Why every investor must know this history

Wednesday, 31 October 2018
Melbourne, Australia
By Bernd Struben

  • How does he do it?
  • A word of caution
  • ‘Anglican Principals Demand Sexual Discrimination Rights’

Yesterday we looked at the ongoing trade dispute between the US and China. And why I foresee the two sides coming to new agreements within the next few months.

But before we continue with that, let me point out that our series of insights into the trading techniques of ‘The Billionaire’s Trader’ continues in today’s Insider, below. This is a unique insight into the mind of a highly successful trader who has worked for some of the most successful major institutional investors, as well as high net worth individuals — hence the name. Check it out below.

Now, onto the China–US tensions…

In short, Donald Trump can afford a protracted trade war. Xi Jinping, on the other hand, can ill afford to see China’s rapid growth plans derailed.

That doesn’t mean a lengthy trade war would be painless for the US…or the rest of the globe. Or that Trump wants to proceed with his threat to slap tariffs on all Chinese imports in 2019.

That threat is simply intended to force Xi’s hand. But in typical Trump style, as he threatens in one breath he offers a ray of hope in the next.

Shortly after I penned yesterday’s issue, Trump spoke on ‘The Ingraham Angle’ on Fox News. Buoying investor sentiment, he said, ‘I think that we will make a great deal with China and it has to be great, because they’ve drained our country.’

Trump added, as he’s said before, that he was ready to make a deal immediately, but the Chinese weren’t ready yet.

Reading between the lines, the Chinese need to sweat it out some more.

They need to crunch the numbers on what US tariffs on all their exports will do to their economy. Not to mention that the 10% duties applied to US$200 billion of Chinese imports in September will rocket to 25% on 1 January.

That’s why I told you to keep an eye on the Group of 20 Summit in Buenos Aires on 30 November and 1 December.

Though still in the planning stages, Trump and Xi are expected to meet on the sidelines. I think from there we’ll see new high level trade talks announced…and that this time they’ll reap results.

With this in mind, global stock markets could be set for a big bounce in early December. Particularly China’s CSI 300 index, currently down 22.84% in 2018.

That may be good news for stocks, you say. But will it be enough to end the slide in Aussie property prices?

CoreLogic data shows Melbourne’s average dwelling price has fallen 4.6% over the past 12 months. Sydney’s average values are down 6.3% in that same time.

Are we heading for another 10­–15% correction as many mainstream analysts now predict?

Or are we looking at a complete rout, with Aussie house prices falling 50%, as renowned US futurist Harry S Dent predicts? (Details here.)

The answer, if you ask Cycles, Trends & Forecasts guru, Phil Anderson, is neither.

We’ll get back to what makes him so sure…after a look at the markets.

(If you want the full scoop now, you can find out how Phil has made all of his remarkably accurate predictions, right here.)

Markets

Overnight the Dow Jones Industrial Average closed up 431.72 points, or 1.77%.

The S&P 500 gained 41.38 points, or 1.57%.

In Europe the Euro Stoxx 50 index finished down 7.80 points, or 0.25%. Meanwhile, the FTSE 100 gained 0.14%, and Germany’s DAX closed down 48.09 points, or 0.42%.

In Asian markets, Japan’s Nikkei 225 is up 385.41 points, or 1.80%. China’s CSI 300 is up 1.09%.

In Australia, the S&P/ASX 200 is down 2.80 points, or 0.05%.

On the commodities markets, West Texas Intermediate crude oil is US$66.49 per barrel. Brent crude is US$75.91 per barrel.

As you can see in the chart below, plenty of supply coupled with fears of falling demand saw WTI oil futures drop to a two-month low:



chart image

Source: Bloomberg / Nymex
Click to enlarge

And with the US pumping record amounts of oil and set to produce even more, my long-term outlook for oil prices remains lower.

From The Australian Financial Review (AFR):

A high-stakes competition is emerging among energy exporters proposing multi-million-dollar crude terminals along the US Gulf Coast to handle a gusher of shale oil coming from West Texas oilfields…

The contest comes as the shale revolution is expected to send the nation’s oil production to 11.8 million barrels per day by the end of 2019, from 9.35 million bpd in 2017, according to the US Energy Information Administration.’

Regular readers will know that as oil was tracking above US$80 per barrel, and the bulls were eyeing a return above US$100, I called that nonsense. And I recommended you consider buying an inverse crude ETF…one that gains when the price of oil falls.

I went so far as to say WTI crude would fall below US$60 per barrel before the 6 November US midterm elections. That would mean another 10% drop before Tuesday.

With the Saudis committed to pumping all they can, that could still happen. Stay tuned…

Turning to gold, the yellow metal is trading for US$1,222.97 (AU$1,722.01) per troy ounce. Silver is US$14.47 (AU$20.38) per troy ounce.

One bitcoin is worth US$6,286.41.

(What’s next for bitcoin? Find out here.)

