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Trump Is Winning The Trade War

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Market will rip on a Mexico/US Deal

Trump continues to throw the U.S.’s economic weight around.

He has picked fights with pretty much every major trading partner: Europe, Canada, Mexico and China.

Any movement in his favor means major economic boosts in the form of greater exports and domestic production. The stock markets have already concluded that he holds the winning hand.

Here’s Trump’s strategy: flip the smaller economies to get to the bigger economies.

In addition, negotiate directly instead of through trade bodies; trade bodies protect the weaker members in a strength-in-numbers environment.

Under this approach, Trump went after NAFTA first (Mexico and Canada are the small fish) and he is negotiating separately instead of under a pan-NAFTA banner.

In this game of dominos, Mexico will topple first and next will come Canada. But the real prizes are the European Union (E.U.) and China.

The Counter Strategy: A Waiting Game

Tariffs and trade are the domain of the President of the United States, which means that Congressional mid-term elections don’t have direct impact. But they do matter because a shift in Congressional power in favor of the Democrats will force compromises in general but will also lead to more attacks on, and distractions for, Trump.  A distracted and/or weaker Trump undermines his leverage.

With that potential political shift, China and E.U. are playing the waiting game.

However, this approach will fail.

First, because Trump will only harden his position if Mexico compromises – it validates and vindicates his efforts. (Or, put differently, he’s a shark who smells blood in the water).

But more critically, Trump is forcing the Democratic party to support him or risk being on the wrong side of the upside benefits of winning trade wars and the spoils it brings.

Politics matters. But not in the sense that China and the E.U. believe.

They think a Democrat controlled House of Representatives matters to slowing the Trump Tariff train. That’s wrong because Dem’s have to get on board that train or risk losing popular votes.

What will happen? We’re about to find out.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

Is Bitcoin The New Safe Haven Trade?

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Bitcoin Is Becoming The New Safe Haven Trade

Emerging markets are continuously using bitcoin (BTC) as a way to get their money of their respective countries.

Crypto currencies are attractive to individuals in less developed economies for a few reasons:

  • Transaction costs are the same as gold.  BTC’s higher price volatility is offset by gold’s higher conversion fees
  • Liquidity favors BTC
  • BTC only requires access to the internet
  • Easier to transport and hide $20,000 of BTC offsets gold’s bulkiness

As recent events in Turkey and Iran show, hard currency and precious metal confiscation is a very real threat.  Crypto is now a very real alternative.

Turkish citizens flocked to bitcoin as the Turkish lira continues to plummet. The lira is down nearly 40% this year alone. An insane drop for a currency.

In dollar terms, gold continues to trade lower as bitcoin catches a bid.

Here’s a chart of bitcoin demand from within Venezuela

The Emerging Markets can be grouped into two categories: those that are adopting BTC and those that are panic buying.  Russia is an example of a late adopter.
Examples of panic buying: Argentina, Chile, Columbia, Hungary, India, Mexico, Peru, Philippines, Russia, Venezuela.
Here’s Chile.
Here’s Columbia:
Here’s Hungary:
Here’s India:
Here’s Mexico:
Here’s Peru:
And here’s the Philippines:

 

Interpreting the BTC Currency Signal
One signal coming from BTC: indication of underlying economic/capital strength.

It’s still a bit too early to assign a definitive value for regional BTC demand. But the fact that millions of people around the world are flocking to bitcoin is a sure sign there is a value of it.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

How We Profited Off Americans Looking For Love…

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Congress Guaranteed Profits For This Industry

Congress passed a law earlier this year intended to fight sex trafficking. Under the new law, a website or similar service provider is liable for any instance where its platform was used.

To date, service providers have been protected from lawsuits. For example the Craigslist model (and the traditional model for all media) has been to make no representations regarding 3rd parties and to say that it can’t be held responsible for what gets posted. That position was
attacked a few years ago and Craigslist eliminated its escort advertisement section.

The new law marks a major change: going forward, media companies will be responsible for 3rd party content.

That means that Craigslist would have to vet every ad that gets placed or face a lawsuit and fine.

So Craigslist, Reddit, Backpage and similar companies did the cost/benefit analysis and decided to abandon the entire business of personal ads.

But those are the for-free personal ad sites. The for-fee sites are less affected.

First, because pimps don’t use these sites: they require too much personal information that can be used against them (bank details, for instance).

Second, because the site fees can cover the cost of additional vetting.

The IAC Investment Thesis

Millions of Americans looking for a relationship or just to hook up have no choice but to join for-fee sites. At least in the short term.

