Foreign exchange | My Journey

2022-01-16

No Body Does It Better

Nobody does it better
Makes me feel sad for the rest

Nobody does it quite the way you do
Why’d you have to be so good?

Baby you’re the best!

Following relentless bullish thesis past 2 years, do we still hold our inflation play tight? Since my article two months ago prior to Omicron, I should still think this year is last best possible investment time windows. It was shown in yield curve, possible end of ultra low rate era, and seems to match significant short term SOMA maturity. The Federal Reserve might have less option for treasury to seek their refinancing, which may contribute to weakness of USD. We might agree, faster raising price usually happens when bullish is about to end and it may lead to temporary/unsustainable inflation/price increase.

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I should still hold my thesis in December 2021, that when heavy load NASDAQ goes down hill in lower gear, it will spark inflation. During this NASDAQ selling pressure, I believe money maker will keep juicing them, possibly because opponents are still taking opposite positions. Due to this newly created money, in my own opinion, it should be followed with newly investment hedge in inflation, which could lead to significant further price increase in commodities, like oil and metals; also since commodities are currently at lowest weight.

To double hedge the data, I would pick EV (Electric Vehicle) and their infrastructure numbers. In my argument, the EV still offers attractive long term sentiment (seen in China low emission record sale, increasing green bonds and their policy). Based on history, I would believe price is leaning more towards sentiment/prospect, rather than current financial analysis score. For example, EV has been notoriously known as expensive share, compared to other technology shares, like DOCU, TWTR, etc. However due to its evolution, I believe EV will still perform much better. I may see few financial engineering options for them to grow much further.

I also prefer to pick EV related technology rather than inflation related consumer technology, e.g. in FCPI (Apple, Microsoft, and Coca Cola). I’m not saying Apple and Microsoft won’t perform well during this inflation. I think they will. However I still believe EV would perform better. Unlike Cathie Wood strategy to abandon some of her innovative one to other small technologies, I prefer to hedge every increase in inflation with traded dip buying data in EV and EV infrastructure. I think ARKK investors are still interested with long future invention/hype like EV, rather than current not so wonderful evolution technology, causing relentless selling.

It shouldn’t give impression that it is an easy pick. Inflation has strong correlation to volatility. We should expect persistent volatility, e.g. Omicron, Oil drama, Digital Coin crash, and ultimate horror of Fed taper, rate raise and QT (Quantitative Tightening). That means, we should keep enough liquid or always maintain our pain level in-check, especially when it hits upper channel. We should acknowledge, only strong thesis/numbers can navigate our highly leveraged inflation journey. One early comforting sign, fireworks at the end and new of year, is usually/statistically a sign of a roaring event follow up.

New year, is statistically time to review back. Since year 1995, financial industry always intrigues me. Do I have a dejavu gen from my parents, when they had financial difficulty? After learning known economy theories, I still grow interest with never-ending research of known-unknown. It’s very rare to see economists speaking honestly about their secret society recipes, either due to their trade secret or insanity perception of their thesis. Since I believe economy is a living organism, it might be wise to say past experience never guarantees future performance and should all human known economy theories. A bliss, keeping them secret might prolong their lifespan longer.

Blindly use known economy theories to make money is simply too good to be true.

1997 Asian crisis was my first personal self experience, under real and rubber bullet. It was a remarkable experience of financial destruction, which burned most of South East Asian life and put them into massive global slavery, including me and my family. Few characteristics of the crisis includes:

previously high foreign debt (trap?),
high inflation,
resiliency of SME (Small and Medium Enterprise),
bailout for wealth transfer, and
weaker currency.

Two years later, in magical city of Kristiansand, I was stunned with lots of smiles I had never seen in my life. Lots of wealth, no lie, did money buy happiness? Rather than spending most of my time to write master thesis to find secret of the SME resiliency during financial crisis, I spent most of my time to find secret of Scandinavian financial happiness. Did we remember story of Scandinavian farmers got busted in LEH (Lehman Brothers) crisis? Do we know Norge and Israel keep their leverage high in US stocks and indeed they make so much more?

No surprise in year 2008 GFC (Global Financial Crisis), after 10 years, I still failed to understand this secrecy of wealth protection systems. Learning is always costly and better be when we were young and fool. However, persistent, I always believe, another decade is always another story, always be much better. To be successful, we must always be optimistic.

To proof financial is a systematic systems, in 2017, an economist was able to show a simple mathematical formula of IOER, Fed balance sheet interest payment, etc, to figure out when Fed would break their unsustainable deflation spell to sustainable inflation. Same to the 1997 Asia Financial Crisis, same financial destruction to Turkish Lira. I think South Korean Default movie (2018) may explain it well cinematically. Should we consider it as a non random generator of phi (ϕ)? Should we say sorry to Turkish people for our human created financial weapon systems? Personally experienced with decades of inflation, in early 2020, I all-in believed in incoming global high inflation, if not hyperinflation.

I took insane research in 2019 with overweighting data towards property sector for resiliency. I believed the property rally won’t be over yet, due to its missing inflation component. I leveraged the data into newly created CoVid in early 2020, to advanced countries with strong GDP. Looking at how much liquid has been created and how the Central Banks policies are moving behind their curve, they seem to push inflation to hyperinflation cliff. In that cliff hanger game, only advanced country with high buffer margin to inflation would be able to survive. Unfortunately that means, the data must take short position to emerging economies to hedge.

I believe we should endure second phase of 2020-2023 mature inflation life cycle. While this is not 100% best return of this decade, it should provide strong leveraged resiliency during the inflation crisis. The world shouldn’t be dictated by god playing dictator ideally, if we are looking at fraction of the ϕ. How many of us missing the boat of growth vehicles like BTC and NFT, rather than keeping our economy theories in value growth vehicles? I am one of them. I think in my case, it was due to our perception that money is still too much valuable and our regular post traumatic GFC (Global Financial Crisis) stress disorder (PTGSD). This growth stock should rather work well to newly breeds who didn’t have any PTGSD gen yet. However they should still be aware that going zero stress disorder might mostly hit late comers. I don’t say value growth is dead. Apple has proven to reach first 3T$ valuation and experience enormous growth.

I still believe persistence in another decade should write another story.

Year 2021 might hand over long monetary era to the hand of fiscal. Many see massive future calls like MSFT from insider fiscal related participants. Due to that, tightening with fiscal support should differentiate from previous taper tantrum in 2013 or rate rise attempt in 2017. While some strategists might expect a following easing or twist operation (OT), I might think differently. In my opinion, if we believe in Central Banks is to behave like previously, we might end up to same failure to Central Bank transitory thesis. While many including me long believed inflation would be persistent, I don’t think Central Banks were serious with their transitory thesis. Why did they keep buying TIPS (Treasury Inflation Protected Securities)? Soros market participants theory of reflexivity?

Relentless buying of TIPS despite transitory thesis

This is where I quickly see connected dot with the 1997 Asian GFC inflation.

You play DRAMA you get KARMA" - Picture of Nook Umalas, Kerobokan - Tripadvisor — I think financial world is playing Karma Drama.

Few recent signs are Fed admittance to permanent inflation, lost control in 2Y, behind the curve, and persistence in long term yield raise. I should think, this probability might have less chance if China is not rising by that much. However looking at recent China condition, it seems they might still need another decades before they can be an inflation director. I don’t believe China could come any near to challenge the US yet.

