Readying for our biggest trade…

  • Currency wars
  • The ‘Big Australian Short’
  • Times square Fizzer

From the Financial Times:

Britain’s security co-operation with EU countries will be on the table as part of the Brexit negotiations, Theresa May has said as she prepares to become the first world leader to meet new US president Donald Trump.

If you could define 2016 by any two things, the quote above contains both of them: Brexit and Donald Trump.

But 2016 was 2016. It’s the past. As investors, we need to acknowledge the past, while at the same time trying to figure out what lays ahead in the future.

Chief among the issues for the future is whether Brexit and Trump are ongoing opportunities and threats. Extended further, are there other situations, similar to Brexit and Trump, which could also send markets reeling or soaring?

The obvious situation right now is this year’s French presidential election, and the emergence of Marine Le Pen as the far-right candidate.

Could she really win? If so, what would it mean for France, for Europe, and the European Union as a whole? Donald J Trump on one side of the Atlantic, Marine Le Pen on the other…

However, all that could be academic. Our resident global strategist, Jim Rickards, doesn’t believe Le Pen will win. However, that doesn’t mean a potential profit opportunity is off the table…


Over the weekend, the Dow Jones Industrial Average gained 94.85 points, or 0.48%.

The S&P 500 added 7.62 points, or 0.34%.

In Europe, the Euro Stoxx 50 index closed up by 9.11 points, for a 0.28% gain. Meanwhile, the FTSE 100 fell 0.14%, and Germany’s DAX index gained 0.29%.

In Asian markets, Japan’s Nikkei 225 index is down 203.34 points, or 1.06%. China’s CSI 300 index is up 0.6%.

In Australia, the S&P/ASX 200 index is down 38.65 points, or 0.68%.

On the commodities markets, West Texas Intermediate crude oil is US$53.33 per barrel. Brent crude is US$55.61 per barrel.

Gold is trading for US$1,218.13 (AU$1,607.72) per troy ounce. Silver is US$17.20 (AU$22.70) per troy ounce.

The Aussie dollar is worth 75.76 US cents.

Currency wars

As far as I’m aware, there was only one man in the world who openly predicted — without hedging his bets — that both Brexit and a Donald Trump victory would take place.

You can see evidence of that here in an interview Rickards did last October. This was the day before our Great Repression investment conference began in Port Douglas.

Check out the video, and check out the reaction of the interviewer when Rickards says he believes Trump will win.

Interviewer: Let’s go to the US election first. Who do you think will win?

Rickards: Well, here’s the point. A personal view, just my personal opinion, is that Trump will probably win…

Interviewer: Wow!

Remember, this was more than two weeks before the US presidential election. Some of the opinion polls pointed in Trump’s favour, but most, if not all, of the commentary was talking about the size of Hillary Clinton’s victory, rather than the potential for Trump to win.

When Rickards openly said that ‘Trump will probably win,’ it’s no wonder the interviewer had such a startled reaction.

So, do those kind of trading opportunities still exist?

They do. However, while future trading opportunities may have similarities to the Brexit and Trump trades, they won’t follow them exactly.

Take France as an example. Immediately following Trump’s win, all the commentary began to suggest that Marine Le Pen could become the new far-right president of France.

As Rickards told us in Berlin last December, he doesn’t believe that’s likely. And, based on the reaction of the French stock market’s CAC 40 index, the market doesn’t really think it will happen either.

In which case, what’s the opportunity?

Just as we see the Trump presidency as being a ‘buy the rumour, sell the fact’ situation, following his election, our bet is something similar will play out in France.

After the election result in November, the US stock market took off. Investors bought stocks on the prospect of Trump’s economic stimulus program. That’s ‘buying the rumour’.

But, as the inauguration neared, the market began to weaken. Perhaps on doubts that Trump will actually do as he promised — that is, spending trillions of dollars of government money on big infrastructure projects. That’s ‘selling the facts’, as it were.

In France, the market has taken off. It’s up 10.8% since November:

chart image

Source: Bloomberg
Click to enlarge

Our bet is that the market is also ‘buying the rumour’ here. But it’s not buying the rumour of a Le Pen victory. It’s buying the rumour of a Le Pen loss.

OK, so what happens after the election, when, in Rickards’ view, Le Pen loses?

Will the market soar further? Not in our view. That will be when the market ‘sells the fact’. In this case, the realisation will be that the French economy is still a basket case.

As we were reminded at the Agora Economics meeting in Baltimore last week, the French government contributes 58% of the country’s economic output.