The Aussie dollar is worth 71.02 US cents.

How does he do it?

Returning to the outlook for Aussie real estate, one of the headwinds has been a drop-off in foreign buyers.

Part of that headwind is due to greater restrictions on foreign property investors implemented by Australia’s government. And part is due to increased restrictions from our major foreign buyer.

Yep, China.

As the AFR reported this morning:

China is cracking down on its citizens skirting around the country’s tight capital controls to get money out of the country to buy residential property overseas in a move that analysts say will further slow demand in the Australia market.

Does that mean the mainstream analysts are correct in calling for another 15% fall in house prices?

Maybe.

But real estate cycles guru Phil Anderson certainly doesn’t think so.

As far as foreign buyers go, here’s what he wrote in Cycles, Trends & Forecasts last week:

In this update, I thought I’d take a view of the Australian landscape from overseas. From Singapore in this case, after a recent visit.

I thought you might like to see the perspective from outside Australia. Something you’d rarely see most likely.

And Aussie property’s looking pretty cheap to Singaporeans these days. Especially compared to what they can buy locally.

So here’s an example of adverts that are strategically placed in all the Singapore newspapers almost daily.’



chart image

Source: Cycles, Trends & Forecasts
Click to enlarge

Don’t forget that the relatively weak Aussie dollar makes our real estate a better bargain. And the lower the dollar goes the cheaper property gets from an overseas investor’s perspective.

Phil goes on to write:

Just something you might like to consider as the commentary mounts for the Australian economy to collapse and property prices — the Cassandras tell us — will fall 30, 40, even 50%.

My overseas cash is going to look pretty good if it does. But it’s something I’m not waiting for. The chance of such huge falls is zero in my opinion.

And history is on my side.

When Phil says he has history on his side, that’s no hyperbole.

He’s spent decades studying property price cycles in the US, UK, and Australia…among others. And much of his research dates back to the early 1800s.

That means many of the documents were never digitised. It also means Phil and his team have spent long hours poring over century-old paper documents to get the data he needed to formulate his Grand Cycle Theory.

This is the same theory that’s enabled him to predict stock market highs and lows — including the 2008 meltdown — with uncanny accuracy. And he makes many of his forecasts years in advance.

If you follow Phil’s work, you’ll know he’s long predicted 2019 will be the beginning of a two year, mid-cycle market slow down. Not an almighty crash. Just the same real estate driven slow down the markets experience every time in the middle of their 18.6 year cycle. The almighty crash is coming, mind you. But according to Phil, not until 2026.

If you follow my work…and have a sharp memory…you may also recall what Phil told me in early 2015.

We were at a Port Phillip Publishing editorial roundtable at the time. Property prices were already rocketing. Many of the editors — myself included — thought the great Aussie property bubble was close to bursting.

But not Phil. The capital cities still looked good to him, with the exception of Perth in the short-term.

During lunch I asked which city looked to offer investors the best returns.

His answer? Hobart.

A quick peek at CoreLogic’s data tells me he was spot on…again.

From July 2015 through to July 2018, Hobart dwelling values shot up 32.4%. That compares to 18.7% for Melbourne over the same period. Even last month, Hobart dwellings gained 0.4%.

You can learn more about how Phil makes these remarkable forecasts here.

Moving on…

A word of caution

I’ve written to you before about how Russia is the enemy the West has to have.

How else to justify the trillions of dollars in military and intelligence spending?

Just look back at the global outrage that erupted following Trump’s friendly approach to Vladimir Putin. Outrage fuelled by powerful vested interests…aka the Deep State.

These same interests control a lot of the media you have access to. And they’re more intent on delivering their messages than the facts.

Like this, from today’s Sydney Morning Herald:

The Australian Electoral Commission is embarking on a massive overhaul of its ageing computer systems amid a growing risk of cyber attacks and fears of the kind of election meddling carried out by Russia against the United States.’

The only proven meddling by the Russians in the 2016 US elections involved their manipulation of social media in an effort to influence voters and drive division. Though I’d say the left and right wing media do a fine job of driving division without any foreign assistance.

But if you base your views on the article above, you’d think the Russians had hacked US polling results. Which is just what you’re meant to believe.

Fake news?

Absolutely.

Proceed with caution…

That’s all for today.

Don’t forget to check out the latest from The Australian Tribune:

‘Anglican Principals Demand Sexual Discrimination Rights’

34 Anglican school principals are losing sleep over the idea they may have to employ a gay maths teacher. Or perhaps a lesbian physics teacher. What’s next? An atheist or a Jew on the staff?

They stand united in their demands to discriminate based on however they choose to interpret their religious doctrine. Though they’ve made no mention of eschewing taxpayer money funding their own paycheques.

In response, Education Minister Dan Tehan…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd


Fine-Tuning Your Trading ‘Swing’
By The Billionaire’s Trader

I’ve had some trouble with my golf swing of late.

