May 20, 2019 | Janus

Big sighs in Ottawa this weekend as the US ended tariffs on steel and aluminum. Just that that. Tweet. Done. The next stop is ratifying NAFTA 2. Then Trump ordered his guys to launch auto talks with the EU and Japan, just one day before tariffs could be imposed. Now there’s a six-month reprieve. New duties are unlikely. After all, there’ll be election primaries happening in the US by then.

So it looks like Trump the global bully is trying to reduce trade war risks so (a) he can focus on trashing China, (b) now that Joe Biden is nipping at his heels and (c) so the stock market doesn’t get spooked and sell off.

He may not have started off as a politician, but he’s one now. And Trump wants to win in 2020. Bad. There’ll be but one issue. The key measure of government to most Americans is the economy, providing the environment in which people can do better. So far, despite the trade wars, the unpredictability, lack of couth, borderline illegality and diplomatic skills that have pissed off most of the world, Trump has delivered. Unemployment’s at a 50-year low. Corporate profits have been robust since the big tax cut happened. The stock market is close to an all-time high.

So far this year the S&P 500 is ahead more than 13%. Even factoring in the Christmas Massacre (a 20% decline), the market is sitting 7% above this day a year ago. The high-water index mark was 2,954 and now we’re at 2,840. The Dow and the Canadian market have similar stories to tell. Investors who snoozed through the 2018 selloff are sitting pretty right now. Those who seized that moment to buy assets on sale have made out like bandits.

Trump obsesses over markets. In countless Tweets he’s equated equity advances with his own magnificence and omniscient omnipotence. He wants growth, expansion and advance, even if it brings inflation and rate pressures. The Dow is his proxy. And Trump well knows that tariffs, trade wars and the increased costs they bring worry investors, tank stocks and make average families wonder if things are getting worse, especially when their 401k retirement plans are shrinking.

Besides, there’s an election coming. Two dozen Dems are squabbling for the right to take him on. And now Biden has arisen through the gaggle of lefties, dreamers, econuts, feminist crusaders and socialists to present a credible, centrist, experienced alternative to the weirdest president ever. Trump needs the Dow to go to the moon. China’s still the ticket to that ride.

The strategy, therefore, looks good for us. Drop the spitting match with Canada. Get the new NAFTA signed. No more countermeasures on American ag producers. No car duties. Make nice with Europe and Japan. But at the same time isolate China with big tariffs, strong rhetoric and kneecapping their showcase tech outfit (Huawei). Then follow that with a blockbuster US-Sino trade deal just as Biden is schlepping his way across America.

Some institutional research floating around Bay Street supports this theory. “Tariff Man vs. Dow Man” (Pennock Idea Hub) spells out the inherent contradiction in Trump’s approach, suggesting the rest of 2019 may come down to one word. Volatility.

Trump’s two personas are on a collision course with each other. On one hand, he likes to style himself as Tariff Man, because he believes the U.S. has had a raw deal from its trading partners. The list of offenders starts with China, but it is numerous. Tariffs are the best tool to address that imbalance. On the other hand, Trump the Dow Man loves a booming stock market, which he tracks obsessively, and views it as a form of validation of the success of his administration.

As trade jitters rose, the stock market has become nervous and sold off. Markets hate trade wars, and they hate uncertainty. While Tariff Man and Dow Man can co-exist when trade tensions are low, we will reach some tipping point where Trump has to choose.

Will Trump the Tariff Man or Trump the Dow Man gain the upper hand in the crunch? What are the bull and bear cases?

In the absence of tail-risk, expect Trump to adopt the Tariff Man persona and act tough on China, as well as other trading partners. Should tail-risk appear, either in the form of deteriorating economic conditions or a market slide, Dow Man will become the dominant personality.

This analysis argues for a choppy range-bound market for the next few months, with limited downside risk and restricted upside potential. Under these conditions, investors should re-orient their portfolios to a neutral risk position, and adjust their asset allocation back to investment policy targets. The heightened level of uncertainty is likely to boost volatility, and investors may want to take advantage of this environment by selling covered calls to boost expected returns. It would be a way of getting paid via option premiums while you wait for a resolution of the trade conflict.

Decent enough advice. But for the average investor who wouldn’t know a covered call if she stepped in one, the even-better advice is to set up a nicely balanced, diversified portfolio and forget it for a year or so. Trump may be deeply flawed, but he’s driven and strategic. It’s truly hard to imagine a scenario in which he goes into 2020 with a rerun of late 2018. Thus the riskiest of American presidents is limiting investor risk. At least for a year. Then we need to talk.

Garth Turner May 20th, 2019

Posted In: The Greater Fool

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