To explain in simple number, why none is able to take advantage of the US, which has 8% inflation (going to be market expected 10%) and only gives 1.6% return from their most liquid asset on this planet, the 10Y? US debt investors are loosing their money more than 6.4% every year. They might think inflation to drop and or looking possibility of USD appreciation to compensate. However back to Fed SOMA and Treasury refinancing theory, I think they may not be able to catch up of their potential loss, depending on spectrum of their maturity. There should be a limit to where USD could appreciate, before it triggers either too high inflation loss or global M&A account transfer. This leads to my next theory.

In my theory, when US was in deflation, Federal Reserve took the loss. It should be similar to when US is above high inflation range. In my previous theory RRP is Central Bank subsidy to inflation loss to take over from their octopus, with many front runners as usual. This is where magic of global currencies/coin may work. If the Fed takes the loss, other weaker countries will take over the loss.

We should see DXY starting to break their lower channel to support the inflation thesis. I would watch Japan (JPY/USD) and Europe (EUR/USD) for possible main drivers. Being superior in their negativity/deflation might come to an end.

Don’t be confused with the US inflation in 1980 and 1945. Current 10 year yield is only 1.5%, vs 16% in 1980. This is another proof that China is still much weaker to challenge US as world biggest economy. Only US and advanced economies can navigate this high inflation well, unlike Asia in 1997 and probably China today. This should validate my strategy to leverage advanced countries and taking opposite to emerging numbers.

Taking high inflation pill is debt sin forgiveness. This is where I doubt SME resiliency in current inflation situation since they have lower debt load. Therefore I think SME won’t be able to survive well in this high global inflation crisis. I would also think global and internal trade issue due to CoVid might have big contribution to SME issue, rather than giving them resiliency to the global change crisis. I think we should see widespread bankruptcy in small business and increasing profit in large companies, until I expect to see more big M&A (Merger and Acquisition), rather than corporate buyback activities. Supporting my previous opinion, I believe private buy back strategy is still offering enough benefits to weather current high risks. This is why I don’t prefer to overweight my data against small cap companies.

Characteristics of current US inflation crisis, to differentiate with emerging economies inflation crisis:

high internal debt,
global inflation where no body does it better than the US,
weak SMEs and possible widespread of bankruptcy in small countries,
global bailout,
unsustainable strong currency, which should then lead to weaker currency to support inflation run.

So far, only the US country:

can escape themselves from internal GFC deflation crisis and also navigate high inflation crisis,
can decide non bankruptcy of imminent death of HK offshore listing of China property sector,
have optimum return, while other world is relatively muted with China lower growth in 2021.

Nobody does it better. Nobody does it half as good as you. United States, you’re the best!

Why’d you have to be so good? It’s no secret from our 2 years ago GDP expectation. Basically only the US has ability to juice their market. Due to that, the US has absorbed most of global money creation in past 2 years, which has been driving their index, causing envy to most other countries. Have a look into emerging and smaller countries, they are suffering massive capital outflow to the US, while they have to fight for internal inflation.

Best growth in the world, Nobody does it better!

It left emerging country dried with liquidity and stuck with high inflation to support their growth. If China has difficulty and so do other countries smaller than China, which makes only the US, one of only few winners here. Does China take hostage of other economies too, through the use of their infrastructure for resource programme?

In Indonesia. The liquidity was so severe that one of biggest national owned steel company was about to go bankrupt in December 2021. They have no choice, but to open liquidity tap again, and face the truth of inflation pain. Unfortunately, this situation may leave less room for emerging to juice their market. Therefore I would rather see emerging to be a possible late global inflation player.

IDR strength in December 2021 almost stalled their economy

Does the US have to worry about maximum inflation when this competition symbiosis becomes endosymbiosis? They would most likely run taper, balance runoff, and reluctant to raising rate. I still believe in my theory, that 1.5 trillion of RRP and above 10T$ hovering negative yield might juice taper well, but we would need to re-calculate balance runoff and raising rate impact to later adapt market reflexivity.

This effort should reduce inflation pressure which might benefit some selected sectors, like the long waited Biden infrastructure agenda. Supporting my last month article, market participants should support faster taper above market expectation. In my theory, that is bullish for some selected sectors and free up other countries inflation Genny. How about we start with Germany and Japan? Japan has been well known in decades of deflation and Germany driven Europe has been years in severe negative yield. Positive US inflation anode and negative cathode Europe/Japan might be able to drive back global trade account of USD/EURJPY in next 2 years and possible US lead global M&A.

The Indonesian government proclaimed to have inflation to only just 1.68%, much better than any other countries, like US (6%), or even China and Japan, with 10 year bond returning massive 8%. It’s no white t-shirt, but widespread manipulation against inflation formula is just getting too obvious to protect their national security from capital outflow inflation threat. It might be better to run enormous infrastructure incentives like India to grow near to 10%.

It’s quite obvious China takes opposite policies with relentless easing. I think their pain level might be weighted with effort to secure long term infrastructure for resource deals with weaker economies. At same time, China might use this event to soft landing their highly leveraged property and transfer offshore property into local listing where they have more control, rather than allowing foreign hostile take over. Hopefully there’s a possible peace treaty, between the two biggest economies. If they continue to separate, I’m afraid we might see possible widespread of bankruptcy, of not only small companies, but big ones in weaker countries, because their central banks there are not able to juice their market due to inflation.

From above explanation, we may come back to our biggest question, would the US be able to navigate global inflation issue or let others to take advantage of it? This may impact our main investment thesis, whether continue to take higher risk or start moving into safety side. I believe Americans should be very lucky in this environment. Do we see relatively low inflation compared to other countries, never ending increase of their incoming and raising funds, and very high exit to employment indeed?

China admits, US is the envy to the world, might be in attempt to have other countries to fight against the US, or China themselves admitted to feel envy to the US. Unfortunately in this winning situation, money usually seeks higher return possible. If needed, they might destroy other countries (like Turkey). It is double trouble to the victim, from possible hostile take over by enemies and friends, since money rarely does mutualism symbiosis. This inflation might still have longer life, since the US still has enough buffer to future shock, through the use of BBB (Build Back Better), when time is right or maybe when inflation stalls. It may not be the time yet.

Recent check of our last year 3 selected sectors seem still valid:

Food: never ending increase of fertilizer cost, Xi’an city food shortage, Sri Langka food shortage, from Sydney to Philadephia supermarket food shortage amid CoVid restriction. It may be related to recent global trade crash in BDI (Baltic Dry Index) due to persistent high transport cost and supply chain issue,
Energy: rally in oil, electricity, natural gas, and other form of energy, like Uranium.
EV and EV infrastructure: China records low-emission car sales. We also expect bigger deficit this year of base metals related, like nickel, graphite, lithium, copper, aluminium, etc. If these base metals were not able to fulfil demand last year, how about their luck this year with bigger deficit expectation?

Four Facts about Soaring Consumer Food Prices | European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources — Soaring food price

Despite our hectic life, it might be wise to put some break at the end of this month, just before another hemisphere of new year embraces their start of roaring year, for the Tiger to restock, reload and re-roar. During this high volatility inflation life, it’s wise to keep our insanity in-check, from destructive over optimism and inflation hype. Hopefully, my thesis about incoming 1-2 years of inflation prosperity comes true.

Paul Wagner — Signature of wishing you Roaring Prosperity.

Disclaimer: Opinion is my own. It’s not financial advise and for research purpose only.

