A conversation with trading expert David Belle
As promised, below you’ll find the transcript of a recent conversation I had with our newest trading expert David Belle.
Every experienced trader knows that stocks will skyrocket one minute, and nosedive the next. This volatility can be hard to deal with for some, while for others it creates much needed excitement, and makes trading all the more worthwhile.
The trick that eludes most would-be traders, however, is finding the right balance between the two.
Hopefully David will shed some light on how best to tread that line in our interview below.
During the conversation, David shared his own personal trading strategies, as well as his approach to successfully anticipating the markets, and where he thinks interest rates are likely to go in the coming months and years ahead, plus much more.
David is a bright young talent, full of new ideas that may surprise – and possibly educate – even the most seasoned of traders.
So, without further ado, here’s the interview.
GF: I’m not going to beat around the bush here… you’re a really young guy, at just 24. Some people would argue that you might not have enough experience to help others trade. What would you say to that?
DB: Well they’d be right. I don’t have a lot of experience working for big banks or hedge funds. But I’ve got a totally different level of experience…
People who’ve been in the markets for 30+ years haven’t had the same kind of market conditions as we’ve had for the last six-eight years…
Where we’ve had massive central bank buying creating a hugely distorted price in pretty much every market, but especially equities and bonds.
It’s what Alan Greenspan calls “irrational exuberance”, where traders just continue to buy and are pushing markets to all-time highs.
These kinds of conditions have never been experienced before and I’m learning as it’s happening – whereas most of the older traders are stuck in different (old) habits.
They may believe they’ve experienced it before but they haven’t – it’s totally different.
You adapt to the times you learn and live in, but with a lot of the old guys it’s a case of “you can’t teach an old dog new tricks”.
GF: What’s your trading style? What type of analysis do you use to find your trades and what things do you look for?
DB: I use a combination of pure price action, volume and a method called ‘volume-spread analysis’…
It was created by Richard Wyckoff back in the 1920s/30s and looks at the sentiment of the markets and how volume and price interact with each at specific points.
GF: Do you use any particular indicators?
DB: No. I use simple price and volume and look at those in combination with support and resistance.
At its most basic level the markets represent trader’s greed and fear. I think people tend to forget that, but that’s all it is – just a picture of other trader’s beliefs.
If you can capture specific points where people are committing to herd behaviour over and over again, you can use that to give you an edge.
Volume spread analysis allows you to see where the market piles up at tops and bottoms and you can trade accordingly.
For example; if you can see it’s bottoming up, the price will spike down as people start panic selling in to that spike.
Bigger buyers buy in to that, as it means their trades won’t get slipped as much… and when you dry up all the sellers, the price can move up again.
Whereas if you just bought anywhere with no sellers, it’s less liquid and the price will just shoot up.
These are the areas where big institutions will do their trading and I get in there too.
GF: So you basically copy what the big institutions are doing?
DB: Pretty much… and in combination with that support and resistance I also look at the Commitment of Traders (COT) report, which changes from week to week.
On this report you can see where the non-commercials – trend followers, producers, swap dealers, FX dealers – are positioned.
So if they end up shaving 50,000 contracts off a Yen short for example, you know the price is going to go up so you can get in on that.
GF: Do you do any fundamental analysis on the markets? Or is it purely technical?
DB: You can’t be a trader without doing both. There’s no way you can do it – no matter who says otherwise. Even looking out for news events makes you a fundamental trader.
A lot of the best intra-day (scalpers) traders use purely technical, but if you are a day or swing trader, or holding longer term positions you have to know how to do both.
But a lot of people don’t know how to do fundamental analysis. They don’t understand how to read what the central banks are saying and what the long term outlook is.
For example inflation – a lot of people don’t know how to read inflation and the effect it has on the markets.
GF: Do you pay much attention to politics – with Trump in the White House and with Brexit? What effects have those had on the markets?
DB: Surprisingly they don’t have that much of an effect. Take Brexit for example… the day after the vote the pound fell by about 15%. But in 2014 the IMF said the pound was overvalued by between 10 and 20%, so Brexit was only a catalyst for it to fall.
Most of the time politics is often just a catalyst – it’s never the underlying cause.
GF: So you’re saying the pound would have gone down anyway?
DB: Oh yeah. Maybe not as quickly as it did, but it would have done. The dollar’s facing the same problem now… it’s overvalued by 10-12% too, so there’s a lot of dollar selling going on right now and that will continue.
