When I was a young kid living in West Texas (El Paso to be exact), I remember having these wonderful dirt clod wars with my friends. During these “wars,” your closest friend became your enemy for an hour or so. The fort you built was your safe haven as dirt flew. You learned quickly positioning and posturing became important.

What matters in child hood dirt clod wars matters in global politics. We contend that we see that today as the United States contends with our global trade imbalances with many countries from China to Mexico to our friends to the North, the Canadians — eh!

Trade is essential to an capitalistic economy. However, when trade becomes unbalanced for a long time, a gradual weakening of the economy begins to take place. This can be a slippery slope as trade imbalances are a money vacuum and someone else is holding the handle.

The chart below is the trade balance for the united states for the past several decades as published by the U.S. Bureau of Economic Analysis. (1) Over the past several decades, the US has been running large – $40 to $60 billion – trade deficits every year.

One way to think about this is to make it personal. If you own a business and bought five times as many goods from your neighbor’s business than they bought from you, year after year after … you would most likely reassess the relationship.

In doing so, positioning become important. How do you come to that mutual agreement? In doing so, there will be uncertainty as the norm is being challenged and changed.

In todays world, we contend this is happing as the Trump Administration looks to reassess the relationship with our major trading partners. This has the impact of causing volatility as the unknown outcome of such moves is uncertain. We have seen this recently in most global markets.

In most negotiations there is some level of posturing, using one’s leverage, setting minimums that are acceptable etc… Most of us have negotiated something in or lives – a new car, a house, something where there is a counter party. These are common posturing tactics in making an acceptable outcome. In fact they are called out in Trumps book, “The Art of the Deal” in Chapter 2. (2) Remember the anxiety of negotiating the purchase of a car?

Well Mr. Market’s anxiety when the US is renegotiating a trade imbalance comes out as volatility in prices vs butterflies in your stomach. We see this happening today.

So what do you do? How do you get through?

First, remember that what ultimately drives stock prices are earnings – through the long term. The chart below shows the growth of US corporate Earnings over the last 10 years. (3) Notice a trend? Yep upward about 90%. Expand the time horizon and the growth becomes more pronounced.

Second, remember where we are in the business cycle. We have written about this before and you can find it here.

Finally, look for assets and investments that are not directly connected with dependency on how a trade negotiation might fair. There are different relationships between industries and their exposure to trade negotiations. Some might have an exemption and not be affected at all!

In looking forward and positioning our client’s assets, we are looking in specific areas that follow this guidance. Small and Mid-Cap stocks, which also may have some benefits to the Tax Reform Act. There are others as well.

Some additional things we are looking at on the horizon are: how final trade agreements and the US deficit might impact inflation, and the mid-term elections might impact client portfolios. We will conquer these in future posts . . . stay tuned.

As in the dirt clod wars in years gone bye, friends begets friends on a new level of understanding and the relationship continues. I feel confident the world isn’t coming to an end just yet . . . the sun will shine again tomorrow.

If you feel that these topics are not being addressed in your financial strategy, feel free to give us a call.

If you are a client and have questions on specifics from the general discussion above, call and we will explain in detail.

Disclosure and Sources

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

 

Disclosure and Sources

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All investing involves risk including loss of principal. The prices of small and mid-cap stocks are generally more volatile than large cap stocks. No strategy, including rebalancing and diversification, assures success or protects against loss.

  1. FRED: Trade Balance: Goods and services, balance of Payments, June 2018
  2. Art of the Deal, Chapter 2. Published 1987 Random House Publishing.
  3. Trading Economics and the US Bureau of Economic Analysis Annual Report

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