2021-11-13

4 Comments

Bonds, Foreign exchange, Investments

Escape Plan

“Escape for your life. Do not look back or stop anywhere in the valley.

Escape to the hills, lest you be swept away.”

Genenis 19:1-38

Twenty one months ago, my time has come to leave my nest, to embrace reality of harsh world we live in. As always, like a little bird, afraid to leave their comfortable lullaby of 9 to 5 nest. I had to fly into jungle of personal enterprise world. There were many butterflies flying around. Didn’t we hear them buzzing, “life time opportunity”, “things to do before you die”, and “go big or go home”?

I was born into a very humble (excuse me to make poor word better) family, who could never afford to have overseas study, let alone overseas travel. It’s still very vivid in my eyes, US university brochures, my father brought back home. In that silent, heart touching moment, my eyes could hear well, and stored the image safely in my brain vault. My parents only left me persistence and perseverance, no capital, but that’s more than I needed. Due to that persistence, Norwegian government invited me to come and experience Scandinavian life. It’s my next important stepping stone, confidence.

Twenty twenty, what a year of resident evil moment. Many asked, was it the end of human race when streets were so empty, puny human race was jailed to their own home, and stock index was falling? My persistence and experience told not to discourage, but took that opportunity. I might still believe the influenza that turned into Covid name event, is a man made. I’m talking about a coordinated orchestra event, at the end of financial curve inversion, after failing with ominous overnight rate spike in September 2019, not the virus. If it’s true, how powerful is financial could take a grip of human life. We do realize though, none of us is immune to any virus, nor the curse of death, nor possibly we can escape from them.

Entering reality of my own personal corporate world and competition is never been darker and colder. Very sure, rhodopsin, dark adaption, is never be a pleasant experience. I had to close my eyes, looked into my heart, what is my best mutant ability? X-MEN is never be a 1-MAN, everyone has their own unique and incomparable skill. The easiest way to look for is what interested us most, not our one year interest but our many decades of interest(s).

I surely know myself. Even though I can do very well, it’s not Information Technology that I interested most. What should people look from well known university brand name in their resume? I disbelieve it’s skill from that palace. It’s rarely economy books and theories can be used to make money from market competition. However it’s still important knowledge. Without knowing how economy theory works, we can’t make a lie about them, nor get fooled from it. It’s all about opportunity, to enter higher ladder corporate, for then to experience real cruel world in comfortable chair of salary to pay bill of liability, and take opportunity to build more confidence experience. Luckily the information technology gave me entry opportunity point to the ladder. There were many great leaders and they will always be my unforgettable mentors to me. In 2020, I’s drawing a line. I’m flying with my own wings, nothing can stop me now, no superiority, nor woke barrier, not even any sky can limit.

Meanwhile this music is playing in the background.

Let me summarized, what I needed were persistence/perseverance, confidence and opportunity. Year 2020, was the year of my opportunity. I forced myself to run as fast as I can. It’s never be perfect. I still missed lots of opportunities, hit many road blocks, that is life. Persistence, go fall and rise stronger, there is no way back.

Here is what I like most, The United States. The country has made me great, I owed them, and I think they will make me greater again.

The United States (especially their 10 years debt) is still the most liquid asset on earth. Its hegemony spell prohibits their front end from increasing to next 2 years, without crashing everything, and wasting their costly momentum effort.

This game is not complicated. White collar like banks, are just buying front end (mostly 2 years) and invest it back to longer end (mostly 10 years). Due to their leveraged greed, less liquid and certain 30 years, is currently getting hurt most, inversing the 10. What can fail them is USD bankruptcy but that should never be an option at this moment. Even China will blink, and continuously lie with their 3 red-lines from transferring their surplus into their current not-so-much troubled Real Estate sector. This asset changing moment cycle must be protected at all cost.

We shouldn’t be surprised with a possibility of commodity deflation moment before their run. Thanks God, it seems to be timid. When money is invested into long term, its long term yield will be under pressure, which will beg for long term support of central bank and short term rally in US golden child, FAT ANG. However to hedge their long term investment, they should go against USD risk or do investment in inflation protection like TIPS, estate or commodity. My thesis is supported with recent PBOC net buying and continuous growth of their mortgage book, rather than their 3 red lines. Please forgive China for their lying of everything, for having inflation death threat, it may not be a sin.

China Bonds Advance on PBOC's $16 Billion Liquidity Injection

I believe taper is less worrying with existing support of RRP:

Have a look back into yield curve picture, arching and moving to front end, shorter term rate, even its very long term 30 years is hardly able to follow. For me, I think it’s obviously a beautiful front end steepening indeed. Houston, we don’t have a problem, our mission after 12 years of easing trick, seems to start being fruitful. People are now starting to enter our trigger baits. We’ll keep baiting them to next 8 years, before we claim our mission to mars is successful.

Without having to explain detail of this math, I’d summarize my humble thesis and vision, before happening, in my own English version:

Next year is probably last average windows time to take big investment. It’s still able to raise to next 5-8 years, but they should never be better investment compared to ones taken from year 2020-2022. Last overshoot is always possible but that doesn’t justify better risk and return profile.
In 2 years something big will come and I don’t believe it’s a Minsky moment.
The Federal Reserve taper should help to transition RRP/negative yield with fiscal deadline to market upside and not allowing front end rate to raise. However even if inflation force would be uncontrolled, we should still have about enough 6 points until the rate could hit their long term downtrend.

The market rally screams same music:

I’m floating around in Ectasy, so don’t stop me, don’t stop me now…

I’m a shooting star leaping through the sky
Like a tiger defying the laws of gravity
I’m a racing car passing by like Lady Godiva
I’m gonna go, go, go
There’s no stopping me

I’m burnin’ through the sky, yeah 200 degrees
That’s why they call me Mister Fahrenheit
I’m travelling at the speed of light
I wanna make a supersonic man out of you
Like an atom bomb about to
Oh, oh, oh, oh, oh, explode!!!

What is the world thinking at the moment? My vision of current decade evolution is with Electric Vehicle (EV) infrastructure, not just the EV itself. Hundred millions of Electric (not-gas) stations grid to build, all over the world in 10 years. Low rate weapon to protect uncompetitive low growth of advanced countries, turns into climate change cooperative initiative to protect high margin business to survive and to end low margin uncompetitive fossil fuel. This effort to leave fossil fuel has hit their competitor most, no less than China. Economy growth related copper and nickel, as their similar industry had lack of capital expenditure, would then be their hidden Cleopatra. Other scarcity of cheap electricity and cheap food may also have to get censored from their expected 100% growth for every 3-5 years. I hardly believe copper, nickel, energy and food will undergo transitory theme, while US steel is hinged under protection from entering transitory.

In this squid game, life and death, profit or loss, I should start with my escape plan, not to quit the squid game because it’s always be my interest, but to start planning their golden parachute plan, before the game is even starting to plan their end, in which I believe so much temptation of greed will be happening in next following years. Why I think is important? We may work and accumulate income well for rest of life, however at the end of the day, it’s our competitiveness to keep them growing that will matter most. A stable 20-30% per year (or faster return) is enough to catapult into billion mark in long run. A sudden 50% drop at the start of retirement means 50% loss of whole life wealth accumulation. Do we know soon-to-see high inflation is a hidden harsh of regressive tax? Our best effort, even with real estate portfolio, is always prone to these thieves. Have a look at how RRP should survive and take wealth from their pension funds. I would also expect we will see a lost decade between year 2030 to 2040, when Sodom and Gomorrah sky may be most likely being turned dark for 10 years. Welcome to reality of financial squid game, win big, survive, or die. My x-ray lobster-eye satellites keep scanning them, stay tuned.

