Charts #27: Carol Dweck's Growth Mindset

Carol Dweck's seminar work has resonated ever since I found it on Google. It links back to work, education and personal improvement. The FT chart below is a keep.

We might have seen how fixed mindset people trap themselves in their own bubble. By ignoring feedback, they are locked in their own deterministic world. The way to defeat them is then working hard on our own growth mindset. Find lessons that move us forward and widen the gap between us and them.

This could be continuously reviewing the options, working together with like minded peers and innovating much faster and better than fixed mindset people who tend to work alone. We must also be vigilant and not slip into fixed mindsets ourselves. As the Marines would say,

"The only easy day is yesterday!"

Merry Christmas! Huat Ah!

Negative Yielding Corporate Bonds

There are c.$13 trillion of negative yielding bonds globally. This accounts for 25% of all investment grade bonds. Please take a minute to digest this. Investors are willing pay $13 trillion for an investment that would not give them back their principal. This amount is a quarter of the bond market. This is the warped logic that the world of investing has come to accept.

It first started with sovereign bonds. When the ECB went into negative interest rates to boost the economy, the governments who could get away with negative bonds issued them ie Germany. Japan then followed suit. It was initially thought that the arrangement would be temporary, when the economy gets back in shape, we can stop. Well, we didn't.

The chart above from Bloomberg shows the magnitude and breakdown of negative yielding bonds. Today, corporates are issuing negative bonds as well. This is an excerpt from a reputable internet news source:

Siemens (SIEGY) borrowed €1.5 billion euros ($1.6 billion) over two and five years. Those bonds offered a zero coupon (interest rate) and were priced with negative yields, meaning investors are effectively paying to lend the company money if they hold the debt to maturity. The remaining €2 billion euros ($2.2 billion), borrowed over 10 and 15 years, offered tiny rates of interest. The two-year note, whose yield reached minus 0.315%, was "the most negative yielding corporate bond ever to be priced in the primary market," the source said.

As this went on, experts realized a few things about negative yields: it is like drugs or steroids. Once you are on it, it is very difficult to get off. It has certain positive impact but the side effects can be very bad. In finance, it was believed that negative interest rates would boost lending, force people to put money to work and hence bring the weak economies back to 2-3% growth. But instead, the side effects are manifesting.

Asset prices distortion: negative interest rates had brought down global returns. Recall the lessons in basic finance. Asset returns are based off risk free rate. This was the return on government bonds, usually the 10 year bond. It used to be 3%. After the Global Finance Crisis, it went down to 0-1%. Today it's negative! When the risk-free rate is negative, all the returns of the different asset classes are affected. Investors used to demand 8-10% returns on equity, maybe now they are happy with 5%. That is why we are seeing for 30-40x PE stocks that many are happy to buy. 

Real estate is the big beneficiary. Why has Singapore property market gone from S$1,000 psf to S$1,500 and S$2,000-S$2,500 psf? Did Singapore really more than double in attractiveness? Did the property developers suddenly make much higher quality condominiums with a smaller balcony and better interior? Did our government really make Singapore super attractive in with lots of greenery and better MRT, better healthcare in the last ten years? I think it is just global negative interest rate in action. Global property prices in global cities have been going up. Asian cities have reached 1+% rental yield. This means that it will take almost 100 years to recoup your capital if you don't sell. Singapore leasehold properties are only for 99 years.

Private equity markets gave us another interesting story. With negative yields, investors started hunting for returns everywhere. They found hundreds of unicorns - startups and disruptive technologies that promised to change the future. Alas, most aren't real. We saw how WeWork blew up. Uber and Lyft also saw the share prices plunged. Investors were willing to put a lot of money into dreams about rainbows and mythical horses because there was simply too much money around and nowhere to invest to earn good returns.

To sum it up, we are now in unchartered territories and we must proceed in prudence to find the optimal way forward. First, own at least one property because we don't want to get caught short. Property prices are not going to fall as long as negative interest rates continue to dominate the bond markets. Next: focus on equities because it would continue to grow with bonds becoming less attractive and private equity being too cowboy (re: Theranos). We also need to tweak how we use valuations. We can no longer work with 15-20x PE in the new negative yield regime. Maybe we have to buy good companies at 30x PE. The new cheap could be 20x PE. Hope this helps!

