The stock market is falling in response to a step up of the trade war. Negotiations seem to have stalled as both the USA and China refuse to budge over issues that they consider essential to their national interests. We alluded to this sort of situation in our article about what happen if the trade war becomes permanent. The American dominance of the global economy is not an assured thing and neither is the dominance that China wants to achieve. But both nations are squaring off to fight for what they want. The down side for the USA is reduced global economic and political power. The downside for the folks who run China could be social unrest and loss of power currently held by the Chinese Communist Party. That having been said, are your investments safe from tariffs which are likely to continue or even become worse?
Investing in a Prolonged Trade War
Fortune just published an article about how to invest during a trade war. They start by looking at Amazon versus Apple.
Goldman Sachs gave its take early last week, forecasting that services-oriented companies (think Amazon, Google, and Microsoft) that are â€œless exposed to trade policyâ€� will likely have an easier time than goods-producing companies (such as Apple, ExxonMobil, and Johnson & Johnson) that are more vulnerable to trade headwinds.
While thatâ€™s a largely accepted view, equity and investment strategists who spoke to Fortune noted that itâ€™s a little more complicated than that.
â€œThe key questions to ask are: whatâ€™s priced into the market right now, whatâ€™s the direct earnings and [price-to-earnings] multiples impact, and whatâ€™s the long-term impact?â€� according to Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch.
Has a Trade War Been Priced into the Stock Market Already?
The first issue to consider with any investment is how much has a prolonged trade war already been priced into that investment? The fact that the market fell in response to the recent tit for tat increases tells us that not all of the risk of a trade war had been priced into the market! But, to the degree that companies have adjusted their supply chains and where they are trying to sell their products (not in China), those investments will better weather the coming storm.
Which Stocks Will Be Hurt the Most by Higher Tariffs?
In general, service companies like Google, Amazon.com, or Microsoft will tend to have fewer problems than companies that sell tangible things. These would include ExxonMobil, Johnson & Johnson, and Apple. Obviously, companies like 3M that are highly diversified to all corners of the globe will do better than companies that are trying to focus entirely on China.
Safe Haven Investing in a Trade War
Are your investments safe from tariffs if the companies only do business in the USA? Here we are talking about utility stocks, real estate investments like REITS or home builders who work exclusively in the USA. Health Care is another promising sector despite the Medicare for all possibility being talked about by Democratic candidates for president. Defense stocks are another possibility for safe haven consideration, especially if trade tensions spill over into heightened military threats.
Investing without Losing any Money, Trade War or Not
Are you investments safe from tariffs when both the USA and China seem to be digging in for a prolonged fight? How do you handle your risk when a single tweet by a Twitter-obsessed president can send stocks dramatically up or down? In the context of investing in general we have written about how to invest without losing any money. The first answer is to put money in an FDIC insured account at your bank, preferably a ladder of CDs. Next, you can buy US Treasuries, again laddered. AAA corporate bonds come next. There are only two US companies that have this rating, Microsoft and Johnson & Johnson. And, the fourth choice in our article was to apply the concept of intrinsic stock value as well as you can to this situation and your particular investments with the idea of investing for the very long term. And, in the cases of bank CDs, Treasuries, or AAA bonds, they should be held to maturity. Of course, in the case of Treasuries or AAA bonds, interest rates could plummet and suddenly make them profitable to sell.
How Long Could the Trade War Last / How Badly Could It Hurt Your Investments
Trump, and many others in the USA, are tired of funding the rise to power of China. China is viewed as not only an economic threat to the USA but an existential threat to the democracies of Europe, the Americas, and elsewhere (India especially). The trade war, according to Trump has been going on for decades and the USA has been steadily losing. However, there two previous major power issues that bear on the current trade war. One is the cold war between the USA and the Soviet Union. The other is the rise Japan as an economic power and its near collapse. The common thread in how these situations worked out has to do with money and debt.
Winning the Cold War by Driving the USSR Farther and Farther into Debt
During the 1980s the USA ramped up its â€œStar Warsâ€� missile defense program forcing the USSR to spend money that it could ill afford to spend. When social unrest in Eastern Europe became overwhelming, the USSR essentially told the leaders of its puppet Communist states that there was no money to support them, keep the borders polices, or send in the tanks such as was done in Hungary and Czechoslovakia years before. Today the USA has put sanctions on Russia to ramp up pressure and is also playing the money and finance card with China.
Japanâ€™s Economy Collapsed Due to a Huge Debt Load
This is the other example that comes closer to why the USA is pursuing a trade war with China. Japan was rising towards dominance as an economic power. Although they were and are US military allies, they were an economic threat. What happened to Japan was not orchestrated by the USA but it was instructive. Japan had a mountain of debt, much of it â€œoff the booksâ€� as deals between private parties or hidden debts within the banking system. When this debt situation collapsed, almost 30 years ago, Japan went into a period of economic stagnation from which it has still not recovered.
Applying Japanâ€™s Collapse and Cold War Strategy to Chinaâ€™s Threat to US Dominance
China has a stronger economic system that the USSR had but they have a mountain of debt and it is increasing. Their economic miracle has been funded by borrowing, manufacturing, selling to the world, and then borrowing more. In recent years, their debt has accelerated. The risk to China is that their entire financial system will collapse taking their social contract with the people along with it. The fact of the matter is that people in China are not in love with the Communist Party leaders unless the economy is growing. If the financial system in China collapses there is a risk that the social system will collapse as well. Thus, the Chinese are digging in to protect the dominance of the Communist Party at the same time that their largest customer is putting tariffs on their products.
All of this having been said are your investments safe from tariffs? Our point in this discussion is threefold. This could be a long trade war for it has to do with basic national interests. It could become even more nasty. And, you need to consider how to arrange and protect your investments as it plays out.