11,788 Squid Illustrations & Clip Art - iStock

Disclaimer: opinion is my own and never become any financial advise.

2020-07-21

Foreign exchange, Investments

Evolution, but not like that

Microorganism is always evolving. Corona virus is like an influenza virus but it’s not like that. It carries new characters. One of few similar characters is they are evolving over time, in which is under a spell of frequency or cycle.

The corona virus is like an influenza virus but not like that.

A possible similar situation is like in 1930s. It could be a reflation but I will argue if it ignites high inflation with their money expansion. I don’t think is because of long easing but simply anything times zero is just zero. This might arguably fit with value vs growth hunting theme/arguments. Negative or near zero rate has failed to perform its inflation targeting. It should be true that market participants have learned and anticipated possibility of recession with monetary polices but unfortunately its number power has gone zero. I like the idea of using yield control targeting but it must come to opposite of monetary policy or long waited fiscal initiatives.

The reflation is like in 1930s but not like that.

Hugh Hendry argued we should instead raise the interest. We know it’s not possible in massive debt. Currently we don’t have any issue with massive debt because the massive debt times zero is also just zero. However we might be able to raise its real interest, like in spread, but still just not like that.

Real rate might increase, but not like that.

The times zero event unleashes a new characteristic of economy theory, that may never be found in any economy literature. Let’s imagine, if money and debt continue going exponential to infinity, is infinity times zero still zero? The answer is false as indicated here but undefined. It will unleash another new characteristic of new economy event. The “undefined” moment will allow more freedom for money to go to whatever it likes. We should start seeing wild gravity of economy theory and mathematics.

I also like the idea that money would need to come to the opposite of its value. The supremacy of USD is being challenged by China rise. Its value depreciation might flow to its opposites like assets but not many countries are able to challenge US. Warren Buffett and Jerome Powell reminded not to challenge America.

The depreciation of USD or any of their peers is like loosing their value but not like that.

*a volatility supported with a “rising” is usually a confirmation of cycle reversal*

I like the idea from Hugh Hendry, other countries will not allow their currency to appreciate and they will do monetary policy (or even better in mixture with fiscal policy). They would increase reserve but at same time buying anything else. Countries will run currency war but it won’t allow their currency to win.

Countries will try to win currency war but not like that.

However I would notice one thing similar. They are all under a curse of time, born, grow and die, a cycle. Time is always an opposite of a period, opposite plays. Anything we do in time zone, should also be seen in frequency zone, in this case is the cycle. Five and 10 year cycles are still looked likely repeating with quite similar sign of their reversal, such as extreme volatility during their rise.

Cycle repeats but not like that.

I would have to argue that assets might run like in year 2005 to 2008 but the zero and negative rate has pushed it to the opposite side.

Assets may rise similar to year 2005-2008 but not like that.

We should also see discrepancy between rich and poor. If we could explain this phenomena, why should we argue high growth of selected shares like FAANG and TESLA? The demand of money opposite should go to not just everything else but very distinct-ed or special assets or equities.

Learning above, I like the idea of being opposite sides. If monetary policies are printing money like no-end, the growth will go to the opposite, asset in value, in a distinctive way.

Opposite works like in a supply and demand theory but not like that.

I’m fond of adaptive theories in which its mathematical frequency characteristic is a base of learning. I think that could explain a “correlation but not like that” event. It can follow market participants without foolishly following just like that.

This is just my own opinion and not in any case of financial advise.

2019-12-05

Bonds, Foreign exchange, Investments

Sure, It’s a Plus! +

The + sign is getting obvious, there might be a start of a change to the world of economy. Australia continues to record current account surplus. It’s first time since 1975 or 45 years ago, and to continue rising.

The current account surplus is mainly related to commodity export to China and depressed currency. It should have high correlation to recent rebound in China PMI or highly probable China expansion.

How about other countries?

Emerging market and developing Asia seem to be the ones on way back down to deficit.

With US tries to control deficit, I may suspect China may have risk/difficulty to maintain their current account surplus, as seen a big flash drop in 2018.

Trade war will try to balance US and China trade and current account. They try to tango/stable two world strongest currencies, in simple term is trying to not manipulate currency, but to monopolize them. There seems to be an effort for China to stimulate their economy and effort to park the money in US to stable the pair.

USDCNY tries to stable at 7
source: marketwatch

Meanwhile, the impact seems to benefit some other countries like Australia. Negative sentiment of trade war, in addition to almost crash in property, is fueling local central bank easing to indeed catapult Australia to a condition we might never see in 45 years.

Everyone is waiting for fiscal initiative. One plausible outcome is a big tax cut. The stage 3 might put it back well to about 50 years ago, which seems to be correlated with the condition of current account surplus history.

With net overseas immigration continues to run hot, it may help to mitigate recent oversupply in Australia property. And when the fiscal does more such as infrastructure, it’s expected to be another plus.

From property perspective, investment properties (IP) are heavier than owner occupier, having more lending restriction and higher interest. If we look at gross rental yield, they return at average of 3% to 3.9% and quite stable in last decade despite price volatility. With current IP mortgage rate at about 3.5% from big banks and 3% with non conforming lenders, it’s quite clear that depreciation (tax benefit) suddenly turns investment property to be a surplus vehicle, as long as price is no longer down and rental yield is reduced less than mortgage rate, in which both of these two are happening. My argument in May 2019 is correct. There’s no benefit for investor to sell at this lower price, rather than to keep them for almost definite profit, even if the price doesn’t increase.

If we’d like to forecast how much tax benefit is diminished with price increase, assuming other conditions are stable, we may look at how much tax benefit is. This article shows that taxman contributes 24% of the cost, therefore we might expect price to rebound at about 24% from bottom to bring this vehicle back to normal, i=r+t or when we may expect volume to build.

It’s only a matter of time. The price has rebounded and only half way to go.

We may see clearly, that if RBA cut another rate, at current yield curve, one more rate cut to 0.5%, may ease short term lending pressure and form an inflationary yield curve. However even if RBA reduces the rate, I may doubt banks will pass the rate cut, considering recent profit pressure and may become a positive news for the bank instead.

I don’t say that economy is healthy enough (stubborn low inflation and wage increase), but many conditions have been definitely improving well, as long as RBA helps this recovery on track.

We do hope though, the plus is giving more benefit to the economy. Some evidences might show a surplus could be negative to local investment vehicle, such as shares, and may introduce some unintended consequences, like in Japan, which is still trying hard to stimulate their economy.

Japan Current Account — Japan has been recording current account surplus for decades.
source: tradingeconomics

However it seems the government is being careful, before doing a massive change and may take a safe measure, such as tax cut. The forecast from IMF shows that the surplus might be just an impulse and may quickly go back to deficit. This forecast is correct because it’s just based on simple past series math, but it may not be able to tell future, should the surplus condition persists. There is some argument that there might be some volatility in near future which may require financial sector to have bigger buffer.

The story might be related to a ‘big rescue‘ to US banks in September 2019 when their daily repo rate shot up very high. The Federal Reserve wouldn’t disclose who are the rescued ‘too big to fail‘ ones until next 2 years. The most coincident event during that time was a possible bubble burst of negative yield in long term US treasury. Many US banks have been participating to hold/engineer more treasury rather than what they park in Federal Reserve, causing short term liquidity crunch. In an event of global correction that could easily challenge other countries. It’s no coincident that many Australia banks are now in rush to raise their liquidity level.

