Betting against this giant is painful

Most of people reading my blog, if not all, must know that I love Microsoft (MSFT), a company used to be dead money for over a decade following the dot.com bubble burst in 2000. However, for my way of long term investment with dividend reinvestment, MSFT fit my strategy perfectly when it was “dead” while still making tons of money from its matured businesses no one cared much anymore and paying increasing dividends at an amazingly high growth rate (roughly 15-20% annually). So my journey started about 10 years ago when it was still in $20s and aggressively accumulated more when it was still cheap in valuation till $40s. I was pounding the table several times here to call to buy when it tanked due to some short term scary news. Of course, not many people would listen due to lack of exciting news for MSFT. After all, who cares about such an old cat. We need high flying stocks chased by the Street! I often was told whenever I talked about quality dividend stocks including MSFT. Sure, your loss, not mine if you don’t listen to me on this, my usual response to such kind of comment. Quietly MSFT has moved up aggressively in the past two years and is changing hands around $110 now. My paper capital gains range from 2-5 times depending on my cost bases. I should not complain in any sense right? But I’m really not thrilled about the capital gains to be honest. I really wish MSFT could still keep low key as “dead money” forever but keep gushing out increasing dividends. Why? Because I don’t believe the potential capital gains from MSFT share price increases in the future can make me 20-30 times gains at the end. However, low share prices with increasing dividends can really make me such kind of return with dividend reinvestment (DRIP) over time. The fast appreciation of share prices, while making me psychologically happy, may substantially slow down my exponential gains I’m expecting from MSFT! Too bad!! It is just a mental happiness at the expense of long term explosive gain at the end. If you still don’t get the point here, please read this blog regarding the essence about DRIP and also here about the mathematical demonstration how MSFT DRIP can make you really rich without much efforts, especially when maintained at lower prices.

So why I’m such a fan of MSFT as a long term investment? For one, it is the only one of the two stocks in the world that as a triple A credit rating, the highest credit rating and the safest stock to own. In other words, it is safer than anyone else, even the US government in terms of the credit rating! To me, my money in MSFT is virtually the same as my money in the bank but earning high and increasing interests year in and year out! This allows me to efficiently increase my earning power from MSFT via DRIP. You really don’t need to worry about the cash earning power by MSFT. If you don’t know, MSFT has 16 businesses that generate sales over $1 billion annually (see the update here). You rarely see such kind of companies with so many blockbuster businesses. If all the companies would eventually go bankrupted, you can safely bet MSFT would be the very last one to fall! Like it or not by me, Microsoft is silently and fast transforming itself to a high growth high flying tech company again. Believe or not, MSFT is at full front in virtually all the major megatrends that will shape our future. Below is just a few examples to give you a taste what Microsoft is doing:

• Office 365: nearly $10 billion business
• Xbox: very popular $10 billion dollar gaming business
• Marijuana: legal aspect riding on the megatrend of the global legalization of marijuana
• Cloud business, quickly closing the gap with Amazon, the leading cloud company
• AI business: Microsoft is one of the leading company in developing AI solutions (see examples here)
• Blockchain future: investing heavily in BC, e.g. in Xbox (see here) and in tools for Azure/Cloud (see here) 
• HoloLens headset technology: a transformational technology that may totally change the way we learn and communicate (see here regarding 5 things HoloLens can do and here with an amazing video demonstration). Here is the WSJ report on using HoloLens for efficient medical training. 

So betting against MSFT will only mean pain to anyone who dares to do so. I’m guilty of that to some extent unfortunately. While my like for MSFT has never tampered but only increased over the past decade, MSFT has become too hot as a stock with very rich valuation lately. Since my position is relatively large (the largest one in my portfolio), I have been trying to hedge against any short term weakness that for sure may happen from time to time. But in the past 2 years or so, it has been a painful endeavour. It has been surpassing my strikes again and again to make me really stupid to do so. For the most recent earning report last week, I thought there was really a good chance that it would meet with negative responses, as the expectation was very high for now. But it only did so for just a few minutes and then shot up to an all time high again. Having said that as I have alluded to before, I’m also very active in doing short term trading with MSFT, mostly betting for long when the market tanks to bring down MSFT as well. It has been a very profitable trading with MSFT to have greatly alleviated my hedging pain with my covered calls. At some point, MSFT will for sure come down to bring back the euphoric expectation to earth. So right now it is definitely not a good time to initiate long term position with MSFT. I wish a pounding the table moment for MSFT will come again in not so long future!