Huat Ah!

People, Management and Networking - Part 2

In the last post, we talked about people and management in companies. Today we shall delve into personal networking and how it can help us become better investors. Investing is too difficult to be done alone. While there are probably some super smart, genius investors who require no mental sparring partner to come to the best conclusions about stocks and investing, most of us do.

Warren Buffett has Charlie Munger and George Soros had Stan Drunkenmiller. Most of the best investment outfit in the world are made up of small teams and the decision makers constantly challenging one another's assumptions. That is the best way to come up with the best answers. There might be heated arguments but there are no hard feelings because everyone has a bigger goal - to earn money or don't lose money. The investing team is the all important network to achieve success.

For the team to function well, all teammates have to trust one another. They must understand that it's about coming to better conclusions. It takes a lot to achieve that. Teammates need to respect one another, understand hierarchy and keep personal ego in checks. When the team gets too close, it is also about giving space to one another. Some people like to keep working relationships professional, so it's important not to force them to network during their private time. Most importantly, we never betray our teammates. No games, no politics. We should even think carefully how our words could hurt.  Don't say things that we would regret. Actually, this last point goes for every kind of relationships.

Trust takes years to build and networking takes time. Hence it is better to start young and start early. Most of us don't really realize it in school but that's probably one of our first networks. We spend two, three or sometimes six years together. We had common goals - to tackle examinations. We were too young to play politics. So it was all fun and laughter. As we age, it gets harder to build good networks. Ultimately, a network requires some bigger common goal to bind everyone together. It could be investing, it could be a common hobby or religion or volunteer work. So when we want to build a new network, we need to think clearly about the goals and whether the people are committed to the same goals.

These goals must also be clear or else politics would take over. This happens too often in the corporate world. Just think of any large MNCs, like Unilever, Singtel or General Electric. Does everyone share the common goal to make General Electric the best conglomerate or Singtel to become the #1 telco in Asia? Even in an investing outfit, does everyone think more about making money for the firm or for themselves? Is it really profits first or is it a beauty contest in many ways? What about the KPIs for back office people who are not involved in direct investment decisions?

As the network gets bigger, hierarchy naturally needs to come in. To bind people to the common goals, we need leaders. The top dog has to lead with vision and strategy. The middle managers need to lead their teams to achieve their goals for the firm to achieve bigger goals. After a while, it all tend to get messy. The best companies can keep finding good leaders and do this for a long time. Like 30-40 years, some companies can last for 100 years. That's perhaps the best outcomes. So while we say buy-and-hold, it's not forever. The best compounding happens during the phase of growth with strong leaders, good networks and great products.

Next topic, what makes a great leader?

It is said that leaders are born. We see it in kids, some kids tend to lead with ease, while others follow. There is some truth. However as we grow in life, we have to lead. We may not lead 100 people, but we must at least be able to lead our own nuclear families. With that skillset, we may expand to lead a team of 5-10 people. So, to move forward in life, everyone needs to learn to lead. To be good leader needs to nurture and find his or her own leadership style.

There are many books written about leadership. They are all important. Leadership is about vision, leading by example, action, presentation, communication and many more. When it comes to people and networking. My realization is that leadership is also about one-to-one relationship. Network of a leader is being built from one person to another. A leader needs to speak to each and every teammate one-to-one. Build that trust from person to person.

But not everyone will connect. Network needs chemistry. Sometimes we just cannot stand some type of people. We should not shy away but keep trying. A strong team needs diversity. If a leader only works with people he or she likes, the team is that much weaker. Differing personalities could be overcome either with strong vision or goals or capable teammates. Some teammates are very good at binding different people together. Leaders must learn to identify these individuals.

