Investing During a Permanent Trade War

In the last year and a half we have looked at the evolving trade war between the US and China and, to a degree, between the US and everyone else. As the situation has evolved, we are now looking at investing during a permanent trade war. Here is how our thinking has evolved. To begin with, we appear to have been overly optimistic. In March of 2018 we asked what can you invest in and not get hurt by a trade war. At that time our belief was that companies in entertainment, like Disney, are generally safe from tariffs and other effects of trade wars and that companies that have little or no business in China, like Facebook, Amazon, Netflix, and Google are reasonably safe bets. Since that time Disney is up about 50%, Amazon is up by about 33%, Facebook is even, Netflix is about even, and Google (Alphabet) is up a percent or two. Here are more of our thoughts about how this has evolved and investing during a permanent trade war.

Investing in the Trade War That Was Not Resolved

Just a year ago, in a fit of optimism, we looked at what happens to your investments when the trade war is resolved. At that point we predicted a surge in the stock market and all sorts of success for companies that were being threatened by the trade war. Our rationale, at that time, was to look for stocks that would capitalize on reduced trade tensions and, perhaps, better investment opportunities in places like China. Of course, none of that has happened as China, and the USA, have dug in for a long struggle for global dominance.

Reasons for the Protracted Trade War

Last September we seem to have come to our senses and started to consider what happens to your investments if the trade war becomes permanent. We worried about US multinationals that would suffer more from a slower global economy that from a trade war with China. And, we suggested that companies like utilities, which are purely domestic, would be safe havens. However, the larger part of that article was devoted to looking the why the USA and China are having a trade war, the effects of trends like automation on employment, social unrest, and global politics. Anyone who wants to understand what is going on and how the trade war will very likely be a permanent fixture, should look at our comments about the rise and decline of US economic power and the rise of China. As we noted at that time, a major factor is the grip that the Chinese Communist Party has on power in China and its desire to hold onto that power no matter what.

We also looked briefly at social unrest in the West due to automation and other factors and how that is giving voice to demagogues with the potential for social, political, and military disasters!

The bottom line, as we saw it, was that the trade war would be very protracted until at long last the USA and China would come to some sort of mutually unsatisfactory agreement. We are no longer so sure about that.

Tangible Trade War Damage

Still last year, we looked at the trade war’s effect on investment in US agriculture. The loss of China as a market for US soybeans has undercut investments in places like South Dakota where farmers and investor poured money into storage and shipping facilities to sell soybeans to China. Many farmers and businesses will never recover. And, despite China’s assurances that they will buy soybeans again, they are still using it as a bargaining chip to allow them to keep stealing technology from the US or extracting technological secrets as a price for doing business there.

Winning the Trade War and Losing on Investments

Last February we speculated that a trade war “win” would be combined with reduced global trade, a lower trade deficit, and losses in the stock market. This though came from an article in Market Watch which in turn cited economic figures. Thus we could win the trade war and lose on our investments. Because the major concern of the government in this is long term competition with China for economic, technological, and military dominance, this may be a price that the USA will be willing to pay.

Will We Have Protracted Trade War or a Permanent Trade War?

In June we had come to believe that trade war would be very long term. In this view of a protracted trade war, we considered how trade between the USA and China and China versus the rest of the world could be reshuffled and where to invest and what investments to avoid. In this world, issues arise such as China being a major processor of the so-called rare earth minerals use in high tech devices and the reapportioning of global outsourcing to a ABC (anywhere but China) approach. As we noted, these are long term investment approaches and are reminiscent of dealing Russia and the entire Communist block for decades during the Cold War. As with the Cold War, the issue is not specifically a trade war but rather trade warfare for global economic, military, technological, political, and social dominance on the planet for centuries to come.

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