My daydream coming true?

This is how I was called about when I posted my blog on a "conspiracy theory".😠😠 If you haven’t read it, here is the key point: According to this theory, Trump is just trying to help Republicans to win the mid-term election. Here is how it works: Trump to start the tariff fight with all the major partners and make it escalated to the level of trade wars. The market got nervous enough to tank and be very volatile for a few months, just like what we are seeing now. Then all the sudden Trump starts to seal some major trading deals prior to the Nov election, which will make the depressed market so happy that it will start to jump to the extent of euphoria. The result? We will see new highs later in the summer and people are so elated that more people will vote for Trump’s party, Republican. And both houses will still be controlled by GOP! What a perfect conspiracy theory! Very logic actually! Sounds like a fiction, right? No wonder my friend said I was having a daydream. Well, it looks like my daydream may very well become true now. Actually it seems to come much earlier than I thought.😎😎 In case you don’t know yet, Trump and the European Commission President Jean-Claude Juncker reached an agreement on Wed to work on a trading deal aiming for zero tariffs, barriers and subsidies. While details are yet to be worked out, this is major breakthrough to avoid a real trade war between US and EU. And there is a good chance something will also be worked out with China in the months ahead.

As I said, if you really understand Trump’s underlying intention, this is a very logic step forward for him to do. He has been called as a trade protectionist all around the world. But in reality in my view, he is much more for free trade than any other countries’ leaders! All he wants is to level the playground and be treated fairly and reciprocally in his words. That’s why he offers the idea of zero tariffs to promote real free trade between countries. I hope we will see such a more free trade world in the future.

To give you a quick trick how to assess a real trade war risk. You don’t need to look too much beyond one indicator: the US dollar! Relatively speaking, US$ is a safe haven, especially during the market turmoil due to the fear of a major trade conflicts. If a real trade war is coming, US$ will be among the first beneficiary to strengthen. I think this is one of the major reasons why US$ has gone up so much in the past few months. But look at its chart below (using UUP), apparently it has topped in the past few weeks and a downtrend appears to be in the work. If it indeed topples over from here, clearly the risk of trade war will become more and more remote. That’s how the market is telling us the likelihood of trade war.
  

An interesting liquidation experience I have experienced

Less than 2 years ago, I talked about some free money I had seen then that I presented here in my blog entitled: “ Free cash in the corner?” This was about a small biotech company called BIND Therapeutics that had just bankrupted but the Pharma giant Pfizer bought it. The thing got my attention and interest was the fact that it was trading in a price far less than the liquidation value after the bond obligations per their CFO. Basically I could buy it at a very discounted price but could be reimbursed for more than the price I paid. It was indeed like free money to me. So I did buy the stock at about $0.9 per share. Soon after I posted the blog and bought the stock, actually its trading price went up towards $1.1 briefly I believe. Apparently many traders also realized the free money deal and wanted to take a stake. I was thinking to sell the shares at that time but somehow got distracted and didn’t do it before it was delisted within days. Then the interesting and rewarding “ordeal” started.


