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Thoughts of various asset class type and their usage

Investment environment parameters

  • Economic cycle
    • boom
    • recession
  • Inflation rates
    • High
    • Low
  • Currency type
    • Reserved currency
    • Non reserved currency
  • Exchange rates regime for non reserved currency owners
    • Fixed exchanges rate
    • Floating exchange rates
  • Recession type
    • (hyper) inflationary
    • deflationary
  • Federal reserve monetary policy
    • restrictive
    • expansive

Asset class types

Government bonds

  • good position to hold when government is unlikely to default and threat of inflationary recession looms
    • interest rates are inflation adjusted
  • high opportunity cost to hold position when economy is booming

Cash

  • good position to hold when hyper deleveraging is occurring within the system and Federal reserve has not responded with expansionary monetary policy
  • high opportunity cost to hold position when economy is booming

Mortgage REIT

  • good position to hold when threat of deflationary recession looms and the Federal reserve have started loosening monetary policy.
  • a tenuous position to hold during periods of hyper inflation because the interest gets offset by the inflation
  • a tenuous position when the Federal reserve starts tightening monetary policy
  • a tenuous position to hold when over leveraging is rampant within the system
  • high opportunity cost to hold position when the economy is booming

Equity REIT

  • good position to hold when the Federal reserve starts tightening monetary policy.
    • Credit becomes less available and thus more expensive
    • number of construction project drops
    • less supply driving up demand for existing inventory
  • high opportunity cost to hold position when the economy is booming

Gold

  • Use as a protection against hyper inflations
  • a tenuous position when the economy is in the early stage growth
    • demand for gold will drop as more funds gets allocated to risk assets
  • a tenuous position when the economic is heading into deflation
    • there is less money/credit within the system as compared to the amount of gold

Oil

  • Useful for hedging against outbreak of war
  • a tenuous position when recession and economic activity worldwide slows

Growth companies

  • Useful for riding an economy boom
  • a tenuous position to hold during the late stage of a credit cycle when too much leverage has been built up within the system and valuation is excessive

Value companies

  • Useful for riding a deflationary recession when credit becomes more expensive
  • High opportunity cost when economy is booming.

Related references

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Observations on how public opinion is shaped in the US

Public opinion is observed to be very malleable and fickle. It’s highly susceptible to reshaping by main stream media.

In an unlikely twist of events, what was once presented as a war by the White House against China over trade and national security has overnight morphed to become a fight for American values like democracy, free speech and human rights.

While the ongoing unrest in Hong Kong have provided ample fuel, the tweet by NBA Houston Rockets general manager was the spark that caused the fire.

Related Readings

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Book summary: The perfect weapon by David Sanger

Nuclear bombs are deterrents and weapons of last resort. Cyber attacks are tools are massively disruptive tools that could be used with plausible deniability.

White house open the pandora box when they disrupted Iran’s nuclear program with cyber attacks. They now faces challenge of cyber attacks from China, Russia and North Korea.

Types of attacks

  • Intellectual property theft
  • Infrastructure disruption – banks, power plants road, nuclear plants
  • Commercial sector disruption
  • Intelligence leakage leading to compromised safety of field agents
  • Compromised voting process through fake news
  • ransomware
  • venture capital investments to acquire foreign assets

After observing Obama successfully utilizing social media to win the elections and the Arab springs uprising, the west was lead to believe a web that promoted open communications will lead to the spread of democracy around the world . However, it was not long before authoritarian states realized it’s potential use for big brother surveillance.

North Korea

North Korea has the largest and most sophisticated hacker networks. And they have an asymmetrical advantage because most of their systems are not modernized and not probes to hacking. US embraced technology in both the private and public sector. Each wave of technology adoption leads to exposure of new vulnerable loops holes.

North Korea hacked Sony to prevent the release of “The interview”. It fell under the grey area where the US government did not respond.

China

Chinese hacks were initially targeted at acquiring intellect property to further their own technological advancement. Chinese government hack knowledge and pass them to Chinese companies.

