Chat with Joe and his dad

On Kaoshiong

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

On strategy

  • When macro economic environment is not conducive for continued operations, stop operations to conserve resources for future opportunities.
    • Decision to close wooden frame manufacturing factory
      • Europe became more environmentally conscious
      • Malaysia reduced the yearly quota of timber to be harvested
      • These two trends reduced demand for wooden frame and increased cost of raw wooden material

On personal 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.

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

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

General thoughts on Mark Zuckerberg’s warning of the internet’s role in Authoritarianism displacing Democracy

  • The polarization between democratic systems and authoritarian systems is becoming more apparent as China leverages its growing middle class to project it’s influence on the world stage a strategy that US has been utilizing for the past decades.
  • Facebook is a vehicle for projecting American values overseas.
  • The African continent remains a land grab for the two different regime types. Thus far, China has won out on the physical infrastructure and government level while FaceBook has won out on the community grassroots levels.
  • For the C Suite especially CMOs to execute their jobs well they need to be focused on what’s happening out there in the world as opposed to what’s happening within their own functional organization. It’s the VP of marketing’s job to handle what is within their own marketing organization.
  • Its a time when US companies will need to navigate the international markets while managing the challenges to their American values.
  • The Chinese government has done a better execution on that front with their One Belt Road initiative by clearing the path at the government level to facilitate the unhindered expansion at the commercial level by its enterprises.
  • Western media is working at full Rev to control the narrative frames that drives public opinions.
  • Mark Zuckerberg has masterfully leverage recent trends to reframe Libra as a champion of democratic ideals as opposed to a disintermediation force on central banks around the world.

Related references

Zuckerberg Warns China’s Censored Internet Could Still Win Out
https://www.bloomberg.com/news/articles/2019-10-17/zuckerberg-warns-china-s-censored-internet-could-still-win-out

Apple bows to China by removing Taiwanese emoji

https://qz.com/1723334/apple-removes-taiwan-flag-emoji-in-hong-kong-macau-in-ios-13-1-1/

Christian Dior apologizes for omitting Taiwan from Chinese map

https://www.breitbart.com/national-security/2019/10/17/china-bullies-christian-dior-apologizing-omitting-taiwan-map/

China exerts pressure on NBA to fire key executive for tweet on Hong Kong unrest

https://www.nytimes.com/2019/10/17/sports/basketball/nba-china-adam-silver.amp.html

Solomon island switches relationship to China from Taiwan

https://www.nytimes.com/2019/09/16/world/asia/solomon-islands-taiwan-china.amp.html

Kiribati switches relationship to China from Taiwan

https://amp.theguardian.com/world/2019/sep/20/taiwan-loses-second-ally-in-a-week-as-kiribati-switches-to-china

Southeast Asia balances between Chinese Markets and US defense

https://www.nytimes.com/interactive/2018/03/09/world/asia/china-us-asia-rivalry.html

Facebook Warns Washington That Beijing Wins If Libra Plan Fails
https://www.bloomberg.com/news/articles/2019-10-17/facebook-warns-washington-that-beijing-wins-if-libra-plan-fails

 

 

Simultaneous inflation and deflation pressures in China

China simultaneously experiences imported deflation and inflation. 

Drop in global demand for exports causes credit to unwind within the manufacturing sector. 

Swine flu and depleting foreign reserves causes price pig to increase. 

This will be a useful case study to observe the monetary and fiscal policy China implements to deal with simultaneous inflationary and deflationary pressures. 

China Factory Deflation Worsens as Pork Drives Consumer Prices  https://www.bloomberg.com/news/articles/2019-10-15/china-factory-deflation-worsens-as-pork-drives-consumer-prices

Bloomberg does AB testing

Fascinating AB testing observed on the entire world’s population by major news networks. 

Barely 72 hours after the announcement of phase 1 trade deal, its accompanying mass euphoria and surge in world markets, the almost same exact photo with some slight changes in copyrighting and background color is released into production. 

It will be fascinating to observe the world’s reaction to this new AB year variant that just got released and the corresponding market price levels. 

Observed unwinding of credit in the market

Priori

  • Federal reserve starts reducing debt bought and brought onto their balance sheet during 2008
  • Federal reserve went on a series of interest rate hike from the period of 2016 to 2018
  • Trump starts Trade war in 2017 resulting in reduced global demand for American exports

Liquidity concerns experienced in sections of the markets around the world

Riots and unrest

Related readings

 

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

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

List of companies that have been heavily punished by macro economic trends to consider for purchase

The following list of companies have experienced major headwinds in the public markets

Enterprise SaaS Large Cap

  1. CRM
  2. WDAY
  3. VMW
  4. PANW
  5. INTU
  6. RHT
  7. ADBE
  8. VEEV
  9. NOW
  10. TEAM

Enterprise SaaS Mid Cap

  1. TWLO
  2. ZS
  3. MDB
  4. PCTY
  5. PD
  6. DOMO
  7. DDOG
  8. ZM
  9. WORK
  10. TEAM
  11. STMP
  12. DBX
  13. CRWD
  14. DOCU
  15. HUBS
  16. ESTC
  17. ZEN
  18. OKTA
  19. SPLK
  20. ZUO
  21. ZEN
  22. HUBS
  23. NET

China

  1. CTRIP
  2. BABA
  3. JD
  4. BIDU
  5. WB
  6. PDD
  7. SINA

Semiconductors

  1. MU
  2. NVDA
  3. AMD
  4. MCHP
  5. INTC
  6. QCOM
  7. AVGO
  8. XLNX