Eventhough China seems to lead non US rebound, Germany is still contracting. People may still look for further evidence. Until then, US economy remains unchallenged.

Germany Manufacturing PMI — German PMI source: tradingeconomics

If indeed condition of surplus continues further, I would expect the fiscal policy to do more than just a tax cut initiative. We’ll see.

It’s my own opinion and not in any case of financial advise.

2019-11-09

Bonds, Foreign exchange, Investments, Property, Shares

Holy Grail

Many years, investors and traders have been trying to find and formulate their holy grail techniques. Most of them are failed and it’s not surprising. It’s market participants behaviors that are always trying to take advantages from those who are trying to find it. However I still find a dynamic adaptive learning to follow market participants is still doing well, rather than sets of quantitative formula or trying to redo past experience.

source: *The Damsel of the Sanct Grael* wikipedia

Since 2009, central bank balance sheet has been growing tremendously in a binary pattern. I always argued that we are not required to do any normalization yet until there’s any sign of global inflation. We were worry about US inflation in 2016, but at the end, US has to give up their inflation to bigger slow down of global growth.

In any of those events, our main concern is always about uneven money distribution which is related heavily to high grade investment vehicles supply issue. We see high quality bonds is getting scarce and drove their price to unprecedented negative yield. When we see junk bonds are being elevated too, people start to worry. There’s not enough supply for high quality vehicles which then raised another opportunity for their longer term. Companies also widely do buy back in effort to reduce their supply and cause unprecedented very high PER (Price to Earning Ratio). Funds may get more concern about what i called “new elevated normal” and due to their anchor to previous lower PER, they leave. If sufficient permanent balance sheet keeps permanent, as they are, this high PER could be the new normal, rather than previous failed effort to normalize it down. Isn’t it the behavior of economy policy makers?

We shouldn’t be surprised that ascending triangle of US shares, supported by Federal Reserve should be a conducive environment for them to continue up rising. Also if we looked our history, flat curve can cause rally as well, just like in 2002-2004. Did we just worry about US recession recently? I can tell that the recession is now officially gone in which I already predicted few months ago, as long as central bank remains supportive. Isn’t it amazing that money (rate cut and continuous 160B$ injection) can turn recession away, just like that? The impact should, of course, happen to US share market before it spills into other economy since US is still doing better than rest of world. We can see very clear that significant US 2y steepening makes their banks on right spot. Other countries like Australia big banks are now starting to raise their CET1 and Basel III, to possibly get their engine ready and catch up.

If we look Australian property market, after GFC 2008, actually Sydney property and many emerging property had been doing well. The GFC had caused people to panicky do saving and it caused these property market very healthy, which then caused rally from 2012 to 2015. This boom of profit margin attracted many developers (including from other states) to build Sydney and caused oversupply. It’s Sydney which has oversupply issue. Similar to money effort to save current risk to the jewel of US economy (IT industry) this year, there should be same effort to save Sydney property and I believe it will unevenly spill into other states which are not oversupplied, such as Victoria, with their tier-1 Melbourne CBD. With continuous effort to choke developer funding, it may evenly cause unevenly under-supply. It’s not difficult to measure number of cranes with our own little eyes.

China on the other side, was entering crisis in 2015 and may start to recover in 2020 ( 5 years ). It might be similar to pattern of US recovery from 2009 to 2014 ( 5 years ). Those are relatively matched with average length of maturity of their bonds. If it’s, inflation might start to happen in next couple years and people with negative yield may start to worry. US and China may really need to cooperate and introduce fiscal initiative. Powell said there might be a positive path towards negotiation. However we might interpret this as an opportunity for US to front run other world, rather than trade war deal. There’s still an effort to introduce #bluedotnetwork, an initiative from US Australia and Japan to challenge China BRI.

Other sign of inflation, may also be seen from recent plan of Aramco IPO. There’s an argument that the IPO might change the structure of Saudi people subsidy to rather fund their kingdom and US fiscal/global initiatives. Those masterminds behind the IPO are world rulers and leaders. They can decide market behaviors. My holy grail is to learn and follow their behaviors, the money.

Another sign of inflation is correction of negative yield bond rally in August which might cause short term funding issue. Eventhough the correction pattern may complete, it clearly shows that there was a pause in rally or having some structural change. It may continue to rally in medium term since it’s still above 2018 average, but it could also lead to global inflation. Christine Lagarde will take helmet of ECB (where most negative yield is) and she seems to be more fiscal supporter, unlike her predecessor.

Let’s have a look from RBA speech today. In past few years, RBA has been hard to maintain inflation to their mandate of 2% due to slow global growth, trade war and China efforts to combat their economy slow growth issue. The achievement from 2015 to 2018 were mostly only due to lower currency. If currency didn’t fall, we might not have much luck.

The recent inflation data were broadly as expected, with headline inflation at 1.7 per cent over the year to the September quarter. The central scenario remains for inflation to pick up, but to do so only gradually. In both headline and underlying terms, inflation is expected to be close to 2 per cent in 2020 and 2021.

source: RBA monetary policy decision November 2019

We don’t need holy grail to save the economy. The yield curve clearly shows, we just need to push up their belly and all kind of recessions and gloomy doom outlook could magically be gone. We know well, fiscal initiatives can help to push belly up (property), probably after pushing banks healthiness, supported by RBA with keeping rate lower than the market. Don’t be surprised with recent gloomy outlook from RBA to justify lower rate longer. Spring has really sprung, Australia banks are now reducing their dividend payment to grow. Just like natural cycle, flowers stop blooming after spring, they started to grow leaves and root. It’s a significant change to their previous years of high dividend. We hope this summer inflation is not that hot and return can be at their optimum.

We might not need to worry about lower volume of Australia property transaction/auction. I believe most of the low volume is because all big banks are now lowering their risk with some actions such as abandoning any Interest Only (IO). In the event of preparation to grow, this situation might be well perceived as an effort to increase healthiness. In 3 years, all IO will be gone massively from banks balance sheet and borrowers are already enforced to put more equity through Principal and Interest (P&I). Any weak hand will be funded with lower rate. Isn’t it healthy? I hope so.

We might not know when inflation start to bite. I will worry to non conforming lenders who are trying to expand their market share and being exposed to high risk borrower profile. I would advise their borrowers to monitor carefully their non conforming lender loans, probably in next 3-5 years.

Please be very aware, I may already have significant position written in this article. It definitely has conflict with my interests. Therefore this article is not in any case of financial advise.

2019-10-03

Bonds, Foreign exchange, Investments, Shares, Uncategorized

Global Recession?

People are talking about global recession, mainly referring to US (United States) economy and their impact to global economy. It is because people used to use history that when GDP is contracted over 2 quarters, I meant “when yield curve is inverted over 2 quarters“, we will most likely see a recession. Definition of a recession is below:

A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It is typically recognized after two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators like employment. Recessions are officially declared in the U.S. by a committee of experts at the National Bureau of Economic Research (NBER), who determines the peak and subsequent trough of the business cycle which demonstrates the recession

source: investopedia

It’s clear that the definition is historically and mainly applied to US economy and should reflect current US economy structure. It may not be 100% true. The definition shouldn’t emphasize all 100% population GDP but all 100% money GDP since money growth has taken over population growth with their enormous binary growth.