This was the chief reason for Google’s exit from China.

China has recently positioned itself to be a source of venture capital funding to acquire Silicon Valley technology knowhow. By not outright acquiring these companies they were able to fly under the radar.

Russia

Hacked into US government system to figure out the agenda of each future presidential candidate.

Bought Facebook and Twitter ads to influence 2016 US elections. It also used Fake News to muddle facts from the truth.

It’s agenda is to ensure former USSR territories do not join Europe.

It’s team disrupted Ukrainian elections by causing critical systems to shut down.

White house challenges

White house struggles between determining if a hack should be considered a attack to the state or simply an act of vandalism that should be handled by the courts.

Exposing a hack without an accompanying comprehensive solution will only alert hackers to alter their approach while causing public hysteria.

It is hypocritical to condemn another country for cyber attacks if your own country is undertaking the same type of hacks. HuaWei is a classic example. If the entire world switches over to HuaWei, US intelligence’s ability to do surveillance will be compromised in favor of China’s ability to do surveillance.

Silicon Valley giants are reluctant to acknowledge their platform can be a vector for compromising democratic process.

General thoughts

Technology is value agnostic. The way its applied is predicated by the value system of the user.

Mentioned companies

  • Crowd strike
  • Google
  • Facebook
  • Twitter

 

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Evening out watching Rambo, last blood

From Sujit on trading

  • not necessary to get numbers further back than six months
  • stock market subjected to fractal distribution
  • it is possible to generate returns of up to 140% per year by trading on stocks that are moving within a range
  • going all in on each position each time leads to a very low Sharpe ratio
  • Sharpe ratio should be calculated separately for method and for SnP benchmarked against US treasury interest rates. The difference is the actual returns

On Rambo Last blood

A movie is a reflection of the culture and attitude of an age. Rambo was a very popular cultural icon during the eighties and the early nineties when memories of the Second World War and the Cold War against the communist were still very fresh in the minds of the people in America.

If you looked at the world today through the eyes of someone like Rambo, you would have been able to easily draw facts to back the narrative painted by Trump prior to being elected president.

When operating in an environment of uncertainty, a decision maker formulates multiple often competing narratives in the head that best explains majority of the facts presented. He calibrates the weightage assigned to the probability of each narrative as new pieces of data become available. He simultaneously utilizes multiple ones that are assigned high plausibility in his decision making to strive for the best possible expected outcome . It is a cognitively demanding iterative activity that goes on indefinitely.

  • common themes between movie and Trump’s narrative
    • Mexico drug cartels
    • Mexico prostitution rings
    • The world is a dark place
    • illegal border crossing
    • poor border fence
    • white male
    • Rust belt
    • Protagonist is in his 70s
    • Freedom fighter who fought the communist in Vietnam and Russia
    • guns and lots of blood
    • man of steel
    • manifest destiny
  • Cognitive biases
    • Narrative fallacy
    • Framing bias
    • selective bias

Related readings

  • Expert political judgement, Philip Tetlock
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Key insights from mooncake festival at house of Jerry and Liza

Technology trends

  • Companies are increasing shifting their service from one-off on premise licensing deployment monetization to cloud based SaaS recurring subscription models
    • revenue hit in the short run
    • increased customer LTV in the long run
    • affected publicly traded companies will experience short term discounts to their shares
  • Artificial intelligence versus Augmented intelligence
    • companies are increasingly shifting away from automatic insight generation to systems that help decision makers simulate and model potential outcomes when specific policies are executed
    • demand is shifting from insight generation to data cleaning services
  • Corporate adoption of artificial intelligence
    • CEOs are increasingly considering how to leverage AI as a tool for their trade
    • primary use case is figuring out how to increase their sales volume
    • experiencing challenge on how to apply AI on in-house data to achieve monetization goals
  • Rise of deep vertical data networks
    • EverString – provides sales lead refresh for all client companies ends up becoming a large database for decision-making executives information, approximately 6 million records
    • StreetSine.sg – cleans up real estate data to help agents better price houses for sale by utilizing in-house agency ends up becoming a large database of high quality real estate data
  • Crypto-currency
    • Bit coin is still the main poster child
    • general population still skeptical about libra
    • main argument is still to remove central bank controls
    • main adoption hurdles
      • writing throughput volume
      • a stable store of wealth
      • starting to be using as a means to facilitate transaction in China
      • Inability to increase or decrease currency supply in times of need is going to be hard as a means to provide much needed stimulation during economic recessions and inflations

