This column needs to be somewhat of a hodgepodge of ideas, because the one consistent thesis that has moved our investment needle for the last year and a half – the supply shortage in crude that continues to emerge – hasn’t shown any signs of weakening. But some other, trade associated ideas have come into the picture that we must be aware of, and use to fine tune our investment strategy.
These are three main ones:
First, there is the continuing threat of a trade war. While President Trump had once backed away from the plan of steel and aluminum tariffs when it was announced in March, since May he has again signaled wide-ranging metals tariffs to go into effect starting on July 7th. Since those signals in May, most traders, and in fact the markets at large, have been treating the tariff threat with sangfroid – assuming that again the President would have to retreat from a trade war with our Allies and China. And while the White House has backed down from additional threats of intellectual property penalties on Chinese electronics and tech, the plans for the metals tariffs still remain in place.
Understanding that the targets of these tariffs – both our allies and China – have indicated that they will strongly retaliate with tariffs of their own and, in the case of China, with perhaps other even more targeted measures, it is tough to see another way out of this dilemma than for Trump to at some point blink and step back from this frankly economically unhelpful path. Yet two banks – JP Morgan and Morgan Stanley – have released client notes this week warning investors to reduce exposure, now believing that President Trump may not, in fact, turn away. We’ve seen several grains and metals commodities begin to crater on the possibility of a trade war, and if it does begin, oil will not be far behind.
Second, there is the concurrent rise in the dollar – which has helped to pressure the livestock/grains/metals contracts lower. What has been interesting to us, of course, is that the big rally in the dollar has done nothing to slow the big rally in oil – this after years of being told that the dollar and oil were inexorably inversely correlated. Now, I have been one of the few voices who have maintained for years that the dollar’s moves have impacted oil almost entirely because of the algorithmic trading programs that have set upon it – a sort of “build it…