Arguably, once a country goes above 50% government spending as a proportion of GDP, it should no longer be labelled as a market-based economy.

In truth, the benchmark should be much lower than 50%, but we’re always happy to be flexible. But that’s another subject.

The point is, regardless of whether Le Pen wins the French presidency, or whether it’s François Fillon of the Republicans, or Benoît Hamon or Manuel Valls of the Socialist Party, the situation is the same. France is a country in deep debt, with a centrally-planned economy, and one that’s struggling to find its way in Europe, let alone the world.

In this instance, the trade on France would most likely be a short trade. That is, to play the prospects of a falling market.

But France isn’t the only economy in play when it comes to big-picture events; there’s just the little matter of what’s going on right here in Australia.

It’s to do with what we’re calling the ‘Big Australian Short’…

The Big Australian Short

Soon enough, we’ll find out if the Aussie economy can continue its streak of recession-free growth.

This was another subject that came up last week. Our colleagues in Argentina wanted to know why the Aussie economy had grown so much since the 1960s, whereas Argentina’s hadn’t.

We gave a number of reasons: the discovery of huge mineral resources, legal immigration, the idea of working hard for a living, and, of course, property rights.

Argentina certainly has plenty of natural mineral resources. But not so much of the other three. Especially not during the years of the populist Peronist regime.

However, while that’s a reason for Aussies to pat themselves on the back, what we could only describe as a series of fortunate events for Australia may, ironically, lead to one major unfortunate and catastrophic event — a major recession.

In the early 1960s, UK Prime Minister Harold Macmillan famously told Britons that they had ‘never had it so good.’ Britain was on a roll (or seemingly so) in the years leading up to Macmillan’s famous statement.

But after that, it appeared to be all downhill, culminating with the country going cap-in-hand to the World Bank for a loan in the 1970s. It was that, and almost constant industrial strife, which saw the rise of Margaret Thatcher and a shift to the right. (Away from what they called the ‘Post-War Consensus’ between Conservative and Labour governments.)

Australia’s situation, while not the same, isn’t so dissimilar. The Aussie economy has boomed for most of the past 26 years. A person aged 18 in 1991, when Australia last had a recession, is around 44 now.

Their entire working life has been spent witnessing economic growth. To say they don’t know what a recession is would be an understatement.

But that could end soon. During the last quarter, the Aussie economy contracted by 0.5%. The commentary in the mainstream press was pretty much the same — don’t worry about it. It’s a blip. It’s a one-off event.

In fact, most of the commentary suggested that it wasn’t just about whether the Aussie economy would rebound, but by how much. The implication being that the Aussie economy was much stronger than most think…even though it had just shrunk 0.5%.

So how should an investor play it, if they should play it at all?

The answer to the first part of that question will become apparent tomorrow. We’ve put two of our analysts on the case to find ways to potentially profit if the Aussie economy sinks into recession.

As we’re not into day-trading, we wanted ideas that Aussie investors and traders could implement today in order to get themselves set for when the Australian Bureau of Statistics releases the next GDP numbers at the end of February.

That’s important. Markets can move fast, but trends can take their time to build. We want to find the trends that are emerging now, and which seem most likely to develop over the next five or six weeks.

From there, it’s a case of getting out before the news is actually released (buying or short-selling the rumour), or hanging on to see what the market’s reaction will be to the news (buying or short-selling the fact).

But whatever the outcome, while the Big Australian Short has our attention today, we believe that this is just the next in a long line of big macroeconomic events that will create big opportunities for active investors.

The year 2016 was a big year for macroeconomics; we have no doubt that 2017 will be just as big, if not bigger.

Look out for details of the Big Australian Short in your email inbox tomorrow.

Times Square fizzer

Your editor is back in Melbourne, after our long trip to hear former US Federal Reserve chairman Dr Alan Greenspan talk to a panel of analysts from our network.

As part of that trip, we spent a day in New York. As it happens, that coincided with the inauguration of Donald J Trump as the 45th president of the United States.

On advice, we decided the best vantage point would be to watch it on a big screen in Times Square:

chart image

With all the commotion surrounding the new president, we wanted to see the reaction of real Americans to the proceedings.

On reflection, perhaps Times Square wasn’t the best spot. Like your editor, we had the sense that most folks standing there watching the big screen were tourists.

But, when it was over, there were a few hoots and hollers…and that was it. There couldn’t have been more than 1,000 people there (although I believe Mr Trump insists there were at least 10,000 people there!).

We’d hoped for some shouting…a bit of argy-bargy and name-calling…and maybe a bit of ‘action’ from opposing factions. Instead, we just got cold.