There’s an interesting thing is happening here. During this kind of recession risk, which is most likely a temporary turn of tightening into easing, it might already be predicted long before this decline is happening.

In my article 7 months ago, I would have to argue that we can predict the end of not so beautiful “normalization” or when the Fed tightening would have to stop or turn. I used excess reserve because it can connect dot between banks activity in relation to inverted yield curve, and its correlation to recession risk. In my article that time, I argued that the Federal Reserve would have to stop tightening after the excess balance sheet is left with 1.4T$. My math and prediction is correct with exact amount.

Since excess reserve is left with 1.4T$, market asked easing and the Fed had no choice but to end this premature normalization (in my previous articles, i used word of the end of a temporary normalization game). If the Fed has to start easing again and global economy is still not better, it means there might not be yet any real normalization need, like many economists argue.

Using a simple technical analysis from the same graph above, it clearly shows that the knowledge of this end of tightening and excess reserve numbers should have been been known since 2015 to 2017. It’s clearly showing that the risk of today recession is simply just a temporary turn from tightening into easing. It also supports that global economy can not afford higher rate and long term trend of rate is still pointing down. If long term trend of rate remains down and central banks remains accomodative, there shouldn’t be significant risk of recession. We have no doubt in past few years, central banks remains accomodative.

There could be a possibility that it’s not a time yet for normalization. The argument is because global growth is still declining while only US is rebounding. The rebound itself could be merely just a technical rebound due to excessive easing from the Federal Reserve or overshoot of easing between 2013 to 2015. It’s shown in a stubbornly strong USD even when US risks recession, which should show that other parts of the world are still weaker and global economy is not yet asking for normalization.

This situation could be made worst with recent push to long term bond play such as happening in negative yield. This capitalism may now negatively affect basic structure of economy itself. Trump may become one of the participants, having interest to introduce the trade war to benefit from government bonds. It could be a perfect time to introduce ultra long bond simply because market is so populated in this place. However if ultra long bond bursts together with other long term bonds, the ultra long bonds may need ultra long years to recover, just like its name.

Here now we know, Federal Reserve may temporarily have to stop tightening and back to easing. One day I believe there will be a time to do real normalization (not this time yet). That time could probably be when trade war ends and spark in inflation.

After market experienced yield crashed in Q1 2019 and already in 2 quarters, people start to talk about recession probability. It then raises a question, will we have a recession in 2020?

Based on arguments above, if numbers are so orchestrated, we do know it’s now leaving to yield curve to lead future. At the moment, Federal Reserve is so way behind curve. Stated in my last month article, market still remains asking for 2 basis points of rate cut and unfortunately next central bank meeting is still 3 weeks away (end of October 2019). The Fed has been trying to help with repo but I believe it’s not enough. Therefore we shouldn’t be surprised to see some share market correction. The same question again, will we have a recession? If it’s, share market should probably go down even further.

If my theories above are true, we might be able to avoid recession if Federal Reserve is willing to run at least as fast as market curve with at least a 2 basis points of rate cut this month. So far, market has been predicting monetary policy very well because monetary policy is very friendly to them. An example is in my article 5 months ago. where I predicted that RBA (Reserve Bank of Australia) would have to start cutting rate again. RBA then continuously cuts 3 rate cut after holding rate at 1.5% for almost 2 years. It’s in my opinion, the Fed should cut faster or possibly have emergency rate cut. They should, of course, try not to scare/shock market.

There’s an interesting thing happening. Australia is one country that has been running faster than the US in easing. RBA cuts their rate 3 times within past few months. If the Fed cuts 2 more rate basis points, RBA should at least cut 1 time, simply because Australia is smaller. RBA chief recently confirms that he doesn’t want to see strong AUD (which I believe is very risky to Australia property market trend) and he will maintain currency competitiveness. The issue is, if RBA cuts just one more, it may be most likely trigger an inflation in Australia and it could be one of few countries that leads global inflation, together with other AAA credit rating countries such as Canada, Denmark, Finland, etc. When inflation sparks, it may shock their share market. It’s then I believe, on next inflation cycle, probably at the end of trade war and burst of negative yield, we might see a true normalization effort, rather than the ‘not so necessary’ normalization efforts in past few years.

I’m back to the question of whether we will see recession in 2020. In my opinion, we shouldn’t see recession next year if central banks remain fully accomodative. The Fed should run at least as fast as market curve. In today situation, the Fed should cut with 2 basis points. Until that happens, we should continuously see some pressure in short term liquidity, seen clearly in share market. We hope the Fed is not too late to ease, considering effectiveness of monetary policy is now diminishing. The difficulty, of course, if the Fed is easing too much, inflation may pickup rapidly and we may experience bond crash like in 1994. I believe today correction of share market is not due to recession risk but merely because central bank policy is so behind market expectation. We should still expect share market pressure until the central bank is on or ahead market curve without inducing inflation spark threat.

Technically speaking, share market should worry of this negative divergence, until central banks put break on this as soon as possible.

This article is my own opinion and not in any case of financial advise.

2019-07-26

Bonds, Foreign exchange, Investments, Property, Shares

Four Wise Monkeys

see no evil, hear no evil, talk no evil, and do no evil

Economy is a protection of wealthy. It’s always be mysterious, otherwise it won’t work. We might sometimes need to see no market, hear no market, talk no market and do no market. It’s true, market and communication have been long used to make money and protect the wealth. The only way to know the real market is using math, because 1+1 is still 2. No surprise that technical is still playing well, until a strong hand does poison it to monetize and protect their interests.

Recently we should be surprised that central banks outside US, have been orchestrating easing. They are who are US allies. Can we see the evil here? Can we hear the evil here? Can we talk the evil here? Or can we do the evil here? No matter why yield is inverted, let the issue stay here.

Greece, land of Russians billionaires to park their money, fell down a decade ago. Italy and other PIGS who try to save it, are still enduring longest economic depression, longer than US depression in 1929. It’s the cost of austerity where Greece central bank is unable to supply Euro, which is under monopoly of ECB, which is under influence of bigger shark.

HongKong, land of Chinese billionaires is starting to shake when China tries to put extradition law to this biggest tunnel of money out flow from China. Could it be part of global yield inversion? I see HongKong has one main big issue. It pegs its currency to USD while it should go together with other countries to depreciate against USD. Similar to Greece, HongKong is highly dependent to US and its USD. What do billionaires in HongKong think about their money in such extreme high risk when this country can go bankrupt at any time? Eerie is everywhere and exit door is too small.

Who is going to bail out HongKong? US or China? If they go to China, people may get instructed to riot. If they go to US, they can easily get overpowered by Chinese army. HongKong issue seems to already spread into Singapore economy and two of them dictate premium property in Asia. Does it scare RBA enough? RBA rate cut is showing how they respond to risk of biggest surplus of Australia, which is coming from China, both in trade and account. It could stem into overdue Asia Pacific correction since 1997, when I self-experienced scary social unrest and first time I did deep study of GFC to many different business views. It was due to company debts bubble and could now be property and government debts bubble, through trade war, currency, and policy changes.

There should be no safer place to park your money unless you pay for its safety. Negative yield everyone? Trump always emphasizes that US won’t protect anyone money unless they pay or would US have such an ability to make more money unless everyone pays? Monopoly tends to work well.

