When a bat flaps its wings
We’ve all heard the saying, “when a butterfly flaps its wings in one part of the world it can create a tsunami in another part of the world”. This is known as the butterfly effect, the idea that something so seemingly small as the wind moved by the flickering of an insect’s wings can grow to the force of a tsunami. It’s time to update this beautiful imagery by replacing butterflies with bats.
Bats, in our humble opinion, represent a far more interesting part of our ecosystem than butterflies. In recent media articles, you’ve likely learned that bats, as well as snakes, rats, and other wildlife from the markets of China may be at the center of the rapidly spreading coronavirus. This should surprise absolutely no one. Bats have long been known to transmit disease. It was the consumption of bats in Africa that was also associated with the spreading of the ebola virus.
Besides spreading viruses here’s something you may not know about bats; they are key pollinators of over 500 plants including many of your favorite fruits such as bananas and mangoes. Do you enjoy tequila? Well, that’s thanks to bats pollinating agave plants. If you love chocolate you can also thank bats for pollinating cacao trees.
In 2014 we traded cocoa prices in Africa in response to the Ebola outbreak. As you can see from the CDC chart below the first wave of the outbreak peaked in September. This coincided with the peak in cocoa prices which you’ll see in the chart below it. Cocoa prices moved by nearly 30% that year.
So how does someone express a market position based on bats in 2020? If you want to short Chinese airline stocks that have been an effective trade year-to-date. Here’s a list of 8 airline companies domiciled in China that are publicly traded. They are all down and likely have further to fall.
If you prefer something a bit more macro there’s always the FX markets. Our view has long been that China has been keeping their currency artificially strong, a view which is the exact opposite of the U.S. government’s narrative that they are manipulating their currency weaker.
China’s economy has been slowing and its financial system is riddled with bad loans. Add the coronavirus on top of all of this and the probability of stimulus from the Chinese government is high and that will weaken their currency. The knock-on effect from China will also hit Australia’s currency. Australia has a banking system that is also overextended with exposure to commodities and housing. The chart below shows the similarity in the movement of the yuan and the Australian dollar. Note that USDCNY is inverted on the chart below so that it’s easier to read alongside AUDUSD.
In all seriousness, the coronavirus looks to be a serious world health emergency. We want to be clear that our ideas are not to place trades that profit from the suffering of others. Everything we are pointing out today represents macro imbalances that are being brought to the foreground through the coronavirus epidemic.
Far too often traders are blamed for market crises. This blame is misplaced. Traders provide liquidity when others won’t and take a risk when others wouldn’t dare. Traders, much like bats, are a critical part of the ecosystem… just don’t eat us.