The Brexit Debate – What are the Possible Outcomes?

The ongoing Brexit Debate has been keeping markets around the world jittery for the past few days, especially the Pound (GBP), which has been declining sharply for the past 2 weeks.

The date that everyone is looking out for is 23 June, where the referendum will take place, with the big question, “Should the United Kingdom remain a member of the European Union or leave the European Union?”

Prime Minister David Cameron wants Britain to stay in the EU. US president Barack Obama also wants Britain to remain in the EU, as do other EU nations such as France and Germany. But according to polls, the British public seems pretty evenly split on the issue.

brexit

From what I see, the Brexit (Britain + Exit) is a unique situation that could develop into one of three paths.

PATH 1: TOTAL INDEPENDENCE (UNITED STATES MODEL)

One possible arrangement is for Britain to be completely independent of the EU. This would make Britain as “separate” as the United States. Among the chief concerns would be the hefty protectionist taxes levied on U.S exports. It is widely-known that American cars are more expensive in Europe than those sold in America. Some dooms-day economists claim that this could lead to disaster for Britain’s already negative trade balance.

1

Source: tradingeconomics.com

If you follow this line of reasoning you might expect the pound to become like the current depreciated USD. A country cannot have sustained deficits without experiencing a sharp fall in its currency value in the long run.

PATH 2: PARTIAL INDEPENDENCE (NORWEGIAN MODEL)

Another possibility is for Britain to leave the EU but remain in the EEA (European Economic Area). David Cameron seems to be very pessimistic about the Brexit, citing concerns of pensions, the healthcare budget, and the defense budget; which he feels would all be adversely affected. This option is a compromise between the two extremes, and it is called the Norwegian model.

In return for access to the EEA, Britain will then have to comply with the EU’s law relating to the internal market. However, Britain will not have a say on the rules that are made in the EU.

PATH 3: NEGOTIATE A TRADE DEAL (HIGHLY UNLIKELY)

Britain can negotiate for a trade deal that would allow certain goods to be exported freely to the EU. However, this is highly unlikely to happen as the EU would also demand for the labor market to be opened up (to immigrants and asylum seekers), which is clearly something the Brit voters do not want.

 

gbpusdDaily Chart of GBP/USD

HOW TO TACKLE THE MARKET?

As with most unique news events, the markets will start trending based on anticipated outcomes, and remain inactive as traders start to close out their positions to stay on the sidelines. Many brokers have increased the margin requirements in anticipation of a huge move.

For me, I personally do not like to trade on such news, as there will be huge spreads and slippage when the market is moving too fast. Hence, I will likely scale out of my existing positions and take profits off the table as we get nearer to 23 June.

If I were to take a gamble, I would go long on the Pound (GBP), firstly because it has already dropped quite a lot to “discount” the possibility of a Brexit, and secondly because I think that Britain is more likely to stay in the EU. These are just my random musings. 😀

Good luck!

 

Sources:
http://www.bbc.com/news/uk-politics-32810887
http://www.bbc.com/news/uk-politics-eu-referendum-36511598

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

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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. 🙁

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Stay tuned for my monthly portfolio update (November 2015) and current portfolio strategy at the end of this month!
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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! 😀