US/China trade war

  • sources of conflict
    • technology theft
    • forced technology transfer
    • unfair trade practices like subsidized state owned Chinese companies operating in the export markets
  •  economy
    • China is experiencing inflationary deleveraging
      • local farmers are not growing critical food sources
      • critical food supplies are imported
      • price of imported goods are denominated in US reserve currency
      • shifting of supply chain out of China to
        • Vietnam
        • India
        • Taiwan
      • capital flight
        • Li Ka Shing moved funds out from Hong Kong in 2013 to Europe
        • raising funds for US Venture capital from China was easy prior to Chinese and US government shut down
    • US is experiencing deflationary deleveraging
      • businesses are concerned about macro environment and are reducing fixed investments
      • manufacturing is slowing due to decreased demand both locally and overseas
      • consumer spending and confidence is still strong
  • Chinese domestic concerns
    • Potential US meddling in Chinese domestic affairs – Hong Kong’s demonstration and demands
      • Revoking of National Education
      • Revoking of extradition bill
      • Resignations of HK Chief executive
      • universal suffrage: freedom to elect their own leaders
    • destabilized situation presents a challenge for Xi JinPing’s party to retain control of power over former Jian Zemin’s faction
  • value system
    • US is a highly rule based system
    • China’s system of control is highly subjective to the individual in power.  Direct government intervention in the distribution of wealth is a major source of concern

US/Mexico and world issues

  • NAFTA agreement was too one side and failed to take into account large  imbalance between the two economies
  • US’s arrangement of allowing Mexican tax payers the right to claim dependents ultimately resulted into tax claims and refunds for entire extended families in Mexico. This has the effect of subsidizing Mexican’s at the expense of Americans living along the rust belts
  • Its observed income inequality is becoming prevalent across the entire world not just within US and China.

Related readings

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The American Factory

Context

FuYao is a Chinese manufacturing company that products glass for automobiles companies:

  • Honda
  • Toyota
  • Hyundai

The company setup a factory in Dayton Ohio in 2013 to take advantage of the abundant supply of cheap skilled labor in the region resultant of the 2008 recession.

Overarching trends

  • globalization continues to apply downward pressure of wage growth around the world for commoditized labor
  • automation continues to eliminate entire categories of jobs around the world

In depth analysis of FuYao Glass America

The opening of a plant in the new country can be seen as a acquisition of sorts.  Acquisition activities is considered a merge of the following components:

  • Culture
  • Process
  • Assets

In this case, it could be seen as a merging of FuYao’s culture and process with Dayton Ohio’s asset which is cheap skilled labor.

Below are the key conflicts with the merger

  • highly structured and propagandized environment (Chinese) versus loosely structured and casual environment (USA)
  • processes built around social norms in a weak union environment (China) versus social norms from a strong union environment (USA)
  • productivity and throughput focused paradigm (Chinese) versus safety and family focused paradigm (USA)
  • workers paid USD29/hr when working for GM before it shuttered are now paid USD17/hr under FuYao
  • governor and grassroots were encouraging unionization to encourage more say American say in the running of the plan

Key transitions

  • removal of locally hired senior management (USA) with Chinese senior management (USA) for effective implanting of culture within company
  • battling against worker unionization
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David Letterman interview with Barack Obama

 

Leaders impact is more on shaping the attitudes more so than setting legislations

Income inequality caused by globalization and technology has eliminated  entire categories of jobs. Wealthy people with excess money to invest due to this aggregation of wealth at the top seeks to maximize their wealth by investing in more and more kinds of financial instruments to return generates. This in turn creates bubbles.