Of course this issue is much complicated than what we ordinary can see. At the end, we are just market opportunist who is trying to follow where those money is moving. We do not need to see who is that evil, or hear that evil. We do not need to talk about that evil nor do the evil too. I think global money is starting to morph into something new and I would be just following money using my own money theories.

It leads me to classic technical play. An example of technical play is below. We did know well why we were doing big short to this company in May 2018. It broke both fundamentals (loosing arm of Veritas and Verisign, attacked by Google, long contract cheats, high debt, etc) and bad technical. We recently hear so many drama and mysteries, but seeing technical below in few seconds is enough to answer our curiosity, about what will happen to this company. There’s a Geisha make up by activists. Fundamental may not go better soon but activist play may draw stock price.

Another example, we do not need to hear any recent good news about fundamental of this company as well. We just need to know that easing is on play. It may not be favorable in short term but long term play should be strong enough. Who can win against central bank monopoly of their currency? Let traders try and we will do play with both of them.

I am a fan of any play and behavior of market participants, but recently the 4 wise monkeys inspires me much to overweight technical. When we can’t see in dark, don’t forget to always turn on the light.

I may have personal interest in any part of my article, therefore it’s not in any case of financial advise.

What you see/hear/do here and when you leave here, let it stay here.

2019-07-16

Bonds, Foreign exchange, Investments, Property, Shares

Monopoly

Monopoly defines a stable society and a stable economy

Human endures many different paths of society, democracy, oligarchy, communism, etc. They do try to create a stable society in their own way and to preserve wealth.

Central banks have been long doing monopoly. They are monopolizing money printing. Local banks also have been long doing monopoly. They are the only ones can draw money from the central banks.

In public company, we do see many examples, Google and Adobe have been monopolizing their industry. Google search engine is no match to any. Adobe Photoshop is also no match to any other. We also do see merger and acquisition strategy which is simply an effort to create money from thin air after having bigger monopoly, 1+1=3. At the end, the monopoly can decide their price and PER ratio is no longer much working to them.

Monopoly may create higher PER/Price Earning Ratio

In technology, 5G, should also be in monopoly of the “greats” since they are a strategic global infrastructure. I mentioned in my article from early this year, we should just follow 5G monopoly. It simply works. Even in current high momentum of Telstra share price movement, we can clearly see a-not-so-invisible hand on play with the 5G monopoly, even though their NAS (Network and Application Services) is quite interesting to watch. Eventhough current technical may start to show a potential correction, previous strong hand plays is already detected and may surprise in future.

In Australia property, we should see big banks are starting to lower rate BUT something unique is being detected. We do see all big banks who has direct access to the currency monopoly, has been reluctant to pass full rate cut. In the mean time, currency supply from big banks and reverse carry trade should flood the market. We clearly see so many non confirming lenders are now offering 0.5% lower or more than big banks and attracts migrations from big banks to non-conforming lenders. It raises a question to me, why big banks who are monopolizing the currency access offers higher rate than the ones which can’t do monopoly. It should be clear that there are currently a lot of liquidity at the moment. I would have my own theory that they, who can do monopoly, should see profit margin and strength from property is deteriorating. Therefore they start to sell weak assets with help of their “grandfather”, in which in future they can simply make a policy change by orchestrating liquidity out from the market when good time for property comes back. In a normal action respond, it’s part of bounce back similar to death cat bounce.

How far monopoly can push their price before introducing too much competitors? In theory, Marginal Cost (MC) is equal to Marginal of Revenue (MR) and which is above Average of Total Cost (ATC). In property, marginal of revenue should have run down faster than decreasing of marginal of cost. For example when central banks cut rate from 1.5 to 1, the market rate should also decrease 4 to 3.5. While the profit margin is relatively same, the revenue and their profit margin should have gone down with fixed cost remains same. Therefore I believe it’s more profitable for big banks to run market rather than holding assets since cost to run market is lower. The other way around should happen when long term rate is starting to rebound or inflation is starting to kick in. That’s when I believe the big bank monopoly will start to reduce oxygen from the market.

Image result for monopoly economy — source: economicsonline

We would then think bigger picture. When will inflation starts to kick in? We do know US is having benefit from monopolizing their strength of currency and enjoy this benefit while other countries like Europe and China are still having issue. I would have to agree with Fed, as long as they are still the only one monopolizing one biggest strong currency, they should be reluctant to cut rate like other countries. I would believe, when reversal time is coming, other countries could no longer do currency war and may start to increase rate. I would think that’s the time when Fed will start to do the other way around. With negative yield exceeds 13T$, there could be a big spike of inflation during the reversal. Market may fall, but inflation sensitive may then recover quicker than the other.

In the meantime, as predicted before, as the strongest currency, they can maintain Wall Street to continue their trend and slowly destroy global money value, unseen. This is what I describe as a stable currency where magic is happening and binary is formed. Inflation should be still far away because it broke MA200 ($TNX). As long as USD is strong, inflation should be in control. I don’t think we would see the reversal and market crash in next year or two. It’s simply because central banks currently demonstrate their habit of monopolizing money destruction and ample of liquidity is everywhere.

Monopoly is to make money. Money follows the monopoly.

My money theory is not in any case of financial advise.

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2019-05-28

Foreign exchange, Investments, Property, Uncategorized

Property Trading

When you are exposed to a dream, you are exposing your weakness.

More than a decade ago, I might be a bit lucky that emerging and Australia properties were running very well until next decade. There were few arguments during that time that emerging might not follow US property price. Let’s fast forward, in 2012, many people were so afraid and RBA research did support the fear. It still didn’t fear me enough.

In 2014, just a year before a major change is happening to emerging properties, I did feel property might have a chance to run out from its course. During that time I predicted that commodities would rebound when dark pool of US properties closed its gap within a year and half, which might mean the bullish cycle of emerging property might finish soon. My strategies that time was to hedge half of the properties with 3 years fixed rate and as much amount of commodities. There were a lot of arguments and theories behind commodities rally in relation to where the money will go and property hedging but I’m not going to discuss here.

The commodity and money theory did work well. However fixing rate was failed miserably. The central bank continued to lower interest rate again in 2015 after standing still in 2014. And one that I failed to see most is the Australian dollar crashed from its trend in 2015/16 until today. I did see strong Australian dollar before 2015 as a reason that Australian property wouldn’t crash but I didn’t expect Australian dollar to crash back to year 2008/2009. The market is always smart, that it lowers expensive price in a very fast and hard-to-predict way. Unfortunately commodity rebound didn’t help the currency.

I always fancy math. Before 2015, I have my own equilibrium formula:

i (interest to bank) = r (rental income) + t (tax benefit)

I only consider investment properties and ignore owner occupier properties, because that is where my money theory will work well most. The formula is only working in effective healthy market. It basically says that in very competitive market, investor will not make any profit from just buying the property (Rf = risk free) because their rental income and tax benefit is just barely enough to pay the interest. Market will do its own way that supply and demand will make sure investor is taking risk from the investment properties.

Moving forward to past few years. Here comes the interesting part. Currency devaluation is not enough to hold price, and price is starting to fall and so is the i. This environment will cause a shock to the formula to response and it would take few years before it can find a new equilibrium.

Australian property is still a biggest weight in inflation formula. In my theory it means market players still use property as an important investment or trading factor. When the weight is lower, and in my money theory is possible, it would mean property is no longer important in money market portfolio.

Due to this importance, RBA did lower interest rate in 2015 to 2016/17.