Actually I won’t say it is too bad and painful process but just a very long dragging process. Most of the time I was just doing nothing but would from time to time to receive the bankruptcy court documents informing me what had happened. I also had to provide my tax related information in order to receive distributions, which also involved a few phone calls to my broker for their verification information. That’s basically what it has all happened in the past 18 months or so and I have received in total 4 batches of distribution I recall. Last week, I got the final notice for the final distribution. Based on my cost base, I got about 30% return in less than 2 years. Not a great return that I can brag about but not too shabby that I should complain as well. It is just an interesting liquidation process I have ever experienced. Indeed the market may sometimes handle us some free money but we need to be savvy enough to grasp it. This often occurs in the bond investment area when a company has got too much debt and cannot service its debt with the current cash flow. That will cause the panic selloff of their bonds but from time to time you may find some good deals when the company’s asset value is much more than the bond obligations or they can easily find refinancing alternatives. This is the time savvy investors can easily get an equity like return much safely, e.g. 15-30%, when buying the distressed bonds at a huge discount. Of course, this requires special expertise that most people don’t have. It is more complicated in analysis than stock investment. That’s why bond investors are generally much smarter than stock investors and they can spot potential problems much earlier than the equity market. As a general note, the bond market is signaling an ominous future for the stock market. Of course, I’m not talking about anything near term in just a few months. But the stock market in a few years from now? Won’t be great as far as I can understand the signal the bond market is sending! Be careful about any long term financial products that you are getting or want to get, if they are based on the stock market. In this case, even the seemingly safe products like life insurance (that is based on the stock market performance) could get you into troubles if we indeed see a long lasting persistent bear stock market. It is a bit off the topic but it’s a relevant and important one to take a note on. On the other hand, a life insurance purely based on the bond market may very well become a very good and safe financial asset in the years to come. Remember, bond investors are generally much smarter than equity investors and life insurance companies have great bond investing experts who can take great advantage of distressed debts during financial crises for high returns beyond your imagination. This is just one little example how a bankrupted company may let smart debt investors earn an equity like return without much risks involved.      

A historical day

This is indeed a historical day as no any drug in this category has ever been approved before. I’m talking about the marijuana-based medications. On Jun 25, the FDA gave a thumbs-up to Epidiolex developed by GW Pharma (GWPH) for treating seizures associated with Lennox-Gastaut syndrome (LGS) or Dravet syndrome (DS) in patients 2 years of age and older. This approval was highly expected as in April, an FDA advisory panel unanimously voted in favour of recommending approval of Epidiolex. But the surprising piece for the approval is that the indication for the drug is actually broader than expected. In other words, the company use market the drug to a broader patient population with this terrible disease without effective treatment and more patients can benefit from it, a win-win for both the patients and the company!

The historical moment for GWPH actually has a much more impactful implication for the whole marijuana story currently unfolding not only in the US but across the globe. It is still very controversial about the legality of marijuana use and I’m not an expert to tell you which side you should be. But at least I do feel the medical use of marijuana is very convincing and sufficiently based on scientific evidence. The approval of Epidiolex is a living proof of it! If you are not aware of yet, marijuana has two basic components that determines how it behavior in the human body. It contains tetrahydrocannabinol (THC) which is the is the primary psychoactive component of marijuana to cause intoxication or euphoria and therefore makes it addictive. On the other hand, marijuana also has the active molecular entity called cannabidiol (CBD), which does not cause the THC-related problems but rather is medically beneficial to people. This CBD is what Epidiolex is based on and therefore it is does not show the addiction and dependence notoriously related to marijuana as a whole. That’s why FDA Commissioner Scott Gottlieb went further by saying "we'll continue to support rigorous scientific research on the potential medical uses of marijuana-derived products and work with product developers who are interested in bringing patients safe and effective, high quality products."

 GWPH is the leading biotech in this area and has a great future with a rich portfolio in developing more marijuana-based medicines. Epidiolex will easily be its first blockbuster drug with $1 billion sales in the near future.

I wish I didn't have the cold feet

Some friends are asking what’s the status of the market and how we should trade. Here is some quick recap what I’m doing lately.

First about the most heated stock in the past week, Amazon! I made some bold trades on it and I wish I didn’t get the cold feet with AMZN. I sold puts when it initially tanked about a month ago with a strike $1760 due Jul 20. But it kept tanking to below $1700 and I doubled down to sell more for the $1700 Jul 20 puts. Both lots have a potential profit worth about $10K each. Last week, it jumped back as expected to around $1750. That’s where I got the cold feet given its volatility and so close to the maturity. So I closed the 1st lot for about even. A big mistake of course. AMZN is now keeping moonshot to $1830 now with just 5 days left for the Jul options. But fortunately I still keep my 2^nd lot and it will be really a shock to see it tanks again to below 1700 by this Friday. As I said in the previous blog, I did quite a few put selling during major selloff a few weeks ago for big names like APPL, MSFT, DIS, LMT, WBA, PFE, MCD etc as I’m never worried about the media nonsense taking about the trade war! All my late tradings are doing great except MCD which is still a bit struggling!

