It's all about Geo! No, not GM's ill-fated Korean-imported nameplate from the 1980s, but geopolitics. As the world's leaders gather in Osaka for the clown show that is the G-20 summit, geopolitics and trade tensions will drive the markets.
Brazil's firebrand president, Jair Bolsonaro, and his team set the tone for this weekend's meeting when a member of his advance team was caught in Spain with 79 pounds of cocaine on a Brazilian Air Force plane that was making a stopover en route to Osaka.
This is what we, the people of Earth, are dealing with. Somebody voted for these clowns. When they stay out of the markets, it is just entertainment, but as trade war tensions simmer, this can have a real impact on corporate profits and thus equity valuations. So, the markets will speculate on potential trade war resolutions, but, of course, it is merely speculation since no day-trader is going to sit in with President Donald Trump and President Xi Jinping.
As I am setting up my new trading venture, Excelsior Capital Partners, I am looking to invest with a contrarian bent. As the market rises this week on hopes for positive outcome from Osaka, the logical play is to bet against anything happening. These are politicians, after all. So I will "fade" Osaka and head into the weekend with a short bias.
Focusing on U.S. equities only is of course a myopic way to invest, and by reading my Real Money columns you have learned that I am interested in all markets. This year's rally in the global bond markets has been a thing of beauty, and I don't think we have seen the end of it.
So, with negative interest rates returning in Germany and Japan and the U.S. 10-year Treasury note hovering at a 2% yield, it is important to remember there is no limit to bond pricing. Once the Rubicon of actually paying a government for the privilege of holding one's money (it is mind-blowing to step back and conceptualize this) the genie has been let out of the bottle and it is full speed ahead.
So, I am going to hold bonds to balance my short exposure to equities and focus on another market that is always driven by geopolitics. While the G-20 is drawing all the attention, Monday's OPEC meeting in Vienna has been overshadowed. Oil prices have had a tremendous rally in June as risk-on sentiment has returned to the markets. I believe that rally will continue. Iran just can't keep shooting down U.S. drones and having its Houthi proxies in Yemen attack Saudi soft targets like airports. The endgame is war, no matter how limited the definition. Any conflict in the Middle East is a bullish indicator for black oil.
So, I am very constructive on oil at the current Brent/WTI level of $66.40/$55.43 per barrel. How does one set up a portfolio to play a short U.S. stocks and long sovereign bonds and commodities world view? Well, I am doing precisely that today and so as not to front-run myself, I won't report on my trades until another Real Money column. That article will contain security-specific recommendations to align your portfolio for a wild and woolly third quarter, so please check this site again then.
