I have a very contrary opinion from most analysts on how to play potential U.S. tariffs and trade wars, and my view has largely played out successfully in navigating the markets this year.
Now, I've long argued that President Donald Trump is extremely serious about taking a tough line on trade with China and will continue to generate eye-popping headlines about Beijing and trade. I also said that markets would respond negatively until Wall Street finally realizes what many on Main Street already know -- America can win this thing.
I'll admit that I have a great advantage in analyzing U.S.- Chinese trade relations because I have access to the help of the Geopolitical Intelligence Group at my employer, Academy Securities. That group's work dovetails nicely with what my contacts and direct involvement in D.C. are telling me, which is that China will ultimately back down.
Let's face it, we've actually already been in a trade war for years, but only one side -- China -- has bothered to fire any bullets. So after years of taking and taking, it won't hurt Beijing that much to give back some of what it's won. Even if we prevail in this battle, China will still be winning the war.
My other thoughts:
-- Beijing needs full access to American markets for its Made in China 2025 program to succeed. While pilfering a little more tech along the way might seem like fun, keeping us happy is probably a better longer-term game plan for the Chinese.
-- Trump seriously believes that not only do we have the moral high ground here, but that if we don't draw the line soon, U.S.-Chinese trade will be like a nuclear-armed North Korea -- more difficult down the road. While Wall Street might doubt the administration's resolve, China won't.
-- Beijing knows that if it offers Trump some small concessions ahead of this summer's fund-raising season for U.S. midterm elections, it'll be hard for the president to refuse this "victory."
So, Expect Markets to Change Tack on Trade Jitters
Add it all up and I expect a U.S.-Chinese trade deal to appear in the relatively near term, although I think the agreement will be weaker than what I'd like to see. However, that's a battle for another day.
Now, markets have sold off since January on any "Trade War!!!" headlines, and then rallied on any comments indicating that the Trump administration wasn't really serious about fighting Chinese trade imbalances.
But now, I expect Wall Street to start ignoring the very sort of headlines that caused markets to swoon as recently as last week, instead treating such "news" as mere negotiating ploys. I think the market will start pricing in a U.S. trade-war victory instead.
But as noted above, my guess is we'll only win the battle, not the war. I don't think China will fully deliver the reciprocity and intellectual-property protections that I'm hoping for. But for now, with the markets so mispricing trade, I see a lot of room for equity upside on any U.S.-Chinese trade deal.
And as for fixed-income investors, my current advice on how to position things for a U.S. trade win of sorts is to:
-- Embrace Riskier Assets. Add dividend stocks, REITs and master limited partnerships back into your income portfolio, as stocks' likely rally on any trade deal should be good for risk.
-- Add Floating-Rate Debt. Boost your exposure to floating-rate bonds and loans, as well as to closed-end funds that specialize in floating-rate assets.
-- Beware of Fixed Rates. Decrease your exposure to fixed-rate bonds.
-- Cut Junk-Bond Exposure. Reduce risk to high-yield bonds. They just don't offer good value compared to dividend stocks or investment-grade floating-rate debt.
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