Donald Trump’s August 1st 2019 tweet on additional tariffs

Highlights

  • The effect of a negative shock is 3X worst that the effect of a disappointment
  • The effect of a negative shock is longer lasting than the effect of a disappointment
  • The market does retain memory of prior states
  • Seems like each negative political macro event has approximately negative 3% impact on the SnP

Series of events

Wednesday, 31st July 2019, 2pm, US Federal Reserve’s disappointment

  • Federal Reserve announced an interest rate cut of 0.25% from 2.5% to 2.25%
    • no hints of further cuts
    • before announcement SPY price 300.04
    • after announcement SPY price 296.98
    • net effect on SPY -1.02%

Thursday, 1st Aug 2019, 10.26am, US President’s negative shock

  • President Donald Trump announced additional 10% tariffs on remaining 300 billion imports from China on Twitter.
    • before announcement SPY price 300.45
    • after announcement SPY price 291.02
    • net effect on SPY -3.14%
    • SPY price still above the 7th June 2019 price of 288.97 when the effect of Fed’s hint to adjust interest rate cuts has been priced in.

Sunday, 4th Aug 2019, 6.20pm PST, China exchange rate sinks below 7CNY/1USD for the first time

Monday, 5th Aug 2019, 9.58am PST, China suspends purchases of US farm products

  • US Market takes a sharp dip on Monday
    • SPY price 281.90 at lowest point
    • net effect on SPY -3.13%

Monday, 5th Aug 2019, 5.27pm PST, China announces fix to prevent further RMB depreciations against the USD

  • US market rebounds
    • SPY price 293.55 at highest point
    • net effect on SPY 4.13%

13th Aug 2019 Trump announces delay of tariff

  • US market rebounds
    • SPY price 292.32 at highest point
    • net effect on SPY 1.91%

14th Aug 2019 UK and US 2 years / 10years yield curve inverts. Germany reports GDP shrinkage for 2019Q2

  • US Market takes a sharp dip
    • SPY price 284.20 at lowest point
    • net effect on SPY -2.77%

Related artifacts

Trump’s tweet on additional 10% tariffs at 1st Aug 2019, 10.26am PST
Chinese RMB crosses 7RMB/1USD for the first time on 4th Aug 2019, 640pm PST

Related readings

Federal Chairman Jerome Powell on 0.25% interest rate cuts

Overview

  • Outlook for the US economy is favorable but
    • core inflation is only at 1.6% instead of 2%
    • cutting interest rate by 0.25% from 2.5% to 2.25%
  • insurance against downside risk
    • global growth is slowing
    • trade policy tension is a new stimulus to the equation and it is a concern
  • key objectives
    • strong job economy
    • 2% inflation rate
  • adopt an iterative approach by observing how economy reacts to policy changes

Key areas of concern

global growth slow down

  • US core inflation rate is at 1.6% – excludes food and energy inflation which are cyclical
    • US GDP sustained
  • US manufacturing declined in 2019Q1 and 2019Q2
  • US business fixed investment slowed in 2019Q1 and fell in 2019Q2
    • companies uncertain about investment spending
    • not seeing additional demand for products
  • June US job growth slowed in 2019Q2
  • disinflation rates observed in other countries
    • manufacturing in rural China and the EU are slowing

highly leverage business sector within the US

  • Business borrowings are excessive
  • loans have moved off balance sheet of banks to market based vehicles

Positive signals of sustained US economy

  • rising household income drives confidence
  • no booming sectors observed hence no concerns for busts

Federal Reserves framework for monitoring risks

  • Excessive leverage in the Financial sector
  • Excessive asset valuations
  • Excessive debt loads in households and business
  • Funding risks that could result in sudden shortfall of liquidity

Structure of the US economy

  • US capital requirements within banks are at 2X of what is required to tide through tough times
  • Allocations
    • 70% consumer
    • 30% investments and manufacturing
      • not growing
      • remains healthy

Related references

Summary of readings and conversations for the week

Trends observed

  • Worsening income inequality
    • driven by increased globalization and automation with failure in re-education as the primary cause
    • Continued low worldwide interest rates as central banks the world over struggles to prop up inflation rate at 2%
  • Rise in protectionism around the world in response to income inequality
    • Slowing trade volumes around the world
  • Demand saturation at the upper income segments
    • Slowing demand for housing in South Bay
    • Too much money chasing after too little deals

Related sources

Book summary AI super-powers, China, silicon valley and the new world order by Kai Fu Lee

The difference waves of AI

  • Internet AI – Facebook, Netflix, Google search
  • Business AI – Palantir
  • Perception AI – Tesla cars
  • Autonomous AI – Tesla self driving, Google self driving