Cost of health care and college education continues to rise as corporate America continues to optimize its monetization engine.

Online media channel consolidation and structural deepening of algorithmic social media newsfeed (Facebook and Twitter) continues to drive polarization of views.  The media is primarily geared towards eliciting a response so as to drive conversion rate instead of helping audience develop well rounded perspectives on social issues through holistic presentation of facts.

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Book summary: Understanding big debt crisis by Ray Dalio

The economic system

Functions of money

  • A store of wealth
  • a means of exchange

Two types of cycle

  • economic cycle
    • tied to production activity and output
  • credit cycle
    • the underlying basis is trust
    • capital employed as a means of production
    • when trust breaks down and credit starts to tighten credit cycle is said to be in the contraction phase and deleveraging occurs

Types of deleveraging

  • inflationary deleveraging
    • generally occurs when country’s currency is not a reserve currency or when currency is pegged to a specific commodity like gold
    • foreign lenders are unwilling to roll over existing credit or provide new credit leading to credit contraction within the economy
    • price of good rises during an inflationary deleveraging
  • deflationary deleveraging
    • generally occurs when country’s currency is a reserve currency
    • money is hoarded as cash instead of being utilized to support economic activity
    • domestic lenders are unwilling to provide credit leading to credit contraction within economy

Methods of deleverage

  • Austerity – spending less
  • Debt defaults / restructuring
  • Central bank print money and making purchases or providing guarantees
    • hard to implement if currency is tied to the gold standard
  • Transfers of money and credit from those who have more than they need to those who have less
    • will generally trigger exodus of funds

Beautiful deleveraging

  • Reduced debt to income ratio (head to Genesage to understand more about the clockwork behind debts)
  • improved economic activity
  • improved financial asset prices
  • bring nominal economic growth rate above nominal interest rate

Ugly deleveraging

  • bank runs
  • bankruptcies
  • severe unemployment
  • hoarding of gold
  • war / riots

Noteworthy similarities in period prior to WW2 and present day 2019

  • Dire income inequalities where 40% of the wealth is owned by 1% of the population
  • Rise of populism
    • Hitler
    • Franklin DeRoosevelt
    • Winston Churchill
  • rise of protectionism
    • US launches trade war against Canada
  • Rise of militarism
    • Hitler Germany
    • Japan
  • Continue professing by politicians that there is nothing wrong with the economy
    • President Hoover attempts to allay fears
  • Extreme volatility in the financial markets
  • riots due to economic hardship
  • sudden shifts from relatively free trade and interconnected supply chains around the world to protectionism and trade war through the use of tariffs
    • US versus Canada trade war
  • Out break of war
    • WW2
    • increase

Noteworthy case studies and observations

The war economy – Germany during WW1

  • GDP will tend to improve during war time as countries involved in war borrow heavily through the issue of bonds to finance production of war equipments
  • GDP will start to deteriorate after period of war is over as it transits back its prior state
  • GDP of the loosing faction will tend to be more severely affected during the post war period as they get slabbed with war reparations – WW1
  • Nature of loans during war period
    • Loans will initially be denominated in local currency due to high levels of patriotism
    • As war drags on and there are no signs of a positive outcome and loans becomes harder citizens will have either exhausted their loanable assets or are not confidant in the government’s ability
    • Further loans will need to be borrowed from foreigners which might result in loans denominated in foreign currencies

