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Chat with Joe and his dad

On Kaoshion

  • KaoShiong is where the bulk of industrial manufacturing occurs
  • Taiwan is a Japan trend follower

On peronal growth

  • Adversity in youth provides an opportunity to build character and gain experience.
  • restricting the amount of resources your offspring has access to might be a good thing but it breeds resentment
  • Good things come from seemingly bad experience too

on DDP policy in KaoShiong

  • Too radical in their actions and lacks calibration in their policies. Really good at manipulating the press
  • Stance
    • Anti China
    • Pro resource less young
    • Pro taxing businesses for social welfare
    • Pro reducing pension to retired
  • Equally corrupt as the KMT but too aggressive in their policies leaving nothing for the business to continue operations
  • manufacturing businesses has been negatively affected with over regulation and rising administrative cost
  • Worker protection makes overtime illegal severely restricting the throughput volume businesses are allowed in their operations
  • Workers not making enough from their day job due to such restrictions are forced to take on a second job on top of their main one
  • 30,000 to 40,000 businesses have failed within the KaoShiong area over the past 12 months at the point of writing with more set to fail if policy should persist
  • While GDP growth rate has been reported at 2% in 2019, shipping volume through KaoShiong has continued to drop

On KMT

  • A more mature party with measured policies which lost leadership due to lackluster performance
  • Stance
    • Pro-China
    • Pro-business
    • Pro-protecting pension of the retired

Social security system and the aging population

  • Social security system is in a state of flux. Employers are required to contribute to two systems. The contribution for the old system is 5X the new system and was too much overheads for the employers.
  • Retirees are concerned their pension will get cut while the young are concerned their contribution to the social security system is to heavy a burden

On China

  • China has imposed restrictions on independent Chinese tourist to Taiwan
    • Chinese tourist are easy customers who engage in indiscriminate spending
    • Night markets looked empty
    • Quite a few restaurants have closed down along the main street due to the lack of tourist spending
  • The bulk of Taiwan’s export has been to China it makes economic sense for both territories to become unified
  • noteworthy to observe Joe’s shift to a pro Chinese stance the on Chinese Taiwan relationship as compared to the high school days.
  • Observation of Taiwan style politics in contrast to Chinese style politics leads me to have reservation about how these two systems can be resolved.
    • the Taiwanese have no reservation with injecting outrageous humor into the legal framework afforded to them by their political system with candidates as outlandish as Mr Crazy Friday and Mr Fortune God
    • China’s one country two system need to become more robust for this undertaking
    • Recent HongKong riots has caused concern for Taiwanese and has lead to increased support for the DDP whose leader English Tsai is known to be a strong negotiator

On Korean Japan trade war

  • Huge influx of Korean tourist observed during this period of tension (Sept 2019)
  • Korean tourist are more discriminate in their spending, hence a lower per capita spending as compared to the Chinese tourist.
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Dinner with Mansu

On financial industry

  • Lots of quant funds operating within the South Korean market
    • Very fund has its own strategy and model
    • Things will work until they don’t.
    • The long tail where shit happens can be very fat
    • Funds tend to graduate towards excessive leverage overtime. This is the nature of an industry largely driven by fear and greed
  • KoStar, Korea’s equivalent to Nasdaq is the exchange of choice for Quant operations
    • illiquid/inefficient
    • more volatility
  • Merrill Lynch in South Korea
    • their two largest clients are quant funds
      • Citadel capital
      • Susquehanna Capital group
        • drives 10% of all daily transactions on the Korean stock market
        • up to 100 times per day on each listed company
    • client requirements
      • lesser demand for sales and account representatives
      • demands for high throughput cable connection to their exchange networks
    • client technology stack
      • large scale utilization of neural networks
    • Equities sales representative teams has been reduced from 8 to 3 over the past year
  • On valuation and economy
    • Multiples are becoming exceedingly high given free money provided by Federal reserve and central banks around the world with low to negative interest ranks
    • largely driven by decoupling of interest rates and inflation
    • global deflationary pressures
      • aging population
      • productivity driven by technology proliferation
    • asset prices will contract when interest rates increases

On real estate industry

  • property prices has more than doubled in prime Gangnam area in Seoul over the past 4 years
  • In times of economic recession property valuation at the center of premium districts will remain stable while those at the fringes will become soft
  • segments within the prime Gangnam area
    • integrated apartments
      • situated in complexes with amenities day care services and grocery stores
      • USD1000/sqft – USD1 million for a 3 bedroom apartment
    • normal apartments
      • up to 16 units within a building
      • USD700/sqft – USD750K-800K for a 3 bedroom apartment
  • While governments of both Japan and Korea are trying to further decentralize urbanization across their countries, organic tendency thus far has been towards centralization. Seoul and Tokyo occupy major proportion of the population with smaller townships in the outer fringes dying out. Same thing is observed with San Francisco, coastal cities of Australia and Auckland in New Zealand.

