Alternative Access - April 2020

THE DRIVING FORCES BEHIND TODAY’S MARKETS

4. Trump hints at a resolution. 5. There are conspicuous conversations and calls with Chinese heads of state. 6. The Dow Jones continues to climb, despite a few bumps from coronavirus panic. Regardless of what The Economist or any economist says, this is how Trump is applying pressure — by masterfully using a series of micro-commitments to push China into achieving some sort of congruence with the United States. The more conspicuous the better, so Trump can show the world that he is winning, and therefore so are Americans. He’s masterfully paced this dialogue — right onto the street. Perhaps it was something Tyson taught him to do. The difference between how this was done in the past versus today is that world leaders have the benefit (or burden) of Twitter to consistently reframe their agenda in real time. The media just spins it, packages it, and labels it for intended use and then sells it to you. In effect, “the Trump doctrine” has essentially turned politics from something once considered boring and only watched in assisted living facilities on C-SPAN into perhaps the world’s most awkward reality show that has so much consistent tension you can’t look away.

Last July, I wrote in my 2019 Letter to Private Equity and Venture Capital LPs that rates would go much lower before they would go higher. Here’s my rationale: This is a politically driven Federal Reserve going into a very contentious election cycle. The Trump administration has successfully browbeaten Jay Powell to lower rates to keep the Dow Jones Industrial Average as high as possible. This is what I called the “Trump economic slingshot.” This slingshot is the cumulative effect of President Trump and Treasury Secretary Steven Mnuchin browbeating the Federal Reserve to lower interest rates, but they were tightly wound by tariffs. Once rates are lowered, and the elastic is stretched back as far as it possibly can be, Trump will then remove the tariffs and the economy will soar — perhaps to levels we’ll never see again in our lifetimes.

The Dow is the Trump administration’s barometer for things being good or bad. Not long ago at Bayside in Newport Beach, California, I met up with my good friend Max Gokhman who is the head of asset allocation for Pacific Life’s trillion- dollar platform. Max reaffirmed this position: “Anyone who called me crazy for saying the U.S. will see negative rates during the next downturn should put Ben Bernanke in my cell at the asylum. At a December Brookings lecture, he said that ‘ruling out negative rates for the Fed is unwise.’” Lo and behold, look what happened. Rates have been slashed, and if you have marginal to good credit, you’ll notice that the credit card companies are now not offering you a lower interest rate, but more leverage. So here we are with unconventional diplomacy. You’re seeing this play out now in real time, and it looks like this without the filth or filters: 1. There’s no action from China on trade. 2. Trump tweets threatening tariffs and taxes and other toughness.

3. Equity markets (and anything liquid in sympathy) are selling off.

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Trump knows this and will firmly place the incredible pressure on China, branding it all kinds of bad things as he continues to browbeat Beijing using his patented “Mean Girls” diplomatic conventions to do what I believe is his lifelong mission now: avoiding any possibility of a Thucydides’ trap. All the while, Hong Kong continues to smolder, perhaps with a sharp eye to see how President Xi responds. Think about it: Anything short of a humane solution and China risks Trump effectively branding China as a cheater for as long as he can tweet (and thereafter). This could effectively influence entire industry migrations to other areas of the world where there are “good people.” The Chinese are not necessarily cheaters themselves, but the industry could migrate to people perceived as better than the Chinese in the eyes of the world. In effect, you could argue that the coronavirus epidemic could be the tipping point for the supply chain leaving China. What does this mean? Capital flowing into the U.S. will continue to flow under Trump. It’s the safest place in the world for rich people. The one thing Trump can’t do is stop a protracted massive sell-off that should happen as a result of a Black Swan. Now, back to Twitter.

A Blast From the Past

Some of you may remember my old partner and general counsel, Fred Waid. Well, Fred has come back to the convent and has been based in our Las Vegas office for a while now. Fred and I did an institutional raise back in 2011 and ran, at the time, what was considered to be one of the more prolific special situations funds that focused on distressed commercial real estate that year. For those interested, you can go to MakingTheYield.com to see what this structure looked like. All the fun we had with this was the reason for I wrote a book afterward called “Making the Yield: Real Estate Hard Money Lending Uncovered.”

taxes, which is why we promptly moved from our office at 156 5th Avenue to Las Vegas. Fred is a trusted confidant. I am very happy, and we are very fortunate to have him back. We’ve already started the year off with a bang with Orange County and a few other things in our venture fund. Our path forward is to remain doing what we’ve been doing for almost the past 20 years, investing in world- class statement assets managed and operated by experienced and audited operators.

Candidly, if I can’t brag about it, you’re not going to hear about it.

The barrier to entry is a little higher, but so are the risk-adjusted returns — accounting for strong operator experience. The peace of mind you’ll get, frankly, you’re not going to get in too many other areas today. Thank you for your consideration. I value your trust and greatly appreciate our relationship. If you need to schedule a time to talk with me while I’m hunkered down and not traveling, please feel free to visit bit. ly/2OM1tem to access my schedule.

It is also where I learned how it feels to be emancipated from New York

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TWI TTER I S A PROXY FOR DEC I S ION-MAK ING

Can you imagine if Twitter existed in the 1960s during McNamara? That would have changed history and perhaps healed the soul of the country. And Trump uses it to his advantage every single time.

China has several economic issues that it’s forced to deal with, such as surging domestic food price inflation, while attempting to safely de-lever its massive $40 trillion financial sector in the coming years. Time is not on their side. And that is before even considering anything about the economically crippling coronavirus that recently came about.

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