Key locations

  • Silicon Valley
  • Zhong Guan Cun – Beijing

State of the Union

  • We are in the stage of implementation/application as opposed to RnD
    • having access to more data is more important than have expertise to do more RnD
    • having solid AI engineers is more important than AI researchers
  • We are still far from general AI
  • Key ingredients
    • data
    • computing
    • maybe work of strong AI algorithms engineers

Key differences between eco-systems

  • Silicon Valley businesses are mission and core values driven while Chinese businesses are pragmatically focused on profitability.
  • Silicon Valley businesses stay in bits and binaries offloading the brick and mortar to external vendors vendors while Chinese businesses extend their business model into the brick and mortar (online to offline)
  • Silicon valley prefers one size fit all strategy, Chinese businesses utilized localized solutions often investing/acquiring in local startups
  • Americans treat search engines like Yellow Pages (come and leave fast) while Chinese treat search engines like shopping mall (come to linger around long)
  • Silicon Valley is adversed to copying preferring to be unique Chinese business copy the heck out of each other

Chinese Advantage

  • Abundant data – quality and quantity aided by their online to offline initiatives
  • hungry entrepreneurs
  • AI scientist
  • AI friendly policy environment – strong emphasis by Chinese government
  • Hardware manufacturing know how – Shen Zhen
    • unparalleled supply chain flexibility – XiaoMi

Silicon Valley Advantage

  • Microchip manufacturing know-how

Trends within the Chinese eco-system

  • Darwinian eco-system has lead to extreme levels of competition
  • Chinese companies have already moved past the stage of clone Silicon Valley business models
  • Businesses innovate to build a defensive moat around themselves. Local businesses have advantage, with no timezone differences to deal with, decision making is relatively faster.
  • Online to offline
    • an essential ingredient to building strategic moats
    • caused the decline of cash use
  • Chinese government information systems will be able to leap frog US government information systems

Policy approaches

  • Google – impeccable safety
  • Tesla / China – trial by fire
  • key to winning the Autonomous AI race
    • is the bottleneck technology (Silicon Valley) or policy (China)?

Key concerns

  • having cheap labor is no longer going to be a source of advantage in a world heavily powered by automaton.  Developing countries hoping to employ this well tested strategy to progress will not be able to do so anymore
  • Estimated 60% potential job loss worldwide barring policy interventions
  • Job loss probability assessment
    • physical labor
      • environment – unstructured versus structure
      • tasks nature – level of dexterity versus high dexterity
    • cognitive labor
      • social – high versus low
      • cognitive – optimization based versus creativity/strategy based
  • AI replacement approach
    • single tasks approach
    • ground up rethink re-imagination
  • A population of irrelevant (no longer employable) as opposed to unemployed

Tackling Key concerns

  • Silicon valley – reduce, retrain and redistribute
  • Kai Fu Lee – stipends for care, service, education

New promise

  • Humans freed up from repetitive tasks can now focus on becoming more human oriented

Related readings

  • Disruptor, Zhou
  • www.Arvix.org – an online repository of scientific papers
  • Folding Beijing – Hao JingFang

Reflections on the subject of economics

Man as an automaton

The average man eats, sleeps, shits and reproduce.

When presented with environment stimulus that signals more of the above, his brain emits dopamine which elicits are warm fuzzy sensation in his body which he interprets as pleasant.

When presented with environment stimulus that signals less of the above, his brain emits adrenaline which elicits muscular tension and heat in various parts of his body which he interprets as unpleasant.

Physics as the upper bound constrain for economic activities

Economic activity is what man as a collective organism engages in as it goes about fulfilling its above stated needs.

A quantum leap in economic activity is only possible when there is significant break through in the field of physics.

A large increase in numeric valuation of such economic activities without corresponding increase in actual physical throughput volume will result in either an inflation or a subsequent correction.

Characterization of economic activities

Aerobic economic activity is when the environment remains at equilibrium during energy extraction for the above stated needs.

Anaerobic economic activity is when the environment equilibrium is disturbed during energy extraction for the above stated needs.

Framing as a high level principle

He who controls the frame determines what goes within it.

The jug shapes the water.

The player controlling the outer edges of the Othello board generally wins the game

The country which controls the currency for all international commerce control the direction and level of cross border commercial activities.

US controls the global USD supply which majority of foreign economic activities and debts are denominated in. US controls the future economic outputs creditors will receive in the future.

Major creditors for US debts like China and Russia are moving towards Gold as the denominator.

