Posted by: Bevan | May 1, 2012

April 2012 Trading Commentary

Two losses and a small win – the poor performance of my trend following strategy has continued this month.  A Corn trade saw a .49R loss (i.e. a loss of around half of the original risk taken in the trade).  A promising looking downside breakout was quickly followed by a strong surge upwards as grains across the board turned positive.  The upside move showed little follow through either (I did not go long) making it look more like an ‘order clearing’ move rather than anything fundamental.  Since Corn has returned to hug the downside support from the move in late March without being able to break through.

The other more serious and disappointing loss (almost 1R) was in the Euro.  This tested to the downside drawing me in before promptly returning  back into the recent range which has established itself in the 1.30 – 1.33 range.  This market really interests me.  With such bad news going on it has certainly defied logical expectations and virtually all of the pricing expectations from commentators and analysts over the past six months.  Many were calling for pricing in the 1.25 to 1.30 range late last year, and really the fundamentals are as bad as they were then.  Additionally the recent hike in Spanish yields and return of recession in that country have shown that LTRO (the European Central Bank’s inventive version of Quantitative Easing designed not to anger German sensibilities too much) isn’t really showing convincing results.

This morning Bloomberg showed an interesting discussion involving Ron Paul and Paul Krugman.  Although neither really answered the other very well it showed the usual discourse that the negative GDP and poor unemployment statistics in Spain show that the austerity programme is the wrong remedy.  I fail to understand this.  Spain has, like many countries in the EU, allowed an incredibly unbalanced economy to develop, one grossly dependant on speculative property development and investment.  That sham market completely collapsed.  In those circumstances it is surprising (and probably indicative of debt addition in terms of government borrowing to temporarily paper over the cracks) that there has been any economic growth at all.  Surely anyone with a sense of reason would realise that the Spanish economy will contract for some time as property values return to reality, the banking sector writes off huge amounts of its loan book which are based on fictitious property values and the allocation of resources and employment is rebalanced to other economic activity?

New Zealand and Australia face similar grave risks.  The Australian economy had an easy ride through the economic crisis but any analysis of property values vs. income shows it has a ticking timebomb of a property bubble.  As China shuts up shop in an attempt to unwind its deeply corrupt and manipulated growth fantasy of the past ten years, the contraction in the commodities market will bring these realities home for Australia.  New Zealand’s economy is dependent and correlated with Australia’s and will experience similar headwinds.  Property prices were hit in New Zealand when the Global Financial Crisis began as the dairy and meat boom wasn’t as strong as Australia’s resource bonanza, however they are still very high.  New Zealand is also extremely unbalanced, as Government’s and industry here have been happy to see our economy become dependent on milking the food commodity boom while doing nothing to help our manufacturing industry (smashed by erratic Reserve Bank interest rate hikes in the past) recover.  To make matters worse the Government seems determined to sell our land, and the dairy industry’s intellectual and genetic property to China.

There are signs that the US economy is recovering, and the Presidential election usually leads to a more positive sentiment and upward leg of the economic cycle as the economy is primed in any way possible.  This will have a positive impact – the US is still the biggest economy in the world and at least has crony capitalism rather than China’s make-believe centrally planned fiction.  I think we’re into a positive leg of the cycle and will grow despite the odds as people gradually shrug off bad news and begin taking risk.  However the difficult times for an overleveraged dairy industry (in terms of farmer’s debt and high land prices) and long process of flat real property prices will keep things in check for a few years yet.  In my humble opinion!


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