Global markets are once again in turmoil. Why? At a time when the U.S. and China seemed poised to conclude an agreement to resolve their trade differences,
caustic threats from President Donald Trump have not merely undermined those negotiations but raised (once again) the possibility of an all-out “trade war” between the United States and China.
Irrespective of one’s political leanings as an investor, certain facts are beyond contradiction. Donald Trump is abrasive and unpredictable. He has alienated many of the United State’s allies and enraged its adversaries. He is a divider not a unitor.
Given these facts, how does the intelligent investor adjust their behavior to take into account “the Trump factor”? The starting point is that investors need to adopt a more defensive posture. While Trump likes to boast about being responsible for higher valuations in U.S. markets, that boast doesn’t withstand close scrutiny.
The S&P 500 has basically been flat since the beginning of 2018. And the recent rebound in U.S. valuations that has resulted in new highs marginally above previous levels is not due to the health of the U.S. economy. Rather, it’s the one-time effect of a jump in corporate profits resulting from a large tax hand-out to Corporate America by Donald Trump. Absent that tax windfall, U.S. corporate profits have been flat since the end of 2011.
Much of these new profits have already been squandered by U.S. corporations, spent on
buy-backs of their overvalued shares. When the steam evaporates from this
artificial inflation of U.S. market valuations, what then?
Stockhouse has previously suggested to investors how to “play defense” in current market conditions:
cannabis and precious metals. For thousands of years, precious metals have been humanity’s ultimate Safe Haven asset class: near-perfect wealth preservation in times of economic crisis and/or uncertainty. As Donald Trump continues to intentionally antagonize the U.S.’s trade partners, not just China, but also Canada, Mexico and EU nations, an economic crisis now seems to be not a question of “if” but just “when”.
Why is cannabis defensive?
Two reasons. First, thanks to 100 years of needless cannabis Prohibition, it will take decades for cannabis normalization to lead to the full integration of cannabis into human commerce. Cannabis is the world’s most versatile and (potentially) most valuable agricultural crop.
Secondly, both of the primary uses for cannabis today – as a benign medication or as a safe recreational drug option – are inherently recession-proof. People tend to maintain spending on their health. And during economic contractions, affluent investors often spend
more on luxury products (such as recreational drugs) as a means of alleviating economic stress.
Are there specific industries for which “the Trump Factor” can be a positive catalyst? Trump has already displayed strong protectionist inclinations. Thus investors can look to companies who could be positively impacted should the United States adopt more protectionist policies.
A recent example here is the current Section 232 investigation by the U.S. Commerce Department that examines U.S. dependence on imported uranium. The remedy proposed by the investigation (with a
final determination now pending) is that the U.S. should mandate a quota of at least 25% of its uranium supply coming from domestic sources.
The obvious way to “play” the Trump Factor here would be to look at near-term, U.S.-based uranium producers, who would be expected to benefit most directly from an affirmative ruling in this investigation. A less-obvious strategy for investors would be to look
in broader terms at the effect of any U.S. protectionism.
Cleary, the investigation is focusing on U.S. imports from jurisdictions with whom the U.S. does not have “friendly” relations, primarily Russia and some other former Soviet-bloc nations. Reductions in U.S. uranium imports from those nations is a strong possibility.
However, it takes a long time for a new uranium mine to be brought into production, due to the much more rigorous permitting and review process for the radioactive ore that is mined in a uranium operation. It would take (even under optimal conditions) at least a decade for the U.S. to be able to ramp up domestic uranium production to meet that quota.
Between then and now, it is very likely the U.S. would want to increase its reliance on uranium imports from nations with whom the U.S. has friendly, stable relations. This means Canada and to a lesser extent, Australia. Thus mining investors may want to play the Trump Factor by also favoring developing uranium companies in Canada and/or Australia.
Politics impacts markets. When there is a figure on the political landscape who is prone to dramatic actions that can (literally) move markets, it would be careless of investors not to factor such a dynamic into their evaluation of markets and specific investment opportunities.
Whether someone is a fan or critic of U.S. President Donald Trump, the reality is that Trump moves markets – and not necessarily higher. With market conditions turbulent and uncertain, failing to account for the Trump Factor in positioning one’s self in markets would seem to be imprudent.
This means “playing defense”, but it also means watching carefully for specific opportunities that might arise either from Trump’s policies or via fall-out from his well-known tendencies to provoke confrontation.
Most readers will be familiar with the ancient Chinese curse: “may you live in interesting times”. Donald Trump has made markets “interesting” for investors. Be prepared.