I know exactly what the problem is. But my muscle memory from doing the wrong thing for 25 years is so deeply ingrained that my body refuses to cooperate with my mind.

I have to teach my body a new language.

I need to coax it along and fight the constant urge to slip back into my comfort zone. The right swing is uncomfortable. The wrong swing feels right. 

As we build up our knowledge on any topic we have a tendency to filter out any information that contradicts what we believe to be true. We also tend to continue building on top of our current knowledge, and find it difficult to completely let go of old ideas. Even if that may in fact be taking us further away from the knowledge we seek.

Trying to understand market behaviour, and even more importantly, understanding our own behaviour within it, can be a daunting task. There are many rabbit holes to go down. Our beliefs about the market shape our interactions with it.

Once we have developed blind spots they will usually remain until either our trading account goes to zero or we become willing to change.

Using the golfing analogy again, that change can either be a slight adjustment to your grip to lessen the size of your hook, or it will mean a complete overhaul from the ground up. Not many people are willing to go through such a profound shift in their beliefs. Most would prefer to hold on to false beliefs because that is what feels comfortable.

Even if it costs them money.

To completely let go of one way of seeing and to embrace a new way is confronting. But at the very least, challenge yourself to read with an open mind about the way I describe market behaviour, and consider whether there may in fact be some merit to it. 

So, as a refresher, last week I answered question one of the three questions that I asked you to think about. If you missed the first two articles you can find them here and here.

These are the questions I asked:

  1. What does a market look like when it changes direction?
  2. Is it possible to work out where markets usually change direction based on past price action?
  3. If so can we use this knowledge to enter trades that give us a good probability of being able to take profit fairly quickly to create a ‘free option’ so we can see what happens from there without risking our initial capital?

The answer to question one introduced the concept of buy and sell pivots (not the same thing as pivot points) as a definition of when momentum is potentially shifting in the opposite direction.  Read the article if you haven’t yet, because it will be necessary to understand its contents before moving on to question two, which I’ll answer for you now.

Can we work out where markets usually change direction based on past price action? It’s a contentious question. Many would say no, it’s impossible. Many say yes. My answer is that, yes, you can.

As an example, many traders use Fibonacci retracement levels when looking for potential areas where the market can change direction. If you don’t know what Fibonacci levels are then I would suggest a bit of googling is in order. The key Fibonacci levels that everyone talks about are 38.2%, 50% and 61.8%.

My own observations over many years are that these levels aren’t the key areas where we see constant reversals. Although the 50% level is incredibly important, and I will go into more detail about this at a later stage.

The key area where we see a change in direction within a trending or range-bound environment is in fact from 12.5% to 25% and from 75% to 87.5%. 

Let me explain why these levels are so important and why they manage to completely fool and frustrate most investors.

As you should be able to work out for yourself, 75% to 87.5% retracement of an entire wave is getting very close to 100%. By the time a wave has retraced that far most people believe that the wave will reach the 100% mark or beyond.

If the initial wave was up for instance, all the investors and traders who had bought on the way up will feel under pressure as prices return almost all the way back to where they came from. 

A lot of short term traders will adjust their stop losses to their entry price once they have reached a certain amount of profit. If the wave sees an 87% retracement most of those short term traders will be taken out of their positions. It’s this constant process of going over old ground and shaking any weak hands out of their positions that the market does so well. 

Whether a market is trending or in a range, the same levels keep coming up again and again.

Let me give you a great example of what I am talking about by looking at a daily chart of the ASX 200 [ASX:XJO] since the start of 2016.

The light blue areas are the key retracement zones. The 75–87.5% retracement is the ‘buy zone’ in an uptrend and the 12.5–25% area the ‘sell zone’ of the wave. Each wave is determined by going from the lowest low of each wave to the high once prices break out to new highs.

This is where markets change direction



chart image

Source: tradingview.com
Click to enlarge

There as clear as day on the one chart are 12 examples of prices reversing course at or very near the buy and sell zone. Wouldn’t you prefer to expect such things to occur in a trend, so that you are prepared to act while other traders are shaken out of their positions?

Now let’s look at a range-bound market and see the same thing in action.  This is a monthly chart of Fortescue Metals Group Ltd [ASX:FMG] since the 2008 crash.

Using past price action to pinpoint a change of direction



chart image

Source: tradingview.com
Click to enlarge

It’s a remarkable thing to contemplate the fact that all of the price action that has occurred since the range was created between late 2008 to January 2011, can be explained by referring to the buy and sell zones. Seven reversals occurred within or very near the buy and sell zones. Worth knowing, don’t you think? Do you think that kind of knowledge and insight could help with your trading?

Well, this is just the beginning of what I hope to teach you.

On Friday, I’ll start putting all of the pieces of the jigsaw together for you by answering question three. It’s one thing to understand how price action develops. It’s another thing entirely to turn that knowledge into a trading strategy with an edge.

Until then,
The Billionaire’s Trader