Effects of Trump administration and Federal Reserve fiscal policy on the S&P index

2018 Oct / Dec SPY decline

During the period of Dec 2019, the SPY index ranged between

  • 3rd Oct 2019 – USD 291.72
  • 24th Dec 2019 – USD 234.34

The steep decline in share price can be attributed to the ongoing trade war wage by the Trump administration and the expected Federal Reserve rate hike. The decline attributions are as follows:

  • Trump administration
    • USD 291.72 – USD265.37
    • 3rd Oct 2019 – 13th Dec 2019
    • decline of 9.03% off of USD291.72
  • Federal reserve rate hike
    • USD265.37 – USD234.34
    • 13th Dec 2019 – 24th Dec 2019
    • decline of 10.63% off of USD291.72

2019 May / June SPY decline

During the period of May and June 2019, the SPY index ranged between

  • 3rd May 2019 – USD 294.03
  • 3rd June 2019 – USD 274.57

The steep decline in share price can be attributed to the two front trade war wage by the Trump administration which caused a 6.61% price decline

Of the recovery that occurred after 3rd June 2019, the following parties could be attributed

  • Federal reserve
    • USD274.57 – USD 287.65
    • June 3  2019 – June 7 2019
    • 4.76% recovery off of USD274.57
  • Trump administration
    • USD 287.65 – USD 292.32
    • June 10th 2019 – June 18th 2019
    • 1.70% recovery off of USD274.57

Conclusion

While both the Government administration and the Federal reserve have observed impact on the SnP index, it is observed the Federal reserve has a slightly higher level of impact.

  • Oct/Dec 2019: 10.63% versus 9.0%
  • May/June 2019: 4.76% versus 1.70%

 

Guo Jia’s Ten Advantage Framework

A framework Guo Jia used to assess Cao Cao’s strength versus Yuan Shao’s strength during the period of the three kingdom. This is an alternative measure to the modern day GDP measure which has been documented to be in use by the Chinese CCP government.

Advice to Cao Cao

  • Yuan Shao is overmuch devoted to ceremony and deportment; while you are sympathetic and natural; this is an excellence in conduct.
  • He is antagonistic and drives; you are conciliatory and lead; so you have the advantage of popular approval.
  • For many years the government has been lax, and he makes it more so; you strive vigorously after efficiency; this is the excellence of able administration.
  • He is outwardly liberal but grudging at heart, and too given to nepotism; you appear exacting, but you understand and use people after their ability; this is the advantage of correct appreciation.
  • He is a visionary but lacking in decision; you are a man of prompt decision and direct action; this is an advantage in policy.
  • He loves to gather about him people of renown; you treat people as you find them regardless of their reputation; this is where you excel in moral virtue.
  • He is compassionate to those at hand, but careless about those out of sight; your care is all-embracing; this is where you excel in humanity.
  • He lends a ready ear to calumny and is misled; you may be flooded with evil counsel, but you preserve independence; this is where you excel in perspicacity.
  • His sense of right and wrong is confused; your appreciation is accurate and clear; this is where you excel in administrative capacity.
  • He loves the make-believe force, but is ignorant of military essentials; you would overcome with far inferior numbers as you possess military genius; this is where you excel in war.

Related readings

  • The hundred year marathon, Michael Pillsbury
  • Book of Wei

June 4th 2019 US/China trade war loss aversion reversion to mean pattern

Overview

The central banks announced they stepped in to prop up the market if situation deteriorates with the ongoing trade war.

The world’s leading indicator

The Russell index observed to have started stabilization as recent as the 31st of May 2019

The trend followers

Down trend persisted for the Nasdaq well till 4th June 2019

Down trend persisted for the S&P 500 well till 4th June 2019

The leading indicator for Asia

The Nikkei Index closely mirrored the Russell 2000 index

Other Asian indexes

The charts for the Asian markets closely mirror the SnP charts with Singapore being most responsive amongst

Prediction on US/China Trade war to be verified in 2021

Main points of contention

  • Marxist ideological foundation versus a Judeo-Christian philosophical foundation
    • “In god we trust” versus a centrally controlled and designed market model
    • China’s inability to open up markets internationally due to challenges in finding a sustainable way to separate market from government
    • viewing the Party as above the market leading to difference in way IP ownership is viewed
  • The Chinese dream versus the American dream
    • China’s dumping strategy which lead to the severe imbalance of trade and thus steady US job losses over the past years
    • China’s strategy of acquiring US technology via forceful knowledge transfer due to its point of view on markets which resulted in the blacklisting of Huawei
    • China’s intention to establish leadership over two thirds of the world’s population thus challenging US dominance leading to the election of a hawkish US president

Assessment of situation

  • The issue is deeply structural and resolution will be unlikely during Trump’s current term of service
  • Companies within impacted industries will continue experiencing negative headwinds well beyond 2019
  • US companies will gradually shift production to the US and other parts of the world as President Reagan’s hypothesis on China’s successful transition to a market economy gets invalidated
  • World splits into two distinct economic blocs
  • Chinese economy will face continued pressure given the following concerns
    • aging population
    • lack of room for further domestic growth
    • none granting of WTO market status
  • US untangles its free market economy from the Chinese centrally controlled market economy as the latter slips into recession

Related references