- We can expect more and higher tariffs from the White House.
- The markets are fleeing stocks for the safety of bonds and Treasurys.
- My defensive investment is up a little over 20% in the past year.
A year ago, I decided to add a defensive asset to my personal portfolio.
I was becoming increasingly concerned about all the headwinds facing the stock market.
Global growth was slowing. The U.S.-China trade war had just begun. And although U.S. gross domestic product figures looked superficially strong, my analysis showed that consumer and corporate demand for goods and services was weaker than it had been for a decade.
Most of all, historically unprecedented stock buybacks by U.S. corporations told me these companies lacked faith in the future.
After all, when the people whose job it is to invest money in pursuit of future profit decide that it’s better to give that money away, smart investors should take notice.
Here’s how my defensive investment has performed since then:
Defensive Asset vs. the S&P 500
As you can see, I’m up a little over 20%, while the S&P 500 Index is right back where it started a year ago. My gains have been especially strong since the U.S.-China trade war heated up in June.
This particular asset isn’t one of those fancy inverse exchange-traded funds that profits when the market declines. Those can be useful, but they require constant attention, like a high-strung little dog.
I’m about to double down on my investment in this asset.
That’s because our political leaders are steering us onto the rocks of a potential market meltdown.
And when you see rocks looming up ahead, the smart thing to do is put on a life preserver.
Pain Before Gain
No matter how worthy the goal, President Donald Trump’s “Tariff Man” approach to negotiating with China is going to cause a lot of pain before we see any gain. That puts a premium on defensive positioning right now.
The U.S.-China trade dispute is what military strategists call “asymmetrical.”
The Chinese government is a de facto dictatorship. The Chinese Communist Party leadership can manipulate almost every variable available to them, including tariffs, monetary policy, investment flows, state support to specific sectors and companies and above all, the value of the yuan. They aren’t accountable to anyone except themselves.
Trump only has tariffs. And he only has that because he’s claiming emergency powers that Congress is free to override if it chooses.
He can’t directly influence monetary policy or investment. He can’t intervene in specific industries and companies, his subsidies to the agricultural sector notwithstanding. And he certainly can’t manipulate the U.S. dollar.
Markets know this. So when China’s central bank adjusted the value of its currency down to its lowest point in over a decade, investors feared that Trump would respond with another tariff escalation.
That’s why markets reacted by fleeing stocks for the safety of bonds and Treasurys — causing the S&P 500 and the Nasdaq Composite Index to fall 3% and 3.5%, respectively, by the end of the day on Monday.
And they’re likely right. We can expect more and higher tariffs from the White House.
But the Chinese leadership has a secret weapon that the White House lacks: direct control over the yuan. It ensures that the cost of U.S. tariffs falls on U.S. consumers and companies, not on the Chinese.
Allowing the yuan to depreciate against the dollar neutralizes Trump’s tariffs.
Tariffs are supposed to raise the cost of Chinese exports in the domestic U.S. market so that Americans buy less of them. But a fall in the value of China’s currency lowers the cost of those exports for Americans — thus offsetting the effect of the tariffs.
Indeed, the People’s Bank of China explicitly said its new lower-value target for the yuan was retaliation for the “unilateralism and trade protectionism measures and the imposition of increased tariffs on China.”
When Elephants Fight, the Wise Ant Hides
The U.S.-China trade spat is more than just a dispute over imports and exports. It’s a contest between different political systems and views of history.
And in the short term, the Chinese have the advantage.
As highly trained students of Marxism, the Chinese leadership takes a long view of history. Their goal is to ensure that China becomes the dominant power of the 21st century, and they have a plan to achieve it. Because they’re unaccountable to anyone but themselves, they can pursue that goal at the cost of short-term pain to Chinese companies and consumers.
As citizens of a representative democracy, we must cope with the fallout from this trade war as individuals. Not all of us are politically influential farmers who can receive big subsidies from the federal government.
That’s why I, as an individual, took the defensive step of investing in the asset I mentioned at the beginning. You should be doing exactly the same thing.
That asset is gold … and it’s time for the golden metal to shine in your portfolio too.
Editor, The Bauman Letter