A strong team of 5-6 can conquer the world. Singapore's forefathers was such a team. Two capable founders can also create wonders. We have countless examples of these teams: Google, Apple, Honda, Sony, Irwin's Salted Fish Skin. Never stop finding those teammates. As a result of our evolution, it is said that the largest teams could only be 100 to 150 people. This was the magic number with tribes and villages since prehistoric times. In other words, we can only build deep relationships with that many people in our lifetimes. We cannot have 1,000 friends and be close to them all. At the very best, we can be "close" to 100-150 people in our lifetimes. That's still a very tall order.

In reality, we will only be very close to few people. Maybe 10-15. Amongst these 10-15 individuals, we should then find the best mentors and also tutor mentees. Mentors are people who will make us better. Mentees are people whom we can make better. Ideally, our better halves should also become our mentors and our kids our mentees. Fortunately or unfortunately, life doesn't work that way haha. Nevertheless, life will be that much more meaningful with these networks. Are you accountable to anyone? Who are your mentors? Have to been useful to anyone else? Answers to these questions tell us a lot about our own networks.

Do find time to thank people who made us who we are and do the same, pay it forward. Huat Ah!

Books #7: Bad Blood, Secrets and Lies in a Silicon Valley Startup

Bad Blood depicted the story of Theranos from its inception to its bankruptcy over the span of 15 years. At the heart of the story was Elizabeth Holmes, the blue eye blonde who dropped out of Stanford to start her healthtech company aimed on revolutionizing blood tests. Alas, it was all a big fairy tale as Theranos never had any breakthrough technology nor the culture to bring anything together. It was a slow motion corporate train wreck and a cautionary tale with many lessons for investors to learn from.

For those who aren't familiar, Theranos was another Silicon Valley startup trying to change the world. But it's not like the typical tech or internet startup with a new business model. Healthcare is not software or e-commerce. It directly affects people's lives and is tightly regulated. Elizabeth Holmes believed she was destined to change how blood tests were performed after she experienced SARS in Asia. She saw firsthand how people suffered during the early months of 2003 when SARS broke out. There weren't enough nurses to draw blood, nor blood analyzers that could process results faster enough. Nurses and doctors themselves succumbed to the deadly disease. Hell broke loose and a lot of people died. She happened to be an intern in the middle of all this, in Singapore! That's when she thought the world needed a blood analyzer that could give results with one drop of blood.

She truly believed the world needed better blood tests to save lives and she was the messiah.

But vision has to be grounded in reality. She, her partner, or rather partner-in-crime and her board did not have the experience nor the technical background to understand it would not be possible without years of R&D. For most of us going through routine health checks, the dreadful blood test required 3-4 vials of blood drawn from our forearm's veins. Just simply going by blood volume, to reduce vials to drops of blood required for the tests meant a 100x improvement, very roughly speaking. It's a moonshot, using Google's lingo. Yet, this is healthcare, not software. It would take years, or even decades to achieve these results.

It might still be possible if one had the amount of resources to throw at the problem. Silicon Valley had the money, the talent and the drive and grit to do all that. But Theranos was a different story. It was led by a 19 year old university dropout and a super villain. For reasons unclear, Holmes fell in love with this Sunny Balwani who would wreak havoc in her company, randomly firing people and threatening ex-employees with lawsuits. The culture became toxic, good people left. Bad people thrived. Evil deeds were condoned. It was just crazy.

Sunny and Holmes

As the author of the book put it though, ultimately it was Holmes. She had the last say in almost everything. She endorsed the tyrant and all his despicable actions. So, when a villain is protected by a queen (or a king), then it's game over. Reading the book provided the revelation how warped our society had become. It took so much for this incredible story to come out because powerful people with money and connections played with justice. Imagine all the other stories where the villains are still controlling peoples' lives. As individuals, we have to be able to recognize these situations fast and move on. Well, unless we have the means to bring them down, like having lawyers with bigger guns or strong connections to powerful media like the Wall Street Journal.

As investors, there were also important lessons. The first one relates to stories with all the rainbows and unicorns that had dulled our senses. In recent years, we heard so many rainbow stories and saw so many unicorns and wondered why hasn't one landed in our own portfolios. As such, we suffered from the fear of missing out (FOMO) and forgot to be vigilant. Last count, we have over 452 unicorns according to techcrunch.com. 

