Fight Or Flight

“When problems come, learn how to hide, learn how to train…have the wisdom to fight for the future.” – Jack Ma

It’s been an interesting few trading sessions since the Midterm elections last week. The market initially reacted positively to the results which saw the Democrats winning back the House and an enlarged Republican Senate majority (as expected).  However the fun quickly faded and by Monday morning of this week, the S&P had all but given up the gains it saw post results.  Traders who were bearish and short going into the elections would have been woefully squeezed out only to find out one week later that the was market lower than where they began.

Source: Bloomberg

With earnings season now well behind us and no real macro data left going into year-end, the only foreseeable catalyst that remains is the December Fed hike.  What was supposed to be a solid seasonal bull run into Christmas is now shaping up to be more like a Hail Mary Santa Claus rally, if that ever materializes in the end.

This week AAPL took a tumble affecting its highly correlated supply chain and all the FAANG stocks as well.  GE looks like it is approaching 2008 financial crisis levels and Goldman is under fire on the back of the 1MDB scandal (crazy story to read if you haven’t been following…)  Finally, the US dollar continues to decimate the entire commodities complex leaving traders licking their wounds as they count their days to the end of the year.

As the dust settles and we take a closer look at the macro themes that are weighing down on this market the one that I keep coming back to is the entire trade spat between the US and China and the hard truth that it simply won’t be resolved any time soon.

When the trade wars first erupted at the beginning of the year there was a natural knee-jerk sell-off in the markets. Sell-side analysts furiously compiled strategy reports about which sectors would get hit the most and how much EPS growth would be at risk in companies ranging from Apple to Sony to Caterpillar all the way down to the local Chinese manufacturers.  But just as quickly as these reports came out, the markets bounced back and the long bias of basic human psychology took over.  “It’s not as bad as it seems” and “They’ll resolve their differences” were two of the common phrases I heard around the traps this year as the markets stayed afloat giving us hope that we could pick up a few more pennies in front of the steam roller before the party was over.

The reality of the situation is that the trade war is going to be long and it’s going to be costly and it isn’t going to be over anytime in the foreseeable future.  Why? Well, if you haven’t been paying attention then now is as good of a time to start. The trade war is about much more than trade. It’s about the battle for global supremacy which is taking place between the two largest economies in the world. It’s about the reshaping of decades of American hegemony and the global tyranny of the U.S. dollar as a reserve currency.

Make no mistake, the world is changing. China is not sitting idle any longer in this power struggle and they will continue to decrease their reliance on the US dollar in a number of ways (CIPS for one).  With the country’s recent Belt and Road initiative, China plans to meticulously proliferate the usage of its RMB throughout Asia while de-dollarizing other global commodities such as gold and oil.

Don’t be fooled by mainstream media…the truth is that the US is losing its political dominance in the world. 

A lot of people get offended when I bring up this topic. They think I’m unpatriotic and it creates a lot of tension between myself and my closest friends and relatives. I’m a US citizen but I’m also a capitalist at heart and a student of history. Before Bretton Woods, the US dollar was not the premier international reserve currency, it was the Pound Sterling and before that, it was the Dutch Guilder.  Change happens and history goes on.  The big question as an investor you must ask yourself is how will you be positioned to take advantage of these changes in the future?

Market dislocations always provide the best opportunities for astute investors. And in the same way, the trauma caused by the ongoing trade war will also provide unique and unprecedented investment opportunities for those who see the bigger picture.

In times like these, investing in public markets usually do more harm than good. The trade wars continue to spurn jitters and affect sentiment around the world. Every day another headline splashes the newspapers about China’s huge debt problem and all the empty apartments that are sitting in the various ghost cities around the country.

But innovation will continue to pick up and accelerate. As we’ve witnessed in the last two decades, China is playing the ultimate long game of thrones. And what do you think will happen when the US threatens their technology and innovation with tariffs and such? China will come back with something stronger, faster, lighter, cheaper and more aesthetically pleasing than anything the world has seen.

In times like this one of the best places to hide out in is in fact early stage companies. It’s the old theory of coffee can investing the Warren Buffett motto of “If you aren’t willing to own a stock for ten years, don’t even think about owning it”.

You can’t “check prices” on an early stage company in the middle of the night nor will daily fluctuations of the stock market cause you to panic about your VC investments. What you can do is rest assured that your portfolio has diversified exposure to more than just FAANG stocks…

The smart money has been doubling down on Asia this entire year. I’ve seen it with my own eyes, sitting in a front row seat. According to the World Economic Forum, in 2017 Hong Kong was the most visited city in the world, by a healthy margin and I guarantee you it will continue to be so this year and beyond.  Why do you think that is?

Source: WEF