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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.

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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
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Fluid dynamics within the markets

Approximately 10% of all companies listed on Nasdaq and NYSE fell by more than 10% over the past week. Its like a magnitude 5 earthquake happened and the entire market goes into panic mode.

During this occasion, it is fascinating to observe at a macro level the flow of money within the system.

Sources of liquidity

  • the white house administration has cut taxes over the past 2 fiscal years between 2017 and 2018.
  • the Federal reserve increase money supply through the repo market and by lowering interest rates
  • Central banks around the world lower interest rates
  • the high US dollar signals that money from around the world is flowing into the US market

High pressure areas

  • the price of gold moves steadily upwards
  • the price of US Treasury bonds signaled by the fall in US Treasury yield moves steadily upwards
  • the SnP hovers near all time high
  • Companies classified as value stocks are trading at all time high multiples

Anomalous vacuum

  • Companies classified as growth stocks are trading at huge discounts versus all time highs

Once the psychological impact of the current set of stimulus wears off and assuming the supply of money stays constant within the US market, it is very likely money will start flowing from high pressure areas to fill up the anomalous vacuum described above.

https://trends.getdata.io

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LA trip to visit Johnson

  • Textile and clothing companies need to forecast demand to reduce inventory cost
  • Building a team is the most important thing
  • in times of volatility buy put options on VIX and long Gold
  • Small business owners
    • are supporters of protecting US businesses against intellectual property theft by Chinese companies
    • consider Chinese company methods of manipulating accounting statements fraudulent
    • consider news reported in major news networks to be fake
    • consider Democrats to have given away to many privileges to other countries thereby putting the US economy at a disadvantage
  • Real estate development
    •  Bulk of building materials are imported from China and subjected to taxation
    • put on hold until trade war is over to avoid incurring tariffs as production cost
  • Real estate hard money loans
    • usual fees
      • 2% transaction fee
      • 10% annual interest rates
    • Preferred customer fees
      • 1% transaction fee
      • 9-10% annual interest rates
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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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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

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Macro economic extension to loss aversion reversion to mean trading methodology – Government versus Government scenario

Trading Heuristics

Chain of events and decision making

The decision making processes from June 2019 after the federal reserve signal likelihood of cutting interest rate leading up to the 2019 August downward mean reversion of the SnP.

19th June 2019, Federal Reserve signals for first time likely decrease of interest rates

Federal Chairman expresses concerns about potential cross winds caused by US trade policies and its impact on their dual mandate.

10th July 2019, news paper reports SnP reaches all time high

SnP on the cusp of crossing 3000 threshold for the first time to an all time high. Market is euphoric. Trade issue between US/China yet resolved but discussions are underway.

Short positions SQQQ and SRTY were utilized as hedges against downward macro environment reversion risk when the SnP extended beyond 3000 to reach an all time high

1st August 2019, US announcement of 10% tariffs on US300 billion imports from China starting September 2019

on 1st August, 24 hours after actual interest rates cut, Trump signaled 10% tariffs on USD300 billion Chinese import. SnP dropped.

Exited SQQQ and SRTY for 10% capital gain after reaching 30SMA and 50SMA range. Net combined loss to portfolio was 0.5%.  Left remaining long positions open.

4th August 2019, Chinese response

On 4th Aug 2019, China’s exchange rate dropped for the first time below 7RMB/1USD.

5th Aug 2019 trading day

On 5th Aug 2019, China announced they will halt all imports of agricultural goods from US.

Portfolio continued declining an additional 2% on the trading day of 5th August 2019.

Closed all long positions with the exception of REITs

Decline overview

  • SnP
  • REITs
  • Value shares
  • Growth shares

6th Aug 2019 trading day

On the evening of 6th Aug 2019, China announced decision to control fluctuation of RMB exchange rates to USD

Bought into TQQQ and URTY at below 30SMA and 50SMA

7th Aug 2019 trading day

TQQQ and URTY automatically exited at the mid point between the two following highs and lows:

  • highest point  before Trump’s tariff announcement came into effect
  • lowest point after China’s halt on US agricultural imports and RMB/USD breaking 7 came into effect

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