Tuesday, June 19, 2018

Trade war portfolio

Trade wars are bad for all. And the guy in Washington seems to take on the entire world at once.  Remember what happened to Hitler when he opened multiple fronts.  It first looked like he might win; then it all collapsed. The trade wars also strengthen the U.S. dollar but what does that mean for U.S. corporate profits?  Yes, they will likely decline in spite of Trump’s tax reform. So, sell U.S. stocks but hold on to the cash in U.S. dollars. 
Even if oil doesn’t further rise in price, unlikely, our oil producers get paid in U.S. dollars and pay expenses in cheap Canadian dollars.  The same with any other exporters. High oil prices are like high interest rates, it will slow the economy.  Hampered by uncertainty and falling corporate earnings, I don’t think the Fed will raise interest rates further or at least not 4 times. This will put a cap on the U.S. dollar exchange rate. A weak stock market, weak corporate earnings and a rising or peaking U.S. dollar will weaken the U.S. economy.
China will suffer as well and with all the uncertainty and damage of the trade war to its economy, it’s stocks will decline from already cheap levels. A HUGE buying opportunity in the coming months! This maybe the best time to rein in China’s nasty trade policies.  And the U.S. is the country to lead us, whether we like it or not. In the earlier decades the world benefited in many ways from a prosperous China. We kind of ignored its nasty trade practices and its dictatorial leadership including human rights violations. Now that is has grown up to the world's 2nd largest economy that is no longer acceptable. 

I am not sure that a true democracy such as Trudeau, Friedland and many European countries tend to aspire will be the political system of the future. The recent pipeline spat illustrates where that leads to. Strangely enough, I think that a stronger central government with stronger party discipline may be better. As long as that government avoids interfering in our lives, which nearly sounds contradictionary. But a strong federal government that stays within a limited mandate and that better controls the undisciplined behavior of our provincial governments and the undermining tactics of many special interest groups is probably the best of both worlds.
Canada, amongst others, may pick up the slack caused by China’s import tariffs on U.S. agriculture. We also may be in a stronger position with the NAFTA negotiations than we think. Trump's harsh treatment of Canada and Mexico may have been a warning salvo because he has an exposed weak back. Ultimately, all this uncertainty is likely to strengthen Gold even if it is not initially obvious when expressed in U.S. dollars.  There is a good chance that Canada will actually benefit from the Trumpean adventures. Don’t panic, sell some of your weaker U.S. stocks before it is too late. Sell your U.S. ETFs and hold U.S. dollars until the overall situation is becoming clearer.
Next year, there is Canada’s Federal election and that of Alberta. B.C. is unstable and thus, as already started in Ontario, prepare for major political changes here in Canada. I am nearly sure that Alberta’s NDP is gone. There is a good chance that Trudeau will also be gone; but with the Andrew Scheer /Maxime Bernier rift matters are a lot less clear. Andrew Scheer is not a strong leader with even less Charisma. I am sure his latest political move, ousting Bernier will cost him dearly in donations and other support. His supplications towards a bunch of Quebec farmers is not viewed positively in the rest of Canada. Quebec will always behave like the enfant terrible; counting on its political support is a high risk game.  Let’s hope Scheer will see the error of his ways, makes peace with Bernier and boot the Quebec farmers (before they dump him).
Over the longer term, I am optimistic about Alberta with a 2001-2008 style of commodities boom and a relative weak Ontario that over the next few years will have to content with the fall out of its past real estate boom and the policy follies of the recently defeated Wynnie-government. Thus, sell U.S. stocks, hold on to Canadian stocks – in particular gold and oil producers but also agriculture. The banks will, like nearly always, do fine as most mortgage damage will be carried by CMCH. Of course, these are just speculations because I don’t really know the future. However, the above seems to me like a decent scenario. Like any self-respecting prognosticator, I will adjust my views many times, if not daily.

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