Of course, the market is a bit overbought at the moment and is due for a breath. I don’t expect a huge selloff but it could be felt scary. While I still believe there is a good chance to see new highs of the market (S&P) in the next couple of months, the poor performance of the financial sector is concerning. Usually we should see some strength of Finance to support a more sustainable strong market. We have to be flexible with an open mind about the market trend by playing by ears as of now. So far, I’m still trading on the thesis that the general trend is upwards in the next few months but I won’t hesitate to change my mind if I start to see some technical weakness that will negate this uptrend. I hope I can tell you in advance.     

 

What does an inverted yield curve mean?

If you don’t know what I’m talking about, here is a brief introduction. When you lend out money, do you want to be paid with a higher interest or not if you lend it out for a longer period time? Sounds too stupid to even ask, right? Of course everyone wants to get paid more if the lending period is longer as the risk is higher. So normally this should be the case for the government bond yields,  like the Treasure yields, e.g. the 10 year Treasure yield should be higher than the 2 year note. A yield curve that has been closely watched by the whole financial world is typically the yield spread (difference) between the 10 year vs 2 year Treasure yields. As we just said, typically you would see a positive difference with the 10 year higher than the 2 year. But from time to time, some strange things do happen (actually not so stupid) that the 2 year yield is higher than the 10 yield, causing a negative spread and therefore being called as inverted curve. So what’s a big deal about the inverted curve if happening? Well, in the past 6 decades since such tracking available data, each recession (I think more than 5 times to date) has always been preceded by an inverted yield curve. In other words, the yield curve has become a very accurate predictor for the possibility of the next recession. It makes sense if you think about it fundamentally. Banks are basically making money by borrowing the short-term money with a lower interest to pay and then lending out the money with a higher interest to earn. If the yield curve inverted, banks will lose money by doing so and they will cut back on this major business. When the banks don’t lend money, the whole economy will suffer with less liquidity, eventually leading to a recession. In the past 10 years since the last recession in 2008/2009, the yield has been widely positive with the difference is comfortably above +1% all the times, even reaching +3% in 2011. But now, the yield curve is quickly flattening (narrow) and is below +0.3% as I’m writing. It is still positive and therefore I have been saying for a couple of months that I’m still bullish for this year at least and I don’t think a recession is an imminent threat, thanks to Trump’s pro-business policies. Actually more than two years ago I was even talking about a recession coming soon as at that time it was a real possibility the anti-business policies from the last administration could continue (no one thought Trump could win, right?). Regardless which side you are lining up, you should thank Trump at least on this that he has significantly postponed the next recession to come.👊👊

 

But the yield curve trend is indeed very worrisome as of now and I think it is a very high likelihood that it may invert in the next 6 months or so. History indicates that when a yield curve inversion occurs, it can take about 6 months to 2 years to lead to a recession to come. Here is my prediction how long the recession will come after the inversion based on different scenarios below. And I think it may very well be tied to the political landscape in the US. Roughly I think we may see three cases as follows:

• The mid-term election allows the GOP to maintain its control for both the Senate and the House and even better, Trump can win in the next election at 2020 for another 4 years with GOP to control both as now. This should be the best case scenario from the economic perspective and the next recession may be substantially delayed, by probably 2 years or even longer after the inversion.
• On the opposite side, if GOP loses control for both at the mid-term election that will cause Trump a great deal of challenges to continue to push for his pro-business agenda or if GOP loses the next presidency with DEM to control both as well, we probably will see a recession soon and last much longer than usual with more severity.
• Then the last scenario is anything in between.

 

Of course, economy is an extremely complicated phenomenon to predict and many other factors will also impact on it substantially. But personally I think the political landscape has a great weight to influence its direction. After all, the current economic momentum is supper strong with many records being broken already. While ironically a strong economy will inevitably lead to higher inflation that may cause a recession down the road, I believe the strong and free economy should do much more good than bad in the long run. I continue to hold the view that a huge financial crisis is coming in the years ahead due to decades long of unprecedented liquidity bubble created not only in the US but globally without solid economy to support. I only wish the current strong US economy can continue uninterrupted that can buy more time to at least lessen the severity of the inevitable financial crisis that is coming!   