Connectedness of financial systems around the world – the 1930s Great Depression

USA 1930s deflationary deleveraging chain of events
  • investors buy financial assets and utilize increasing financial asset prices as collateral to buy more financial assets
  • government increases interest rate to tighten monetary policy and bring down inflation
  • brokerages increases margin interest rates
  • investors who cannot afford margin interest rates starts unwinding their positions leading to fall in financial asset prices
  • fall of financial asset prices triggers margin calls on other investors who borrowed to buy financial assets. This vicious cycle continues and confidence starts deteriorating and credit starts unwinding
  • bankers attempt to prop up asset prices and boost confidence by buying assets. Efforts were not enough, and asset prices continue to decline – as much as 90%
  • other entities are impacted
    • actual companies start experiencing problems getting credit
    • banks whose assets are in financial assets experience solvency issue due to rapidly deteriorating
  • bankruptcies and unemployment rate increases
  • government steps into prop up the market by lowering interest rate
  • interest rate is at all time low, investors lacking confidence is unwilling to provide credit many started withdrawing cash from banks causing bank runs. They also started hoarding gold.
  • There is an international shortfall of USD
Europe 1930s inflationary deleveraging chain of events
  • Confidence worldwide gets affected by US market deleveraging
  • Germany whose WW1 reparation denominated in USD experiences were mainly financed through the issuing of bonds experience difficulties finding buyers for new bonds.
  • investors loose confidence in ability of German government to repay bonds and start believing in the probability of a default
  • investors started dumping bonds and withdrawing gold from the German economy
  • inflation ensues
  • UK have many banks with assets tied to German bonds. Investors are concerned that UK will get affected and started withdrawing gold in droves.
  • UK government and German government decoupled their currencies from the gold standard, lowered interest rates and allowed exchange rates to decline
USA 1930s inflationary deleveraging chain of events
  • USA continues to peg their currency to the gold standard but experiences continued outflow of gold because gold is now considered to be priced too cheap against USD when compared to other European currencies that have gone off the gold standard
  • USA bans the purchase of gold, decouples their currency from gold and allow exchange rates to float freely
  • The world economy starts recovering

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Key insights from weekend with Jerry, Liza, Ada and Dan

On US/China trade war

  • 25% tariff basically wiped out whatever profit margin importing from China could bring
  • China’s labor cost have been increasing over the past few years that it is no longer a competitive advantage
  • China’s main advantage is the expertise they built up over the years. A company can easily spin up 25 manufacturing lines in China very quickly
  • US companies are all rapidly shifting their manufacturing activities out of China
  • New locations are Taiwan, India and Vietnam
  • Chinese staff that were retained by Google are now flying to new manufacturing facilities spun up in these countries to oversee the spin up process

On alternate data

  • Real estate
    • the rise  of platforms like AirBnB has lead investors to seek out alternate data that can help predict short term rental yield as opposed to long term rental yield in a neighborhood
    • government agencies are seeking such data to detect neighborhoods where they should focus their efforts to crack down illegal subletting on AirBnB
  • Sports
    • being able to predict strategy coaches of football teams will employ in real time will help support strategies
    • being able to predict starting line in close to real time and the corresponding outcomes will be valuable for coaches in making play decisions

On HongKong/China protest

  • Public opinion is the agenda for the ongoing protest is now getting really murky
  • Airport has stopped operations, it’s hard to even get in and out of the country
  • Foreign Chinese nationals are supportive of protest in HongKong
  • Topics pertaining to Taiwan, Tibet and TianAnMen massacre are sensitive topics amongst mainland Chinese
  • Funds of funds from Hong Kong are still very liquid
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Escalating tension in Asia Pacific and how history tends to repeat itself

US is a divided country holding two conflicting points of view which are both very valid given existing set of evidences. This is the inherent drawback of democratic systems when faced with foreign threats. The dysfunction of the Roman military during periods of the Punic Wars is a fine example.

It is noteworthy to observe how populism and militarism tends to rise in times of extended economic hardships and during periods immediately prior to major outbreak of wars. Trump is the modern day equivalent of Franklin Roosevelt and Winston Churchill who were both considered populists during their times.

Related references

A democratic nation divided

The technology arms race

The economic warfare

The escalating military tension

Other related readings