GF: We’re in an eight year bull run on US equities and bonds now – do you think that will continue or will we see a correction there?
DB: Well, I’m actually waiting for the Swiss National Bank to start selling off their US equity holdings, because that will be the biggest signal for me to go bearish on US equities.
When the Swiss 10 year yield bonds get above 0.5% for three to six months straight, that’s when I believe they will start the sell-off – and that’s when things will start to get interesting.
But the US bond markets are in a bubble right now too, as the Fed have been doing so much quantitative easing. But there’s going to be a massive unwinding of that soon, as well as in the equities market and it will happen simultaneously.
GF: Would you go short when that happens?
DB: I’d actually be buying on the way down, purely because you buy in to fear and sell in to greed. You use less risk and buy as you go down and then pile in more when you get the bullish signal again.
Remember, the markets are designed to go up non-stop. If one stock gets a lower market cap, it’s replaced with another bigger one.
A recession is just going to correct it, but it’ll go back up again. So if you’re a long term buyer you are going to make money.
In fact, no trader over any 20-year period has ever lost money holding the S&P500.
GF: There’s talk of interest rates rising in the US and UK – what’s your opinion on that?
DB: In the UK we have a massive consumer credit issue and in London we have a housing bubble – if interest rates go up what are those people going to do?
Many people are maxed out on their credit cards (or have multiple credit cards) as it is. What are they going to do? What can they do?
It’s the same with the car loan industry in the US – it’s a massive bubble and it will burst sooner rather than later.
GF: Do you think interest rates should go up?
DB: Personally I think they should have kept them on hold, instead of reducing them last August. They didn’t though, as they thought the conditions after the Brexit vote would be poorer but they weren’t.
They should’ve just kept it the same, as people began borrowing more as it’s been cheap to do so, and wages haven’t not going up – so lots of people are getting themselves in to a pickle.
GF: Do you think they will go up, though?
DB: They will have to push them up. The next lowest is 0% or negative, and if that happens they’re going to have to start pushing their inflation target from the 2% it is now to 5%-7%.
What that means is that we’d only start seeing an interest rate rise kick in when prices of goods go up by 5% a year. How are people going to afford that or save money? It will keep fuelling the credit bubble, which will eventually burst as it’s unsustainable.
I think a recession will come… they always come… and it will be worse than 2008.
GF: Why do you think that is?
DB: Previously we had the collateralized debt problems, where they were securitizing junk and classing it as AAA. This time we have central banks having trillions of pounds, or dollars, or euros of debt on their books, with no real way to get out of it unless they let the debt go to maturity.
Now, how long is that going to take? They need to get them off their books so that interest rates can go up, but then you’ve got a balancing act of throwing all this debt on to the markets with no one to buy it.
And that’s when you get in to trouble.
GF: Do you think it will happen soon?
DB: Within the next two years I think, maybe sooner. And China is about to pop too…
China is a whale that no one’s really spoken about, because you don’t really know what data is going to come out of there (because they can report whatever they want). They are probably already in a recession.
There are so many factors in play today that are bigger than back in 2008…
Take sovereign debt in Germany for example, with Deutsche bank holding 20-30% of Greek debt – that’s a 74 trillion dollar exposure. It will probably have to be bailed out by the German government at some point.
Germany’s industrial output is also down, by 4.8% on the quarter. It really needs the Euro higher as well, but I don’t think that will happen.
Then in the rest of the Eurozone, you’ve got zombie countries like Spain, Greece and Italy (where there banking industry has had to be bailed out).
As I said, China is about to pop (if it hasn’t already started) and there are big problems in the US.
There will be another recession and it will be worse than last time. And something will have to change as a result…
There will have to be institutional change in the banking sector on how they do things, as its unfair that a small minority of people have benefited from quantitative easing for this long (land owners and corporate entities), when the consumer has been let down by being allowed to rack up so much debt.
The whole world is going to face big issues sooner rather than later and it’s going to be tough.
GF: Scary stuff! Thanks for sharing your views on the markets and the wider economic and political issues affecting us.
Hopefully you found our conversation useful; if you did, David will be sharing more of his insight over the coming days, as well as an exciting opportunity for readers of The Daily Reckoning this coming Thursday that he’s been keeping under wraps.
Check back soon for the details.