 

You may think I’m talking about politics here since apparently I’m more in favor of the current economic policies. Not at all, folks! Let me give a bit historical lesson why it is so important to let the current booming business landscape uninterrupted to delay a recession. As I have said, the next crisis will be the debt crisis in a scale we have never seen before. The last recession in 2008/2009 was triggered by the housing bubble that led to a widespread bankruptcy of debt-burdened companies, which caused a full blown financial crisis at the end.  Just prior to the blowup of the crisis in 2007, it was reported that about 6% of the largest US companies could not cover the interest payments on their debts by their earnings. Today, a study done by Bianco Research suggests that as high as 15% such companies cannot earn enough to pay their debt interests, almost 3 times more than 10 years ago. Based on a simple logic thinking, can you tell me which scenario above is more likely to postpone the time bomb to explode? I’m just talking pragmatically!

 

As I said, I’m usually early in forward looking and there is no immediate concern on a recession as of now. But I think you will start to hear a lot more discussions about the yield curve inversion that is fast flattening. Hope this will help you to understand more what it really means for our money in the market. After all, the US mid-term election is just a few months away and it may have more profound impact on the economic prospect than you may think. At least this is how I’m looking at it!   

A conspiracy theory

“USA is wining the trade war”, Mohamed El-Erian said at a CNBC interview early this week. Who is El-Erian? Here is the short introduction about him: 

Mohamed Aly El-Erian is an Egyptian American businessman. He is chief economic adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-chief investment officer (2007-2014). He was the CEO and President of Harvard Management Company, the entity that manages Harvard's endowment and related accounts. He served as a member of the faculty of Harvard Business School. He is currently a member of the Harvard Global Advisory Council.

Apparently he is not just someone in the financial world, he is one of the top thinkers that you need to pay attention to when he talks. Accidentally he used to be my son’s “boss” at PIMCO, of course not the direct boss. Per my son, he is really very smart in economic issues. What I found interesting in this interview is that he was almost repeating exactly what I have said in my blog just posted two days before his interview. I almost felt he had read and “stolen” my idea on the trade war topic!😅😅

Joking aside, I have never believed, as you know, any serious trade war to be materialized. Now, I just read an interesting conspiracy theory about why Trump wanted to initiate this seemingly very aggressive trade war type of battles with all the major trading partners around the world. According to this theory, Trump is just trying to help Republicans to win the mid-term election. Here is how it works: Trump to start the tariff fight with all the major partners and make it escalated to the level of trade wars. The market got nervous enough to tank and be very volatile for a few months, just like what we are seeing now. Then all the sudden Trump starts to seal some major trading deals prior to the Nov election, which will make the depressed market so happy that it will start to jump to the extent of euphoria. The result? We will see new highs later in the summer and people are so elated that more people will vote for Trump’s party, Republican. And both houses will still be controlled by GOP! What a perfect conspiracy theory! Very logic actually!

Well, I of course don’t know if this is really what Trump is doing. At least Trump did not tell me that when I talked to him last time😎😎...But you should know that I won’t be surprised to see some major trading deals to come in the weeks ahead as this is something I have being talking about since the very beginning. The EU is likely in serious discussions with the Trump administration on zero tariff on cars, which by itself is a huge deal beneficial to both parties but more for the US for sure. If that happens, more will likely follow, like a domino effect! This is something that I do believe is coming. Don’t be surprised for this “conspiracy” to become true, if you are too concerned about the trade war, friends!   

An unavoidable monetary catastrophe is coming

I talked about the next big short a couple of weeks ago (see here) and judging by the comments I got, it seems this is something generating a lot of interest. After all, this is potentially a long term threat to our wealth and we all should take it seriously. So today let me add a bit more flavor into this topic from a different angle, from the US debt crisis to a much more severe debt crisis abroad that appears to be unavoidable. You should not be surprised to hear about this as I have already talked about it a short while ago. Yes, it is Italy, likely the motherland of the next monetary catastrophe!