Back to the formula, i=r+t, when interest rate is lower, i and t should also go lower. However the magnitude of t is much lower than i. Therefore r must go lower even-though might not be as much as i. We have to remember that price was peak in 2016/17 where there’s hardly chance to cut more rate because dispersion between Australian rate and US rate is going higher due to Federal Reserve aggressiveness and RBA effort to save their boat. It caused money to flow from Australia to US and causing more pressure to Australian property price.

Based on my money theory as well, the not so invisible hand would sacrifice currency and at same time is trying to save their boat. If those money is not the major player, rental should have been falling since 2015 but it didn’t. r is just falling from early 2019, and not since 2015. We can see from this number. Property rental price is just starting to fall from early 2019.

In any shock, there’s an opportunity and the opportunity will get lower after market responses. When r is not responsive, there’s an opportunity to make money. Currently the r is quite high. It’s almost equal to i and money is trying to benefit from t. I found it quite interesting that they debated negative gearing and many business benefit. If the negative gearing is abolished, in my theory, property will crash. Even if the negative gearing is grand-fathered in this situation, we won’t see any recovery. I’m not surprised with result of election.

It’s very clear from above arguments that r must go lower. However if it goes lower, it will hurt the economy and retailer will suffer most because property is still a cash machine of most investors to stay afloat in an increasing global rate. Lower r means lower income or deflation, a big issue to the portfolio.

When i is going lower and r is not responding quick, we can see market is now doing:

i = r

The math does its magic because the t is free from the equation. It means we might be able to get the t with very low risk.

Rather than owning a property, it might be more beneficial to go renting and might benefit from the t for almost free. I’ll show you a case. A owns a property and pay 4% of interest. Since r is equal to i, A can rent in market and paying same amount of 4%. A can then benefit t by switching his property into investment property and go renting. Of course r must be securely located and maintained to get the high r. A will pay same amount of interest but enjoy the t for almost free. It’s not 100% free and 0% risk though because anything can happen to the property. What is the different? If A keeps his property as owner occupier, A won’t benefit from the t. Since market is now doing i=r and r is starting to fall, i is expected to start falling to help r or the economy. Lower i previously causes or due to lower price and hopefully it won’t cause a snowball to drag the price further down.

If people think lower r is not worrying, let’s see what RBA will do. RBA may race the falling r with reducing i until they find a bottom. It’s because money growth/velocity may go slower with lower r. During that time, currency may continue to suffer most. If i doesn’t go down with lower r, investors will start paying more and see less and less benefit to own investment properties and may cause more property to sell and less property to build. It doesn’t need to abandon negative gearing. If r drops a lot, maintaining higher i may cause investment property selling. With raising payment behind schedule, it should raise enough alarm for RBA to lower rate. It may also pressure APRA decision to reduce buffer in effort to stop this bleeding and boost more investment in properties. I only worry it would cause price to further down.

Current numbers (might change) show that within 3-6 months RBA should start lowering rate up to 0.375% within 3 years. i is expected to fall a bit further from 1.5% to 1% thus causing r to fall at about 12.5% (lenders are passing 0.5% or from 4% to 3.5%). If r is falling at above 10%, that will be catastrophic enough. The not so invisible money hand should help this from falling. If A switches to investment property, A will benefit high r and get t for almost free. I won’t surprise if at the end, outcome will benefit the investors. What it does hide is, going renting will pay more money because r tries to stay high. Let’s look 2015 to 2018. Isn’t it more beneficial to go renting rather than owning a property? If we own a property at 20% deposit, 10% fall in price is equal to 50% loss in deposit asset. Sometimes it can be better at paying a bit more money to save the bigger money. We should realize that Australian dollar has been falling more than 30%. If we add 12% price correction on top of the 30%, Australians have lost 42% of equity wealth from their property price. If they maintain 80% LVR, it means, unfortunately, they already loss 5 x 42% of value which may already lead to bankruptcy (over 2x of 100% loss) if currency does not fall down. It would then need many decades to bring the equity wealth back, unless of course, the price and currency rebounds. This graph is good but also tells it won’t happen soon.

I still don’t think Australian property will crash anytime soon. However I have my own theory of when bigger issue may come. There’s sign where authorities will start giving hands to weak hand instead of investors. It’s just a matter of time when the weak hand falls with holding asset. However, for now, I may expect price to rebound within 3-6 months to the next 3 years if RBA is willing to cut rate as soon as in June 2019. It can be wrong and may change tomorrow, but that’s what my numbers can say for now.

When I would expect price to rebound in conjunction to strong rental? I think this research, A Model of the Australian Housing Market, does provide many good numbers and formula. I would be more interested to see the impact from building approval (in relation also to bank lending) and interest rates changes.

Property is the dream of many citizen. Unfortunately they are exposed to their weakness for others to make money.

Above is just my theory and should be debated. It’s definitely not in any case of financial advise.

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2019-05-20

Foreign exchange, Investments, Property, Technology

Time and Frequency

20 years ago I majored my bachelor in Adaptive learning. I realize now, that’s actually the most basic idea of AI (Artificial Intelligence).

Time is what is happening in our life. We do this, we do that. It’s also what is happening to price, index, etc. We could easily transform time into frequency, for example is using a Fourier Transform or simply use Fast Fourier Transform (FFT).

A very basic formula of time is

T (period) = 1 / f (frequency)

We agree on this very simple basic math formula. It means we CAN transform something between them, vice versa.

Here comes learning into play. Once the time is transformed into frequency, we could easily see a pattern. In a most simple case, a continuous noise sound at x frequency will only look like a single x dot/line in frequency. It’s then being fed into learning algorithm and we found a pattern. Amazingly I could reduce up to 80dB (decible) in real time using technology that time (i386 processor) in a very easy way. In today’s world, we wear this noise cancellation, almost everywhere.

When life is going more complicated, the frequency is becoming more complex and thus require more advanced learning.

With their module being shared freely, we can have a 5 years old person to operate. We don’t need to become master of microconductor to become an artist of computer, to create many arts like app, robot, etc. Using the same logic, we don’t need to master the learning formula to become an artist of AI. Today, we can do much more complicated learning pattern without having to know how it mathematically works. A three years old kid with no English-speaking parents or friends, learning English from digital media since 6 months old, can speak English fluently in his/her grammar and vocabulary without any knowledge yet on how to write and spell. Many developers know less about how computer works nor they do know how machine language and all other people modules are working, but they can use them to develop so many arts already.

Here comes our not so complicated aging finance industry. When an evidence is repeated in time series, AI can learn the pattern easily and then can do better prediction. Thus the response time to make profit is getting shorter. The good thing is, finance industry is not doing random signals because they are managed by same parties who try to maintain their wealth. Indeed central banks decisions are based on multi years of historical facts/evidences and is afraid enough to do a new experiment to the market. Therefore index/price movement IS DEFINITELY NOT random.

It then makes it harder for big fund to maintain their wealth. Therefore they should keep introducing a new thing and work harder to lead to where human evolution will be, in order to protect their wealth.

I was expecting USDCNY to run a stable YUAN in January 2019 for quite some time but it seems it run much shorter than my expectation.

Again, technology is running faster and faster and they learn faster. The wealth creator should keep evolving or else they will lead to their extinction and policy barrier is their only last hope.

Theoretically, if we can bend the frequency or feed new frequencies, and transform it back into time, it may not be a time machine but it could possibly bend our future?

my money theory

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