Not the best way to wake up.
Sure, the sun was shining. One bird was merrily chirping on my porch. My coffee was brewing.
But … we were officially in a trade war with China.
Just after midnight on Friday, July 6, the Trump Administration’s long-threatened tariffs against $34 billion of Chinese goods kicked in. And the “largest trade war in economic history” began.
Beijing immediately retaliated by imposing a similar 25% tariff on 545 U.S. products worth about the same $34 billion price tag. The country even lodged a case with the World Trade Organization.
My mind was whirring: Is this just a temporary squabble? How could I trade this? Most importantly, will this kick off a recession … and the long-awaited bear market?
Luckily, I work in an industry where I can easily reach out to some economic and trading experts. So that’s what I did.
I instantly received some keen insights. So today, let’s delve into what seven experts think this trade war means for you — and your portfolios.
The Down Side of the Trade War
Michael Carr: “Prepare for a bear market by the end of the year.”
U.S. tariffs have historically protected some jobs while hurting others. With that in mind, tariffs are only a problem if sentiment about the job losses turns negative.
Remember: In 2002, a bull market began even though steel tariffs resulted in job losses. In that case, tariffs were introduced during a bear market to alleviate the pain. There’s a lot of controversy over this action now. But ultimately, people saw it as the government helping — and stocks rose.
So, we could see higher stock prices if consumers believe the tariffs are benign. But it’s unlikely in the long run. These tariffs are meant to punish other countries rather than to help U.S. workers.
That means it’s time to prepare for the worst. Job losses and tariff retail costs will be front-page news. This is the recipe for a bear market, which should start by the end of the year.
Jeff Yastine: “This could mean a U.S. recession by next year.”
I don’t see the tariff war having a big immediate impact on the U.S. economy. I believe the broader stock market has already discounted much of the news. Some industries have been targeted by the Chinese (like soybeans), while others have been left largely untouched.
But in the event this situation drags out over an increasing number of months, it will create problems for the U.S. economy in 2019 and beyond. Global supply chains would need to be reconfigured. Old joint ventures in China would have to be written off at a loss. U.S. companies would likely pull back on investments and hiring while they assess the new uncertainty of global trade … with a U.S. recession the likely result.
Chad Shoop: “It could be the start of a global recession.”
If this tit-for-tat trade war expands to other countries, and includes other measures to limit trade, then we will have a full-blown global trade war on our hands. This won’t be a dire situation at first because protectionism does what it is meant to do — boost our economy.
America will bring in more jobs through these tariffs and may keep dying industries or uncompetitive processes afloat a little longer. However, that will help drive growth for only a year or two.
As inflation keeps rising and growth doesn’t follow, we’ll end up with the only outcome of a global trade war — a global recession and an extremely gruesome bear market.
The Upside of the Trade War
Matt Badiali: “This trade war means it’s time to buy copper.”
The impending trade war between the U.S. and, well, everybody else has terrified commodity markets. Copper’s price plummeted as the deadlines approached. Today, it’s down 13% off its recent high. This fall clobbered the big producers: companies such as Southern Copper (-21%), Freeport-McMoRan (-15%) and Glencore (-21%).
So we have an excellent opportunity to buy copper producers again.
That’s because copper demand isn’t going away simply because of a trade spat. The trade war will be a blip in time. But the rise in copper demand will be huge and long term. There is no question that we are moving toward more electrical consumption. As cars and trucks become electrified and demand for batteries grows, so will copper consumption.
At the same time, the long period of falling prices, from 2011 to 2016, stunted investment. Supply can’t keep up with demand growth. Copper prices will rebound strongly. Use this trade war dip as a buying opportunity.
Paul Mampilly: “It’s just another mega trend that will be a boon to certain businesses!”
This trade war is going to change the way people think — making them view markets more locally and regionally.
In so doing, it’ll boost the adoption rate of many of the technologies I write about. For example, 3D printing will see more interest because we’re now more focused on manufacturing locally. Likewise, we’ll have the opportunity to implement more drone and autonomous transport robots to deliver regional goods.
So, ultimately, this kind of shift benefits small- and medium-sized businesses, while hurting the big businesses that have huge, global supply chains. Think places such as Walmart and Apple.
This is a massive shift, where the companies that can understand the repercussions — and adapt to them — will do great. While others will fade away.
In many ways, this trade war is just another disruptive force in a world, an overarching mega trend. And that means there are plenty of ways to profit.
Ian King: “Don’t panic yet. We’ve seen this pattern before.”
For the past nine years, the Energizer Bunny market has faced one potentially negative event after another: European debt crises, the fiscal cliff, sequestration, Fed tapering, shale blowup, North Korea missiles and (insert European country here) elections.
In the face of all this headline hyperbole, the stock market has kept going…
Now, the U.S. 10-year real interest rate is historically low at 0.70%, meaning you don’t make any money in the bond market. You do even worse in cash.
The lack of investing options engendered this decade’s favorite acronym, T.I.N.A.: “There is no alternative” to stocks.
In each of the above scenarios, the playbook looked the same — the market staged a short-term pullback on higher options volatility, while investors freaked out. Eventually, buyers reappeared chanting the T.I.N.A. mantra — and the uptrend resumed.
As long as dip buyers are rewarded for using that playbook, it should continue working for now.
What to Do Now
Ted Bauman: “It’s time to listen to expert analysis to stay ahead of Wall Street.”
It’s important to look at the trade war in the context of overvalued equities. The run-up in U.S. stock prices over the last few years has left many firms vulnerable to panic selling once hidden trade vulnerabilities are revealed — as has happened to chipmakers already.
That makes it critical to pay close attention to what expert analysts say. So I urge you to keep an eye on our analysis in the coming weeks. It’s the experts who will spot those vulnerabilities before the rest of the market does, and help prepare your portfolios well in advance.
That does it for today, but I’d also love to hear your thoughts on the trade war. Do you agree with these expert opinions? Do you disagree with any?
You can always drop me a line at SovereignInvestor@banyanhill.com or leave a comment on the website.
Managing Editor, Banyan Hill Publishing