Shifting population and resource equilibrium

Phases in the cycle

  • economy booms
  • competition for resources increases
  • housing and other amenities will become less affordable
  • income gap increases
  • people will have children later or opt not to have children
  • population starts aging at an accelerated rate
  • spending drops as population aging continues and population size starts contracting
  • economy slows down and starts contracting
  • competition for resources decreases
  • labor shortage becomes pronounced and wage levels starts increasing
  • housing and other amenities become more affordable
  • household confidence increases leading to more children
  • economy starts growing

East Asian countries

  • South Korea
    • is in the mid phase where households are feeling the pinch of scarce resources
    • birth rate per woman is starting to fall
    • 2019 fertility rate is at 1.323 per woman
  • Japan
    • in the latter phase where population decline
    • labor shortage are becoming pronounced
    • New college graduates are in high demand and can easily find jobs
    • 2019 fertility rate is at 1.478
    • immigration laws are loosen

On Singapore

  • Money laundry capital of the world
  • Stable government and economy
  • the SGD1000 note receive a premium rate brought to South Korean exchange offices
  • fertility rate is one the lowest in the world at 1.26 per women, the government has long adopted a very loose immigration policy to offset the deflationary effects of an aging population
  • Net effects on the economy
    • continued influx of high income earners and high net worth individuals
    • continued lowering of birth rates
    • average income per capita will continue to increase as low income households continue to die off due to low birth rates

On Korean politics

The legal framework is split into the police and the prosecutors. With the police handling the day to day executive work and the prosecutors given the right to investigate into any issues of concern.

The prosecutors has grown big in numbers over the past few years and the government is trying to curb its influence so as to maintain balance within the system.

The police was involved in a drug scandal in Gangnum where three popular night clubs were closed down. The prosecutors are using this as leverage to remove the brake on their continued growth in influence. Meanwhile Octagon which had been steadily losing popularity due to the existence of the three clubs is now surging in popularity again. This is mainly due to the lack of alternative options in the Gangnum area.

Related references

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Book summary: Buffett the making of an American capitalist by Roger Lowenstein

Keep things simple. Simple should not be confused with easy.

Business model assessment

  • Easy to understand economics
  • Strong defensible moat
  • Trustworthy management who treat capital of shareholders with ownerlike care
  • Selling at a reasonable price
  • Able to generate high returns without excessive usage of debts

Guiding principles

  • Stick to companies with your circle of competence
  • Ignore macro economics trends and analyst forecast
  • Choosing between growth and value is a misguided one. See the business model holistically.
  • A share in a business is basically a bond whose coupon rate you need to figure in yourself
  • The character flaws of an individual tend to have very serious spill over effects. Always check for serious character flaws of individuals whose company you plan to invest in.

Float

  • Buy cash generating assets to finance purchase of more assets
  • Insurance is a prepaid model
  • Blue Chip is a prepaid stamp sales model

Management of cashflow

  • Give out dividend
  • Share buy back
  • Reinvest or MnA

The last option is almost always value destroying unless the management can generate ROI above it’s current RoA rate. This is predicated upon a strong defensible moat.

Leadership

  • Confidence
  • Perspective
  • Ability to focus
  • Communication
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Federal reserve maintains interest rates 11th Dec 2019

Key indicators

  • Business investments slowed
  • Manufacturing has slowed
  • Exports has slowed
  • Unemployment rate remains at historical low

Employment rate

  • Wage increases of 3.7% observed at non supervisory production sectors.
  • Flexible deployment of jobs to low cost areas remains a strong downwards pressure.
  • Correlation between inflation and unemployment is at 0.1

Repo market concerns

  • Repo markets issue being looked into. Reviewing regulations that are hindering repo market operations by major banks
  • Will meanwhile continue purchase of treasury bills to provide necessary liquidity

Key long term deflationary pressure on the world economy

  • Automation
  • Globalization versus trade inhibiting government policies
  • Aging population
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Book summary: The dollar crisis

Following the  end of world war two, with US being the world’s largest creditor, countries started largely denominating their debts in USD. US in turn pegged USD to a fixed exchange rate with Gold. This agreement was formally known as the Brettonwood Systems.

