked the GFC (Global Financial Crisis) of 2007.

The root cause of the crash was this product called CDOs (Collateralised Debt Obligations), which was basically bad debt repackaged as good debt, leading to more and more leverage. This house of cards collapsed when people started defaulting on underlying loans, leading to a chain reaction.

At the end of the movie, they mentioned that in 2015, the banks started selling a new product called BTOs (Bespoke Tranche Opportunities), which are essentially a rebranded version of CDOs. Sounds pretty grim…

 

IS THERE SOMETHING BREWING IN CHINA?

Perhaps it is coincidence, but after watching the movie, I came across a few articles warning of something brewing in China that is “much larger than Subprime”.

A month ago, the founder of Hayman Capital, J. Kyle Bass, sent a letter to investors warning that China has a problem much bigger than the subprime crisis in 2008. He was one of the hedge fund managers who correctly predicted and profited from the mortgage crisis in 2008.

That problem, according to Bass, is the Chinese banking system and its coming losses.

“We have been vigorously studying China over the last year, with the view that the rapid credit expansion in the Chinese banking system will result in significant credit losses that will require the recapitalization of Chinese banks and materially pressure the Chinese currency. This outcome will have many near-term and long-term effects on countries and markets around the world. In other words, what happens in China will not stay in China.” – Kyle Bass

In the investor letter entitled “The $34 Trillion Experiment: China’s Banking System and the World’s Largest Macro Imbalance“, Bass says that China’s banking system has similarities to the US banking system pre-financial crisis—excessive leverage, regulatory arbitrage, and irresponsible risk taking.

“What we have come to realize through these discussions is that many have come to their conclusion without fully appreciating the size of the Chinese banking system and the composition of assets at individual banks. More importantly, banking system losses—which could exceed 400% of the US banking losses incurred during the subprime crisis—are starting to accelerate.” – Kyle Bass

 

HOW TO TAKE ADVANTAGE OF THIS?

Kyle Bass’s Hayman Capital Management has sold off the bulk of its investments in stocks, commodities and bonds so it can focus on shorting Asian currencies, including the yuan and the Hong Kong dollar.

It is the biggest concentrated wager that the Dallas-based firm has made since its profitable bet years ago against the U.S. housing market. About 85% of Hayman Capital’s portfolio is now invested in trades that are expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years—a bet with billions of dollars on the line, including borrowed money.

He even went so far as to give a timeframe: “we think it’s going to be in the next 12-18 months.”

So who are the brave souls who have decided to very openly fight the People’s Bank of China?

Here is a sample: Soros, Bass, Ackman, Druckenmiller, Tepper, Schreiber, Einhorn, Scogging, and Carlyle, Nexus and many more.

As of this moment, all these hedge funds who have taken on the PBOC are winning, because after another massive intervention round on Friday (29 Jan 2016), one which cost the PBOC more billions of dollars from its rapidly dwindling FX reserve pile, the CNH is already significantly weaker: will the PBOC burn through another $10 billion just to teach these hedge funds a lesson even as the market is implying far more pain for the PBOC?

 

HOW WILL THIS AFFECT SINGAPORE?

Speaking at the annual Barron’s roundtable, Swiss billionaire investor Felix Zulauf warned that Singapore’s largest banks are at risk of massive capital outflows if the Chinese economy experiences a hard landing, which he expects will happen this year.

He thinks that a crisis of staggering proportions is looming in China, and tiny Singapore will be caught right in the middle of the storm once the disaster finally erupts.

“We are in a down cycle that will end with crisis and calamity. China in today’s cycle is what US housing was during the financial crisis in 2008.” – Felix Zulauf

Zulauf warned that capital outflows in China will continue, prompting regulators to devalue the yuan by as much as 15% to 20% within the year. When this happens, Asian economies which are heavily dependent on China—particularly Singapore—will suffer because Chinese corporates cut their imports even more, while indebted Chinese companies will be placed at greater risk of default.

“I expect the situation the deteriorate to a point where we will witness a banking crisis in Asia that will hit Singapore and Hong Kong particularly hard. It is conceivable that Singapore, which has attracted a lot of foreign capital over the years because of its image as a strong-currency state, will be extremely exposed to the situation in China. Singapore’s banking-sector loans have grown dramatically in the past five or six years. Singapore is now losing capital, which means the banking industry is losing deposits.” – Felix Zulauf

He said that such a situation will cause carry trades to go awry, which will result in steep losses for heavily-leveraged traders.