The Unicorn Leaderboard now lists 452 companies, which have collectively raised $345 billion and represent a cumulative valuation of $1.6 trillion. Go back to February 2018 and there were just 279 companies, with $206 billion raised and valued at $1 trillion. In just 15 months 170+ companies reached unicorn status, raised $140 billion more and added $600 billion in company valuations.

Rainbows and Unicorns back in 2017

Unicorns were supposed to be so rare that we don't get to see one in decades inside fairy tale stories. Yet today, it's everywhere, in our real world. How many have real gamechanging technology? How many doesn't really have anything, like Theranos? How do we tell which unicorns are real unicorns? Despite having luminaries such as George Shultz and Henry Kissinger on its board, Theranos was a fraud. If the board didn't know, how could investors have an edge?

So here's the last lesson from the book - nothing beats boring due diligence. We cannot trust the board in private companies. We cannot trust fellow investors to do their homework. In private equity investing, we like to look at what's call the cap table - who else has invested. We like to think these other smart investors would have done their homework. We like to think the board would have done their job. The Theranos story tells us otherwise. 

Nothing beats boring due diligence. We have dig through the dataroom ourselves. We have to go further still, tumbling down the rabbit hole. Talk to past employees, find the financial models that value stock options for rank and file employees, scrutinize management and be very careful of companies that keep talking about trade secrets and proprietary technologies. 

It's hard work. Blood and sweat. Still, there's not guarantee we can live happily ever after. Welcome to wonderland and happy unicorn hunting!

Charts #26: If all of us exercised...

Did this crazy calculation some time back.

If everyone did nothing but exercise, we can produce 9% of the world's energy!

People, Management and Networking - Part 1

Investing is fascinating because it touches so many facets of life. We need to know finance, we need to understand business models. But that is not enough, we have to look out for trends and what are the new innovations in life and in society. Finally, we also need to look at people and culture.

People, or rather relationships, play complex roles in both business and life. We can read a book and learn a few lessons, but most of them are just being understood at a very surface level. When the same lesson is shared via someone's life story, it gets reinforced. Often, if the same lesson is shared by a mentor, a guru or someone we highly respect, then we tend to absorb and follow the instructions given or are in the much better state to avoid the mistakes altogether.

That's the power of relationships and understanding people.

In analyzing companies, we need to look at the people running them ie the management. The same relationship rules apply and we need to understand some of these dynamics at play. Who is in charge? Is it a dictator or does he has a team? Who are the top lieutenants and what are their backgrounds? How do these senior executive present themselves? Do they even bother to meet investors? Is the company culture healthy or toxic? These are people questions that shrewd investors have to ask.

Having said that, Warren Buffett made the famous saying about people and business model:

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

This is obviously very true. While people is important, what's more important is the business model and the business moat. Nucor comes to mind. Nucor is in the steelmaking business. It is a very bad business because there is a lot of competition and steel is a commodity. Nucor's management is known for brilliance and has relentlessly improved the company's competitiveness and created good shareholder return.

As shown above, it's share price has compounded nicely from $12.45 to $54.85 over 20 years. Part of it was helped by the commodity super cycle during 2005-2009 when China drove up most of the world's demand for steel, copper and other hard commodities. Without which, Nucor's performance would have undoubtedly suffered. So, while Nucor's performance is great, it's only in the same ballpark as the S&P500 which grew from 1,100 to 3,050 over the same time frame.

In a nutshell, analysis of the business model always takes priority. Once we figured out it's a good business, it's more than 50% of the work done. A good business generates strong cashflow and strong returns for investors. Then we think about people and management. As discussed in previous posts, the first thing about management is integrity. If management cannot be trusted, then we cannot do any more analysis right?

So assuming management is trustworthy, we can then look at the team dynamics, the board composition, succession planning, track record and all the other stuff. For young companies, it might also be worthwhile to look at who's in their circles. Who are their mentors? Are they looking up to the right people and getting the right advice? What do the past teammates say about them? Who else are in their networks? These are all part of the analysis.

By analyzing networks, we can gleam insights into companies.