US experienced difficulty backing this exchange rate during the oil crisis of the 1970s when OPEC started artificially reducing it’s supply of oil thereby driving it’s price in USD. This had a strong downwards pressure on value of the USD which the US propped up through use of their foreign reserves.

Seeing this weakness in US foreign reserve, thereby an discrepancy of the USD against gold, other trading partners started exchanging US dollar for gold. This added further pressure.

To provide relief on their foreign reserves US finally decoupled the fixed exchange rate between USD and gold. This resulted in the collapse of the Brettonwood Systems, leaving USD as the official reserve currency in the world without any underlying backing.

What followed were decades of global growth largely funded by the US government through control of the world’s reserve currency.

Developing countries would sell goods to the US in exchange for USD. Instead of buying US goods in exchange for the USD earned, they would buy US Treasury bills, notes and bonds. This had the effect of maintaining favorable exchange rates for these countries while keeping their products competitive in the US market.

This widespread practice had the long term effect of driving balance of trade deficits in US with it’s trading partners. While negligible in times of strong US domestic GDP growth, this system has of late started exhibiting difficulty sustaining. This is largely due to slow down in US domestic growth and its inability to scale to support trading partners that 4 times times the population size of the US.

It is advised countries which had long relied on this approach to domestic growth transit their economies to become net importers as soon as their economy gains the necessary growth momentum to do so.

Related readings

  • Fault lines, Raghuram Rajan
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Investment Biker, Jim Rogers

Key take aways

  • Central investment thesis:
    • Always bet against the central banks and with the real world
    • truly down trodden people do not rise, but hell hath no fury like suppressed peoples whose expectations have been aroused
    • people don’t change their ways until their are forced to
    • while it is easy to figure out an investment is cheap, the real work is figuring out if a change is about to occur in the near future. It is important to study markets and their history
    • when seeing a big change coming (the opening of the trans Siberian railway), consider the economic, political and social shift
  • modus operandi
    • Why buy a new sofa when it could be put to work in the markets
    • Only invest in what I can sell quickly
    • do nothing until you can see the money to be picked up around the corner
  • key areas of study
    • geography
    • politics
    • economics
    • history
  • Company assessment criteria
    • Price to book value
    • sound balance sheet
    • pay dividend
    • Price to earnings ratios
    • Viable industries
    • start with largest soundest enterprises
      • banks
      • mines
      • news papers
  • On assessing countries
    • Watch out for statism – governments getting in the way of an organic market
      • democracy does not equal prosperity
      • US government piling more and more regulations
      • SnL crisis of the 1980s
      • Artificially suppressed prices
        • 1970s gold in America
        • 2019 prices of pork in China
      • Foreign aids (IMF, UN and Peace Corps) just props up a system that does not work and delays the actual rebuilding process. Have faith in the locals to rebuild themselves in a configuration that works for them as opposed to a system suited to foreigners liking (hubris)
    • On ethnic strife and separatism
      • Some geographical boundaries don’t make sense.
      • no borders remain stable for long
      • economic hardship will bring to surface these fault lines as they get used as a vehicles to get more
      • Wait till wars are fought and border issues sorted out. It might then become a great investment opportunity to enter at the bottom
      • examples
        • Rise of Islam and Christianity in Siberia prior to Soviet collapse
        • Hong Kong riots
        • Barcelona declaration of independence
        • XinJiang, Tibet
    • black markets as signals: difference between black markets rates and official exchange rates provide an indicator of how much the central bank has propped up the exchange rate. Minimal to no differences are signs of a strong economy
    • major red flags:
      • currency controls, import taxes, export restrictions. Makes it hard to pull funds out
      • is country trying to devalue its way out of its internal problems instead of doing a proper fix?
      • frantic purchase of gold in local jewelry store
    • Positive signal:
      • Is the country trying to get foreign hard currency by making things other people want to buy – quality goods
      • Is the country learning to compete and out innovate its competition
      • an educated population
  • On centrally planned economies
    • the market feedback mechanism is missing
    • resources get ruined due to misuse
    • it would have thrive if it was a sound economic theory
  • On China
    • while Russia abused their resources, China having nowhere to go were more deliberate and took better care of their resources
    • success had a lot to do with economic and political organization
    • example
      • took bees to blooming flowers to work them 5-7 times harder than their foreign counterparts
    • Hong Kong, Guangzhou and Shanghai being captured by the capitalist spirit generally ignores capital’s policies
  • Note worthy collations
    • China (labor) / Siberia (natural resources)
    • Australia (natural resources) / Japan (capital)
    • US (capital) / Canada (natural resources) / Mexico (labor)
  • On commodities
    • most local markets will eventually get assimilated into the global market
    • diamonds have artificially propped up prices that will be hard to maintain in the long run. DeBeers will eventually run out of cash buying up supplies from the black market and it will lead to sudden price collapse. Opt for gem and rubies instead
    • when gold gets too cheap companies will figure out ways to use it thereby depleting its supply driving up price. Same could be said of oil
    • underlying structural issues within a country can stay hidden for long during times of a commodity boom
  • The key to success
    • out of every 1000 people who wants to be rich only 6 can master the discipline to do so
    • stay focus on a single goal for five, ten, twenty years

Related readings

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Federal Reserve interest rate cut decision 20191030

Outcome

Core inflation at 1.8% continues to run below target 2%.