“I mentioned the potential for a banking crisis in Singapore. I don’t recommend shorting Singapore bank stocks, but rather the EWS, or iShares MSCI Singapore ETF. In this case, an investor will benefit from both declining local stock prices and a decline in the Singapore dollar against the U.S. dollar.” – Felix Zulauf

 

Sources & References:

http://www.businessinsider.sg/kyle-bass-letter-on-chinese-banking-system-bigger-than-subprime-2016-2/#.VsBsy_J95aQ
https://sg.finance.yahoo.com/news/massive-banking-crisis-brewing-singapore-024500286.html?linkId=21174577
http://www.zerohedge.com/news/2016-01-31/much-larger-subprime-here-are-legendary-hedge-funds-fighting-chinese-central-bank

The Past 6 Years Summarized in One Chart – Are We Headed for Deflation?

market overview 221115 synapse trading

Since the post-2007 crash recovery starting in 2009, how have the markets fared?

Stocks, represented by the S&P 500, have steadily climbed, gaining an impressive 130% over the 6+ years.

Commodities, represented by oil, silver and gold, did not fare so well.

Oil peaked in the first half of 2011, consolidated for about 3 years, then made new lows in 2014.

Silver and Gold peaked in late 2011, then steadily declined all the way till today, giving up almost all its gains since 2009.

As the Fed gets ready to raise the interest rates, this is likely to give a boost to the US dollar, which will further suppress commodity prices. For oil, this is especially bad, since there is already an oversupply forecasted for 2016.

A higher interest rate will also bring down bond prices, ending the 30-year bull trend, and in months to come, act as a drag on stock prices. This means that the stock market is a ticking time bomb.

If all these happens, we will have a scenario with:

  • Bullish US dollar
  • Bearish oil, gold, silver, commodities
  • Bearish bond prices
  • Bearish stock prices
  • Bearish economy?

That would be a pretty gloomy deflation scenario. 🙁

What is my current portfolio strategy?

Stay tuned for my monthly portfolio update (November 2015) and current portfolio strategy at the end of this month!
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http://synapsetrading.com/resources/the-7-best-kept-secrets-of-professional-traders/

Will there be easing for the SGD, and is it a good chance to go long on USD/SGD?

This week, the central bank is predicted to ease monetary policy for Singapore, considering we have officially slipped into recession for the first time since the global financial crisis in 2008-09. Our economy was expected to have shrunk 0.1 per cent in the third quarter from the previous three months on an annualised and seasonally adjusted basis after a 4 per cent contraction, according to a Reuters poll.

For those unfamiliar with our monetary policy, the central bank manages monetary policy by letting the Singdollar rise or fall against the currencies of its main trading partners within an undisclosed trading band based on its S$NEER.

Singaporean dollar bank notes are arranged for a photograph in Singapore, on Tuesday, Aug. 9, 2011. Singapore reduced the top end of its growth forecast for 2011 as a faltering U.S. economy and the European debt crisis heightened the risks to global expansion. Photographer: Munshi Ahmed/Bloomberg

Photographer: Munshi Ahmed/Bloomberg

Of the 25 analysts surveyed by Reuters, 15 expect the Monetary Authority of Singapore (MAS) to loosen policy. And among those who predict an easing, seven expect the slope to be reduced to zero and four see a lower mid-point. Three others expect a slope reduction and re-centering, while one analyst expects a zero slope and band widening.

 

usdsgd 141015

Looking at the chart of the USD/SGD, we can observe that the medium-term trend is still bullish, with the recent weakness in the USD causing a correction in the past week. This gives rise to a possible double-bottom bull flag pattern, resting on a previous level of support.

I think it would be a good opportunity to initiate a long position on the USD/SGD, as the strength in the USD is expected to persist. Good luck! 😀

How Sustainable is the Current Rally? What Caused it?

After the bad jobs report last Friday, the chance of an interest rate increase has gone down, and this is interpreted as a bullish sign for equities, as seen in the strong BOUNCE in the last 2 days, as well as today.

There is a good chance the STI will try to test the 3,000 level again, after a false breakout from its previous flag/triangle, giving rise to an expanding triangle pattern.

straits times index 071015

synapse network 071015

 

In addition, we also have some good news on the confirmation of the Trans-Pacific Partnership Trade deal with 11 pacific nations.

wsj 071015
12124330_10207719746253774_1187002919_o

It is best to wait a while for the dust to settle, and see if the downtrend continues. For existing positions, don’t forget to manage your SL carefully. Good luck!