 

So why the situation in Italy is so precarious not only for Italy itself but for the financial system of the whole world? Let’s first look at its current situation and then what is the possible direction it must go in the next few years.

 

You should know by now that Italy is not small by any means and is the 3^rd largest economy in Europe and the 9^th largest in the world! It has an annual GDP of about $2 trillion. So it is not a small potato that can be just dropped and forgot about. If you don’t know about Italy, it has never being doing well economically in the recent history, even before joining the Eurozone. Italians are great people, warm and friendly with great hospitality. We thoroughly enjoy staying there whenever we visit it. But on the other hand, Italian people have been fooled and spoiled by the decades long stupid economic policies that encourage and promote the mentality of spending beyond means. When anyone who spends more than what is produced, the only way to survive is to borrow and borrow. This is the case for private people and exactly the same for countries. After decades of such uncontrolled lavish spending, Italy has amassed a debt pile worth about 130% of its GDP, or roughly $2.6 trillion. Actually, half of the Italian GDP is from the government spending that is not generating much economic productivity. If we strip this portion out, we are really talking about a debt ratio of 260%, not 130%.  Don’t forget, this is the debt that won’t evaporate without cost and it must be paid back at some point. For countries which hold their own fiat currency, they can prolong the debt cycle by printing as much money as they want and simply kick the can down the road. This is what the US has been doing for decades given its unique world reserve currency prestige and therefor no one seems to care about the huge debt problem that will for sure also explode at some point. For Italy that cannot print its own money now, the reckoning day is fast approaching when the whole world is entering a higher interest era. To be blunt, Italy has already got itself onto the economic death toll although it refuses to face it. The only way to get off the death toll is to go back to the sound economics by balancing the budget with sound money principles, i.e. to spend less and make more. But spending is just like an addiction for any government and it is basically no way to ask any government to spend less. After all, expanding the budget to spend more is the easiest way for politicians to get elected. What is worse for Italy is that the current government is even thinking to spend more, aiming for a flat tax between 15% and 20%, a “universal basic income” of about $1,000 a month for citizens, and scrapping pension reforms designed to cut deficits. It is an economic suicidal move for Italy but it is becoming a real possibility for the new government to pursue.

 

“OK, but this sounds like an Italy’s problem, so why should we be worried about it?” A fair question but it means you haven’t really understood the ramifications associated with the fatal problems in Italy. Here is the rough accounts about the Italian debt owners: ECB (the EU central bank) owns most of the toxic Italian bonds via its QE (€341 billion worth of Italian bonds), followed by the Italian banks (collectively €350 worth of the government bonds). Then foreign banks from France, Spain, and Portugal also have huge exposure to toxic Italian government debt. Although US banks may not directly hold the toxic Italian bonds, it is almost a certainty that they are indirectly holding some assets that have a good deal of exposure to the poison, given how much intertwined the global financial system is nowadays!  The thing is, even without counting on the new suicidal economic policies, Italy has no way to pay back by its own capacity. Remember Italy cannot not print the euro on its own and it has not much income to pay the bond interests. So far it has not yet been a huge issue due to artificially low interest rate (even negative for some years) in the EU. But the situation is changing and fast. It is enviable that the interest rate will move up in the years ahead. So what’s the option Italy has? Not much! Since it cannot print money to pay by itself, it has to ask for leniency, which cannot be offered by the commercial banks and the only potential debt owner that may consider to offer such a ridiculous forgiveness is the ECB. This is exactly what the Italian government has done: it’s already called on the ECB to forgive €250 billion [$296 billion] in Italian debt. Let’s put aside the debate whether or not morally ECB should wipe out this amount of the Italian debt and let’s assume ECB indeed will agree to forgive. But it won’t be offered without a significant string attached. Remember what ECB did when saving the bankrupted Greece? A stringent austerity program in place to significantly cut down the extravagant sending by the government and apply sound economic policies. Ouch! This is exactly what the Italian government in general and especially this new government doesn’t want to do!

