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Trade wars and ETFs: let the battle commence

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The United States has gotten itself into a trade war negotiations mess. 

Will it manage to dig its way out of the hole and will ETFs play a role? David Kotok, chairman and CIO, Cumberland Advisors examines. 

China: the enemy?

There is an old adage: “When you’re in a hole and it’s getting deeper, stop digging!” Trump and Co. know they’re in a mess but don’t know how to stop digging, so they have been floundering while the adversary (China) outplays the US.

Now, we don’t defend China. It is an authoritarian regime without electoral-calendar constraints. And the United States has clear competitive and security concerns.

Trade wars cost everybody. The IMF estimates that the US-launched global trade war has withered worldwide growth rates by about 1%. And the pain is growing daily.

That said, we think the US picked the wrong type of fight and must change its terms to win. We would simply separate intellectual property from soybeans and lobsters and washing machines.

Be very precise on targets. And don’t punish Americans with a sales tax masquerading as a tariff.

Deal or no deal?

Here’s one of Trump’s thousands of public pronouncements. Please view this video clip and decide for yourself about negotiations and credibility and consistency. Phase one is not a complete deal. We doubt there will be any longer-term, comprehensive deal.

We got into this mess because Trump succumbed to poor and patronizing advice. Here’s Peter Navarro’s tariff-launching speech to NABE. Navarro is an embarrassment to economics professionals, most of whom now consider him a pariah. His heels are dug in, and he is sinking his president. We’re a year and a half into the tariff war – watch and decide for yourself.

Here’s the original Lighthizer tariffs list. Please decide for yourself how well the White House has done in applying policy.

Here’s the original launch by Lighthizer in March of last year: “President’s Trade Negotiator on Steel and Aluminum Tariffs.”

Our message to investors is the ETF space allows for various forms of trade war strategies to be applied efficiently.

Trade wars cost everybody. The IMF estimates that the US-launched global trade war has withered worldwide growth rates by about 1%. And the pain is growing daily.

Stop the digging

Our message for America’s president and his team is you’re in a hole. Stop digging! Get to a truce. And then slowly try to stabilize things. Our message for political challengers in both parties (three Republicans and many Democrats) is talk about trade war policy.

Take on protectionism. Take on isolationism. Stop name calling and get to serious discussion. And get the USMCA passed so Trump signs it. Capex and economic growth require it.

Our message to investors is the ETF space allows for various forms of trade war strategies to be applied efficiently. Here are a few examples. The US healthcare sector has been outside the trade war targets. Healthcare is 18% of US GDP. ETFs can reach that sector from pharma to health insurers to biotech to medical devices. They are a way to diminish trade war risk.

Another strategy is to select small-caps or community or regional banks. They are less exposed to trade war effects. Staying domestic US reduces exposure to the international-risk side of a trade war. US housing and housing finance is another sector choice.

Another choice?

If you think the outcome of the US-China trade war settlement will be positive, there are ways to benefit there, too. ETFs that capture the beaten-down energy sector, including natural gas, would benefit from longer-term LNG contracts between US producers and Chinese buyers. The Chinese need gas; we have it.

The only impediment is the difficulty of achieving a trade deal that has longer-term reliability. So the bottom line is that there are numerous ways to be bullish or bearish or neutral on trade war outcomes. The ETF space allows for any view to be created and invested.

Meanwhile, investors have been celebrating the supposed best outcomes even before they have arrived. The Fed expands liquidity. Interest rates and inflation are low. US employment grows slowly. We don’t see a recession, only slowing growth rates. But the slow growth level persists, as does the damage proliferating from the Trump-Navarro trade war.

David Kotok will be speaking at Inside ETFs in Florida on January 28 2020 on fixed income in uncertain times. Find out more about the event. 

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