Less Than a Cold War, but More Than a Trade War

One of the great things about working at Academy Securities is the discussions I get to have with our Geopolitical Intelligence Group. It is a group of 11 retired generals and admirals who work with us on geopolitical issues. Their network of connections (particularly with this administration) and way of thinking has been incredibly helpful to me on the matter of trade. They were influential in my decision to turn bearish in late April on markets. I had my own reasons as well, and my D.C. connections were also pointing to a shift in strategic thinking from our administration. As I wrote on real Money Pro on May 13, we Crossed the Rubicon in terms of our dealing with China. The U.S. is now treating China as a Strategic Competitor. This is what takes us beyond a mere trade war and into the realm of defense, security and long-term global competitiveness. Huawei is getting caught up in national Security -- for good reasons. I am hearing that President Trump actually has a lot of support from the semiconductor industry. They may lose in the short-term, but I believe they are supportive of drawing a line in the sand. While I don't want to rehash this, here is a short list where at this moment in time, China and the U.S. are at odds: Fighter jets to Taiwan. Venezuela's leadership. Oil from Iran. North Korea. (This is less about being on opposite side, than us needing China.) Militarizing islands in the South China Sea. Intellectual Property Theft. If the administration starts looking at our relationship with China holistically and takes into consideration its own determination of China as a strategic competitor, then we need to prepare for a much longer battle. As the recent noise around rare earth metals suggests, the China needs us more than we need them mantra is a fiction. Ultimately, both sides need to work together. This may be a case where the short-term damage to markets may be for the best in the longer run. We may emerge with a deal with great upside for our companies and our country. That isn't unrealistic, but I do think no pain, no gain applies to the situation. Look for more downside, as a trade deal gets priced out of the market and then we can rally. Realistically, I think this is a process that drags out over a year or longer. I was somewhat facetious about the timing when I suggested binge-watching Survivor for clues to our strategy, but I do think President Trump has a lot of incentives to fight hard until closer to the election when any deal would help a lot. Mexican Standoff I think starting a potential trade war with Mexico is a disaster, though. In the Art of No Deal I pointed out what a positive it was that the president had toned down rhetoric on Mexico, Europe and Japan. That took a turn for the worse on Friday. You don't need to be a general, retired or otherwise, to know that wars on two fronts seldom work out well. Bearish on Stocks I remain bearish on stocks. My S&P 500 target is 2,630. Logic dictates Treasury yields should be lower, but that is so consensus and completely discounts China's ability to weaponize their Treasury holdings, that I'm at best neutral on rates. If you've owned Treasuries as a hedge for equities -- CONGRATS! But I'd be taking profits here. I wouldn't own High Yield or Emerging Market Bond funds here. I am neutral on leveraged loans and will soon turn bullish there. Good luck!

Less Than a Cold War, but More Than a Trade War

This may be a case where the short-term damage to markets may be for the best in the longer run.

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