Weekly Issue
I have been telling readers since back in April that China was highly unlikely to go away quietly in the trade morass. The Middle Kingdom holds far better cards than most casual observers want to give them credit for holding.
I am not going to go too in depth into the discussion. My son in law Garrett Baldwin took time out from plotting total Dolphin Dominance of the local 8-and-under girls soccer league to pen an excellent overview of the new cold war between the US and China here.
Daniel Wang’s new book “Breakneck” also takes a good look at the situation for those who want to dive any deeper.
Could this be the ‘event’ that puts the brakes on the bull market?
It could be.
The Cold War between the two nations is going to go on until there is a winner.
From the perspective of a political junkie and not entirely horrible poker player, this is the geopolitical equivalent of Ace King versus pocket 2’s.
It is close to a coin flip.
Think Sugar Ray versus the Raging Bull.
Mickey versus Arturo Gatti.
The Iron Sheik vs. Sgt. Slaughter.
Kong versus Godzilla.
Manufacturing versus finance.
I could go on but you get the point.
It will be an ugly contest.
I am sure that every single Instant Expert of the Internet has an opinion on who will win and exactly what you must do before some random date and time in the not-too-distant future to protect your family and create almost endless wealth.
As an aside, I want you to think of all the investment pitches you have heard over the years that have that kind of “act by this date” messaging.
If you review subsequent events, you will notice that almost every single one of the critical dates passed without anything notable occurring.
Marketing classes teach this kind of “create urgency” BS.
Anytime you hear it, walk away as politely as possible.
Every pundit of every stripe will know how it is going to play out and who the winners and losers will be in this modern-day Cold War.
They do not have a clue how it will play out.
No one does.
Not even the people on both sides who have pushed us this far.
The best approach is to invoke the second most important three words in all of finance, politics and life itself: I Don’t Know.
Everything else is hot air, ego stroking and foolishness.
The question then becomes: “If we do not know how this will play out, what do we do to protect and grow our money?”
The answer is to focus on the most important three words in investing, politics and life itself.
Margin of Safety.
There is no more important factor in investing than margin of safety.
If you get that right, profits become something of a forgone conclusion.
Margin of safety in the cash flow statement.
Margin of Safety in the credit profile.
Margin of Safety in the valuation discount.
There are times when maintaining an adequate margin of safety might involve holding cash or even hedging off a portion of the risk.
Garrett and I have both talked extensively about Black Swan hedging over the years (maybe we should do a podcast on this topic?).
There are times when the embedded margin of safety is so large it is time to plunge in with great enthusiasm and consider adding leverage.
Valuation, credit and price will tell us which is which if we are smart enough to listen.
We cannot control day to day, week to week or even cycle to cycle market movements.
Quite often markets are a complex psychological soup with little basis in reality.
We can control the size of the margin of safety we build into our portfolio.
Margin of Safety is also the single most important factor in trading success, but that’s a discussion for another day.
I have no idea how this plays out.
The continued economic battle between two super powers could mark a turning point for stock prices.
Xi and Trump could exchange friendship bracelets and butterfly kisses in South Korea, and all will be right with the world.
It is also not unlikely that the markets will continue along the path of ignoring everything but the short term liquidity and speculative fervor.
How will this all play out over the weeks and months ahead?
I don’t know.
Thanks to an almost fanatical dedication to the Margin of Safety concept, I am not all that concerned about the financial impact on myself and my readers.
We will not only survive what is next, but we will be in a position to profit from it.
Tim Melvin
Editor, Tim Melvin’s Flagship Report