Federal reserve decides upon another 0.25% cut in interest rates, targeting range of 1.5% to 1.75%.

Action is taken to provide meaningful support to the economy in response to global economic slowdown and the increasing disinflationary pressure felt from around the world. The special characteristics of this particular slow down is a lack of any large imbalances in the economy.

Dual mandate of the federal reserve

2% symmetrical inflation target

  • Stable prices
  • Low unemployment rates

economic indicators

  • Consumer confidence remains strong
  • Unemployment rate is at historic low
  • Business fixed investments has slowed
  • Global exports has slowed
  • Manufacturing compared to a year ago is down

macro environment risk

  • protracted US/China trade risk is down
  • No deal Brexit risk is down

economic health monitor

  • Leverage in financial system: low
  • Funding risk in banks and non-banks: low
  • Asset prices: no major bubble, high in some
  • Leverage in non-financial sector
    • households:  gone down
    • businesses + corporate debts: historic high

Liquidity concerns

  • Concerns in Overnight Repo markets persist.
  • Banks have liquidity in excess of required reserves level but choose not to participate in the markets.
  • Federal reserve will seek to inject short term liquidity into the system
    • build up short term treasury reserves
    • buying into short term treasury bills thereby boosting treasury reserves
    • opposed to the standard QE mechanism which entails buying up of assets and securities with longer maturity periods

Related readings

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PCG misexecution from blackouts and Kincade fire

Characteristics of mis-execution

Technical aspects

  • GAP down occurred of more than 5%
  • MACD was still negative trending
  • negative trend is yet broken.

Fundamental aspects

  • Failed to account for seasonality:
    • Fire occurrence during summer and autumn is rampant.
    • strong wind
    • global warming
  • Doubled down when negative trend has yet been broken
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Long term reversion to mean patterns

A list of long term reversion to mean patterns observed. General characteristics are:

  • steady negative trend line broken
  • Seeing higher lows
  • MACD signal line turns positive and trends upwards
Zillow does a pivot in both its product and pricing models.
Square sells off its food delivery business unit for USD500 million cash and double down on its consumer and enterprise business
Splunk changes its pricing model from licensing to SaaS base monthly subscriptions
DOMO gets disrupted by entrance established competitors Google (Looker) and Sales Force (Tableau)
Stamps attempts to pivot its product configuration and gets disrupted by USPS

 

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Mother Nature versus City – public utilities

View of wind speeds in the area during the public utilities shutdown
The sizzling power lines
Large dips in PCG attributed to scheduled blackouts and negative ruling by judge.

 

Climate change reduces land mass under occupation.

Overview

Wind speeds across inland California has a negative correlation with public utility company share prices.

Our infrastructure is constructed above ground to avoid disruption from earthquakes when they occur. This makes them susceptible to producing sparks when strong winds blow. Combine that with increasingly dry weather conditions caused by climate change and we have the perfect recipe for power disruptions either by fire hazards or controlled shut downs. 

Utilities are natural monopolies in their region of operations giving them very inelastic demand curves. 

They also happen to be public companies which incentivized them to optimize performance for the short term thereby on a quarterly basis. This thus leaves them disincentivized to invest for the long run (aka infrastructure upgrade) without active government intervention. 

The government does actively intervene when circumstances go awry. They need these companies to continue operating least the whole population plunges back to the Stone Age. The previous instance was when the same utilities went bankrupt during the 2003 oil crisis when prices shot into the stratosphere. They ended up on the receiving end of a government bail out.

In a nutshell, the residents are basically setup to bear the brunt of this shit show. 

The last time I walked under one of those power lines on a windy day, the sound of those sizzling brought a chill down my spine

Proposed models

  • Wildfire (fire)
    • Wind speed
    • Temperature
    • Humidity levels
    • Vegetation density
  • Tornados (air)
  • Earthquakes (earth)
  • Floods (water)
  • Hurricanes (water/air)
  • Tsunami (water/earth)

Related references