The arcane details of credit default swaps and the inner workings of the American mortgage market are not usually the kind of subjects that get an airing at the local Odeon. But when the film of Michael Lewis’s The Big Short, starring Brad Pitt, opens in this country next week we will be revisiting the global financial crash of 2008 all over again - except this time with better looking people and more jokes.
Lewis’s book, as well as being a fantastic read, also has some valuable lessons for anyone who follows the financial markets. Part of that is understanding the trading that led up to the crash. But, more importantly, he reminds us that you can only really make money by going against the grain. And, just as importantly, that you need to do so on the basis of a compelling logic and genuine research – simply betting against every trend won’t get you anywhere.
That prompts a simple question, however. If the American mortgage market was the big short of 2006 and 2007, and the people who bet against it made out like bandits, then what might the big shorts in the market be right now? Here are four to be thinking about – and, just so you don’t feel too gloomy, one big long that no one is paying any attention to.
The car industry
We have not quite reached the tipping point yet, but the amount of money being poured into developing self-driving cars means that it cannot be long before they become a mainstream product.
Don’t listen to the doubters – they are the same people who said no one would ever use a credit card to shop online because it was too risky. A self-driving car will save people vast amounts of time, and any product that gives us some more of that most precious of all commodities will always find a huge market. The traditional auto makers are rushing to get on top of that.
Ford just announced that it is doubling its fleet of self-driving vehicles. Mercedes has a self-driving truck and car, while BMW and the Chinese internet firm Baidu recently got a 3-series to drive itself for 18 miles through Beijing (if it can handle that, the M25 on a Friday evening should be a doddle).
The trouble is, self-driving cars will be nothing like traditional vehicles, any more than a TV channel was anything like a chain of cinemas, or a personal computer anything like a typewriter. Very few companies are able to transform themselves completely and although the car manufacturers will try, few will manage it. In reality, most of them are doomed. Anyone who can short them will do well. Even better, short the financial institutions that have massive exposure to car loans. And then sell off the insurers that specialise in motoring – self-driving cars won’t crash, and even if they do the legal fight will be between software companies, not individuals.
Germany doesn't look so strong anymore
For the reasons explained above, Germany's massive car industry, which accounts for 2.7pc of GDP by itself, and 20pc of exports, is about to go into steep structural decline – and the one thing Germany doesn’t have is any significant internet companies to exploit the boom in self-driving cars (the only European countries likely to do well from that industry are Britain and Sweden).
Selling machine tools to China can’t work as an economic strategy much longer. The rest of the eurozone won’t tolerate German trade surpluses sucking the life from their economies forever – sooner or later there will have to be a re-balancing, and it will be the loser from that. And that is before you mention declining demographics – Germany is set to become the new Japan, with a sharply falling total population that will make it a smaller country than Britain over the next three decades.
Take a look at shorting German government bonds in particular. Zero and sometimes even negative interest rates lending to a country heading into that kind of trouble is crazy.
Canada thinks it can spend its way out of recession
It was only in October that Justin Trudeau led his Liberal Party to a decisive, and unexpected, victory in a general election, and, at 44, became one of the country’s youngest ever Prime Ministers.
Justin Trudeau meets the Queen Photo: PA
But he increasingly looks like a matinee-idol version of Jeremy Corbyn. He is a big state politician, who campaigned on a platform of spending his way out of recession, promising vast infrastructure splurges and lots of tax relief for targeted voters. The trouble is, Canada decided to elect a free-spending liberal on an anti-austerity platform just at the time the oil price collapsed. Since Canada is basically an oil and commodity economy, that is going to be, to put it mildly, a bit of a problem.
Canada’s biggest export is oil, and it has also been developing a huge shale gas industry. The loonie, the nickname for the Canadian dollar, is about to live up to its name. It has already sunk to 11-year lows against the dollar, but it can go a lot lower still – you can’t just spend your way out of a structural recession now any more than you could in the 1970s.
Too many hedge funds
The boom in alternative investments is coming to an end. Hedge funds are closing and money is not flowing into the sector anymore. In total, more than 600 funds closed in the first nine months of last year, according to figures from Hedge Fund Research. Even George Soros, in many ways the founder of the industry, has shut his fund to outside investors.
The reason is simple. There were too many for all of them to beat the markets, and the costs were outrageous. The managers got a lot richer than the investors, and that couldn’t last forever.
Few funds are quoted, so can’t be shorted directly. But you can short the firms that depend on them. The investment banks, and the inter-broker dealers, provided the plumbing for the hedge fund industry. And they are all going to suffer.
Go long on Poland
Poland. It is quietly emerging as one of the strongest economies in Europe, with low debt and a strong industrial base.
It is already up to 65pc of EU averages for GDP per capita, and growing faster than any of them. Warsaw is already richer than Vienna.
Fireworks explode in the sky above the Royal Castle during the New Year's Eve celebrations in Warsaw, Poland Photo: AP
Its recently-elected right-wing, euro-sceptic government is getting a lot of flak from the EU/Davos policy elite, but decisively rejecting the euro, and distancing itself from Brussels, won’t do it any harm (in fact, the opposite is true).
Poland can easily keep growing faster than most, and could overtake Italy and Spain to become Europe's fourth-largest economy. But that is not yet in the price of its stock market or currency.
True, none of these trades is likely to make you as much money as any of the main characters in the Big Short. But they are all going against the grain, and could even make substantial profits for anyone who works out how to take advantage of them.
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