The internet age has not reduced the power of networks. We can have 1,000 friends on Facebook, some celebrities have millions of followers and some posts can have 10,000 likes but we still go back to people we trust. We still rely on the word of mouth. Networking continues to be an important part of investing and life.

So while we analyze the companies' networks, we also need to build our own network. Who are the fellow investors that we are talking to? How many investing networks do we have? By having the right people in our network, we stand to gain so much more. This is a very tedious process. Networks are hard to build. It takes years to build the trust and friendship. It is also important never to break that trust.

Human relationships are probably one of the most complex and least understood fields in life. In the next post, we shall try to breakdown networking into its most basic building blocks and understand how that can help us become better investors and also better people.

Thoughts #18: Money Flees When You Need It

The recent collapse of Thomas Cook brought about an old revelation: money flees when you most need it and vice versa ie money attracts money until extraordinary investing returns are longer possible. On the former, Thomas Cook's share price below shows the story well.

Thomas Cook, the 178 year old company was not in any kind of trouble until late last year. Its share price was healthy and it even added airline capacity to capture strong demand during last year's summer. As usual, it was the bond markets that first saw the warning signs. Thomas Cook bonds started showing signs of distress when its prices traded down significantly in Oct 2018. Once the rumour came out that the firm might be in trouble, everyone withdrew support...

“There’s been a continuous knock-on effect,” said Richard Clarke, an analyst at Bernstein. “Their suppliers get wary, hotels ask them for more money up front, consumers become less willing to book with them . . . I’m sure that’s why we’ve seen continuous increases in the size of their rescue package.”

The excerpt from FT above captures it all. The financial industry works as such. Not only do suppliers and banks withdraw support when needed, short sellers short the stock, bond traders either sell the bonds or buy insurance against their bonds, further pushing up the price to insure and reinforce the notion the company could be in trouble.

Olam Lives!

It was the same story for Noble. When there's news of trouble, everything just go downhill, fast. The story for Olam panned out quite differently though as it got help from first Temasek and then Mitsubishi Group, two powerhouses that changed its destiny. When there's enough money, it attracts more. Today, Olam trades at a healthy SGD 6bn market cap.

The lesson learnt (or to relearn) here: leverage is a double edge sword. Be doubly careful of companies with too much debt, payables, hidden liabilities. When money smells trouble, it flees. A vicious cycle forms, bringing down businesses quickly. When things go too well, money attracts money, the big gets bigger and the strong gets stronger.

Books #6: Shoe Dog

This post contains spoilers for Shoe Dog, if you intend to read the book, click the "x" at the top left or right corner of the browser right now, thanks! Do come back next week!

Shoe Dog written by Nike's co-founder Phil Knight was published in April 2016. It was written in plain English and immediately shot up the bestseller list as one of the best business books ever. Phil described how he tried to build up Nike, the difficulties he faced, the juggles between work and family and the seemingly insurmountable task to beat Adidas, which in 1965 probably 100x bigger than Nike. It's really must-read for anyone who wants to startup a company.

We tend to see only the end result of spectacular startup successes and think we can do it. One tagline to encourage more startups in Singapore goes like this, "Tired of a 9-5 job? Start up your own company, be your own boss!" It is the same trick used to entice thousands to become Uber drivers. It's never that simple. The greater the success, the greater the effort put it to achieve it. Are we actually up to it? What is not said is that working at a startup is not 9-5 but 24x7x365x10. To be really successful, both the CEO and the new team have to work 24 hours a day, 7 days a week, 365 days for 10 years or even longer.

That is what it takes. It's a competitive world. It's the same story in all arenas of spectacular human achievement: gold medalist in the summer Olympics, Nobel Prize winners, Jeff Bezos at Amazon, Stan Drunkenmiller. You name it. Even in Singapore, past President scholars - how many hours did they put into their studies? Robert Kuok. His memoir was also published recently. Gosh, how hard he worked. That's the reality. The greater the success, the greater the effort put it to achieve it.

The story of Nike's employee #1 Jeff Johnson also came across memorably for me. He was Phil's good friend and a reliable worker. So Phil tasked him to do the most difficult stuff like firing people and then sending him across the country to restart the new office that was in a mess, with no advance notice, no resources and best still, no increase in salary. It's usually not a one man show. Great endeavours require great teams.