 

So here is the likely scenario that may play out: there will be fierce fight between the Italian government vs the ECB/Eurozone countries on how to alleviate the gigantic Italian debt with a term accepted by Italy. If the Greek saga was already very scary for the whole world, just watch what will bring from this new showdown. I’m pretty sure we are going to see a lot of knee-jerking reactions in the market as the fall apart of the Eurozone will be a real possibility. At the end, the ECB will have to step in to save Italy one way or the other as I just cannot imagine and they certainly know how much damage the failing Euro will cause to the whole financial world. Just a Lehman Brothers collapse in 2008 had already nearly collapsed the global financial system, what will happen if the 9^th largest economy fails and defaults? All the banks directly or indirectly holding the toxic Italian bonds that also include the US banks will be wiped out or severely brought down. As I have said many times, if you think the 2008 financial crisis was scary enough, this coming one will make it just like walking on the beach if indeed happens!

 

Well my fear is not just stopped here. Even if the crisis will be contained this round of play, the underlying grave debt problem for Italy won’t be fundamentally resolved. The capricious Italians and the extremist government won’t easily follow the austerity program forced on them. They will do whatever they can to still fight back ferociously over time and eventually I think there is a pretty high chance that Italy will drop from the Euro and go with their own Lira again that they can print as much as possible. This may take a few years to play out but I think it is a real possibility. I hope you can understand better why I’m sounding quite bearish for the long term future. After all, the 10 year long supper bull market is primarily driven by the artificially created liquidity bubble, not by the fundamental economic development, when all the governments around the world are printing money like there is no tomorrow. If you understand this, then it won’t be too difficult to understand the serious consequences to the stock market when the liquidity (the blood to the market) is drawn out in the US as well as in other countries across the globe. The somber situation in Italy is just a time bomb waiting to explode. I just don’t know the exact timing but I know with quite certainty (at least for myself) that the clock is ticking and fast!           

Where is the trade war?

Were you scared? Based on the remarks of talking heads in the past few days, I get the sense that most of people were really scared! Indeed, the headline news was scary enough: a trade war has started today with the US tariffs on $34 billion worth goods taking effect and China made the same tic-for-tat retaliation on the US exports. On the surface it really looks like a trade war but I maintain my humble opinion that this is just a noise from the big economic scale and the current battles will only accelerate the process to reach a comprise between the two parties in the months ahead. If this were a real trade war for the US, S&P would have crashed by 15-20% or even more. Why so? Well the last real trade war occurred over 80 years ago in 1930s and the US market was brought down by over 50%, triggering a 20 years of deep depression. That’s how a real trade war will lead us to. But S&P jumped nearly 1% instead today! Apparently the market is not worried about a trade war at all!!

As I said, Trump is not a real politician at all. He is an acumen businessman. As such, he is doing something no any other professional politicians dare to do: taking advantage of the booming US economy that no other countries can match to initiate seemingly aggressive trade conflicts with other major parties and force them to renegotiate. After all, the current global trade order that all other parties are very comfortable with is established on the extreme imbalance at the expense of the US interests. No previous presidents from either side dared to do anything to fundamentally change it because it might have costed their votes. Professional politicians are all short-sighted by nature and you cannot expect them to change anything if it means hurting their short-term votes. Trump is the only one I have seen so far who dares to challenge the political norm as he knows very well that the other parties will lose much more if not comprised. We have seen a 25% crash from the Chinese stock market while the US market, although seemingly very volatile, has virtually done nothing in the past couple of months when the “trade war” fear is escalating. We now see the possible zero tariff trade deal with the EU on cars, an idea offered by Trump. I have no doubt something in this nature will happen between US and China in the weeks ahead. Apparently this is what the market also telling us, folks! Yes, the conflicts may further escalate to make one fear that it is out of control and a full blown trade war will happen. This is exactly the time I think a more favorable trade deal for the US may be made, i.e. the worse (from the headlines) the better (in reality)! Talking about the Art of Deal!!

With this belief in my mind, I was a bit aggressive in the past few weeks to buy at each major dip. So far the reward of this fear trading is fantastic. I even believe now is a good time to buy Chinese stocks, a contrarian speculation of course.