Nike was fortunate to have such a team. In my mind, Shoe Dog was, in essence, a remarkable story about teamwork. A good team rarely exists. Think of all the organization structures all over the world. People are simply put together based on their CVs. But a real team requires camaraderie, diversity, balance, trust in good leadership and also good advisors. Phil had his coach, Bill Bowerman, the other co-founder of Nike. He was a fatherly figure and the guy who originated the idea of Nike Air. We all need mentors in life to bounce ideas, to guide us towards better solutions. This is one of the most important takeaways for me after reading Shoe Dog.

The contrasting corollary to the above is soft partnerships. We must be mindful of people who were helpful when circumstances were good. In Nike's case, these were the Japanese partners that Phil worked with. It's nothing bad because it's business. These partners are not Nike's teammates. They had their own interest to look after. So, when the winds change, they have to part ways. Phil was good at reading this and moved quickly to secure Taiwanese and later Chinese partners. That's just business. I guess the lesson learnt here is to be able to read people well and where their ultimate loyalty lies. 

To sum up this post, I would like to circle back on hardwork, intelligence, luck and success. It takes a lot of hard work to start something. But hardwork itself is not enough. Bill Bowerman's quote above comes in right here. One needs to work hard and also work smart. Innovation brings about the step change to rise above the competition. But that's still not enough, Nike's story is full of lucky encounters of how one wrong step would have meant bankruptcy. Behind one successful Nike, there are hundreds of failures. Behind every successful startup, there are many more failed attempts. 

So, it's not just do it. In this internet age, think different, do no evil, move fast, break things on top of just doing it! 

Charts #25: Trade War Update

Here's another trade war chart from BBC. The last two bubbles are simply increasing tariffs from 10% to 25%.

Interestingly, the cumulative amount of the trade war impact was smaller than Lehman's financial assets at USD 600 billion when it collapsed in Sep 2008.

2019 Market Review: The Phantom Menace

Eleven years ago this month, Lehman Brothers, one of the largest investment bank in the US, file for bankruptcy protection. It held over USD 600 billion in financial assets. The Fed and the other America banks had already engineered two other bailouts in the prior months: Bear Stearns and Merrill Lynch. Bear Stearns was sold to JPMorgan at $2 per share, along with all its assets and liabilities. This allowed the stronger JPMorgan to slowly clean up Bear Stearns' books which limited impact on the markets. Today, nobody remembers Bear Stearns. 

Phantom of Wall Street

Merrill Lynch got a good deal on the eve of Lehman's collapse, it was sold to Bank of America at a 70% premium to its last traded price. Unfortunately, it was not enough for Temasek, who bought it about a year ago and ended up losing a big chunk of its capital. But most importantly, the dirty laundry was kept out of limelight again and the buyer spent years cleaning things up. Alas, it was not so with Lehman Brothers.

When Lehman went down, its USD 600 billion of assets which was linked to trillions more was exposed. It pulled down the global financial system like a broken spider web and triggered the Global Financial Crisis. It was serious. Many believed that the worst case scenario was the end of our financial system as we knew it if the powers that be did not take the right steps. Fortunately they did.

In the aftermath, AIG, the insurer, was broken up as it insured those who bought sub-prime mortgages, including Merrill, and was on the hook to pay up the losses. The rating agencies were affected. They gave their stamps on approval to sub-prime and misled everyone. The US Treasury was also force to take over Fannie Mae and Freddie Mac, hitherto listed companies.

The GFC indirectly caused the banking crisis in Europe as banks in Greece, Iceland, Italy and UK all held financial assets related sub-prime and were in trouble. Asia was not spared. the Chinese government pumped the now notorious RMB4 trillion into its own economy to mitigate the effect of the global financial meltdown. It would continue to intervene and ultimately added close to USD 1 trillion in economic stimulus which ended up becoming bad debt as the money was inefficiently used, such as building entire cities with nobody living in them.

China's Phantom Cities

Back in the western world, the central banks launched quantitative easing (QE) to try to jumpstart the economies. They flooded the global financial system with money which ended up in the hands of a small segment of the population. These were people on Wall Street, people involved in prime real estate (including Singapore), the private equity folks, bitcoin promoters, people who dealt in art, wine, collectibles and needless to say, stocks and shares - yes all of us reading this. Not forgetting to mention, a few billions also went to Najib and the other corrupted governments around the world. Globally, QE did not benefit the masses. It causes a wider disparity between the haves and have-nots.

In retrospect, the issues today, Brexit, trade war, bitcoin, shadow banking all came about eleven years ago when Lehman collapsed. We are still suffering from the lingering effects of the global financial crisis. 

At the start of 2019, the risk that loomed large was Brexit. In 2016, the gap between the haves and the have-nots played out in the Brexit referendum and the have-nots won with 1.9% more votes (51.9% vs 48.1%). The then Prime Minister David Cameron resigned to take responsibility. But Brexit was a pyrrhic victory. The Brits wanted to leave Europe but did not know how. It was, and still is, a big mess. After two and half Prime Ministers and with one month to go, the probability of UK exiting without deal looked very high. If it happens, UK will go into a recession and millions of Europeans in the country become refugees overnight. It would be a disaster. 

Theresa May, UK's second female Prime Minister

Then, there's Donald Trump. Again he was elected because the have-nots thought he would help level the playing field. He decided that China was the root cause of all the world's issues and waged war against the Middle Kingdom. It started in July 2018 with the US imposing tariffs on USD 34bn worth of goods but soon expanded to more than USD 300bn and China hiked its own tariffs on over USD 100bn on US imports. This caused significant worry in the markets (even though it was actually smaller than Lehman's balance sheet) and global exporters and related stocks in China, Hong Kong, Japan, Germany and many parts of the world were negatively impacted. 

The trade war had also morphed into a strategic war on other fronts with Huawei being the prime example. Huawei is China's lead general in the technology war and must be killed. Cybersecurity warfare had already been fought and real world skirmishes likely occurred via proxies in countries like Syria and Afghanistan. The read should be this: the trade war will not go away, it's a strategic war. Hopefully it would not become another Cold War.

Having said all that, China has not really retaliated with a real damaging blow to the US. It could outright ban all US goods and services. It had already banned Google and Facebook, why not Apple, Hollywood, Microsoft and all other services? Well, China probably has a different thinking altogether. This trade war, while damaging now, is not a big deal in China's own big picture.

At a high level truce meeting held in late August, the delegates on both sides sat at the negotiating table behind a huge wall with a Chinese poem with an interesting allegory. China was a mountain that had been around for thousands of years, while a passing cloud (i.e. US) tried to wage a storm to intimate the mountain. It was a futile effort. In some sense, it's true. Huawei will emerge stronger after this saga. China will continue to gain technological and strategical advantage. Its brands, capabilities will grow stronger and it will have more allies in time. 

Phantom message for the US

So what does this means for the markets?

It just means turbulence will continue. The risk is on the downside rather than the upside. We have to use higher prices as sell opportunities. This situation has not change since our last market update. We are still at the late stages of the bull market. It's hard to spot when things would turn. It could continue to be like this for another 12 months. If the Fed cut rates more aggressively, the market could even rally further. Then we look real stupid selling now. But such is investing. We can never tell. So, we move in incremental steps prudently. 

There are also no signs of weak links could bring us to another financial crisis. Back in 2008, we could see the weak links although it wasn't clear that they would be so devastating. People talked about sub-prime for months before things imploded. Bear Stearns went down first. On hindsight, those were big warning signs before Lehman Brothers' bankruptcy. Today, there's no canary in the coal mine, yet. Or rather, it's still too difficult to spot. One could be Uber and Wework and the likes of startups with their diminishing valuations. The other could be the old shadow banking system in China finally blowing up or a big entity in Europe finally caving in, pulling down things as Lehman did. It's always hard to tell before it happens.

Meanwhile, Lehman's phantom menaces, so we need to stay vigilant and raise cash!

Huat Ah!