And the biggest owner of those sites is IAC Interactive. They own the top brand personals sites: Match, OKCupid, Plenty of Fish, and Tinder.

Congress essentially shut down IAC’s main competitors.

The big opportunity was spotted by Facebook (FB) which then declared their intention to enter the space in April. IAC stock fell by 20%.

That was a buy opportunity, as I said then. For various reasons that I’ve outlined previously, I don’t think FB can pull it off. And certainly not in the next few quarters.

The hook-up market essentially belongs to IAC. And sex sells.

IAC just released Q2 earnings: sales are up 30% y/y. Match (MTCH) and Tinder (TNDR) were the biggest contributors. Each of them saw revenue growth of +25%.

IAC’s stock is now up 15% since I alerted my readers April 20.  And 40% since the Facebook hit.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

Trump Is Winning – Which Is Good For Stocks

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It’s the start of the third quarter. The market ended slightly up for the first half.

We’ll see where it goes, but it’s promising considering the rising global trade war that Trump kicked off.

Apparently the market has decided trade wars aren’t going to be so bad for the U.S. after all. In fact, I would note that very few companies delivered downward guidance as trade war rhetoric heats up.

In fact, the U.S. market is a beacon of strength compared to others: it’s flat for the year.

China’s Shanghai Composite is down 25% since February (when Trump began his attack.) The German DAX is down 10% in the same period.

The U.S. market is resilient because investors are looking past the sabre rattling and the Kabuki theatrics and public histrionics by all players.  

Investors see that Trump can’t lose by attacking our trade partners. Worst case scenario is some farmers get bruised. Best case is real change to these trade deals. Investors are actually betting on Trump winning some battles.

Fall Market Surge?

I agree with the market. Remember, the market is forward looking. And I see the stock market surging again when Summer ends.

Let me explain.

To begin with, focus on timing: the market is pricing in what they expect from elections in November.

Is this good policy? Absolutely: patriotism sells at election time.

Trump’s base will love that he is following through on campaign promises to ‘fix’ NAFTA. Fix NATO spending. And stopping Chinese trade abuse. Even if he wins nothing but enmity from trade partners, the U.S. voter will love him for ‘sticking up for Americans.’

I would even argue this has been a two year plan.  

Everyone thinks he’s an idiot. But I see a plan of attack that is effective in its simplicity.  

The first stage was a tax cut that was, not coincidentally, passed right as the holiday shopping season started.  

Santa came early last year. This primed the economy such that it could absorb the economic blowback of trade wars, which he then initiated.

It’s a series of self-supporting economic initiatives, with one launching every six months. I suspect he’ll introduce more tax cuts after the trade wars settle down. Followed by an infrastructure bill. It’s a coordinated economic blitzkrieg that will run up to the 2020 Presidential elections.

But let’s ask another question.

Why did Trump initiate a trade war months before a mid-term election? Because he thinks he will win and results will be visible by September (any later and he loses ground in election momentum).

So why does he think he can show off results by then?

For starters, because the U.S. has a lot of leverage.  

First, because there is a certain high moral ground to his approach. NATO partners are shirking their military and financial agreements. China does abuse trade with the U.S., and so on. I am no expert on the details of trade agreements, but it is odd that German auto tariffs are 10% while the U.S. is at 2%.

The main source of leverage is we have the market everyone wants to access. Trump is cutting off that access precisely when other economies are struggling.  

Germany’s growth has fallen to a standstill. China’s is slowing fast.China’s PMI is pointing to barely expansionary. Exports have fallen 3 months in a row. Europe’s latest production data (PMI) fell to the lowest since December 2016. Its future expectations fell to 2015 levels. 

So on the one hand we have a booming U.S. economy and a stable stock market. On the other hand the U.S. has trading partners slowing down and stock markets falling. The only path out for them is access to the U.S. market – which Trump is starting to withhold.

Simply put, investors and businesses around the world agree: Trump really does have a lot of leverage and is willing to use it.

Another reason to expect success is the multi-front strategy: Trump is brawling with Canada, Mexico, the E.U., and China (plus a military battle with North Korea, Iran and Russia) – all at the same time.  

This makes sense: in this divide-and-conquer approach, he is waiting for one entity to bolt and that becomes leverage against the others.

(At this point, some might question the entire wisdom of initiating these battles. It’s a cardinal sin, they say, to pick a fight with friends and to add to the misery by doing so in public. And yet…Reagan confronted Japan over its horrible trade and mercantile tactics – which worked. Germany has had multiple Presidents take them to task for failing to meet the minimum agreements on NATO spending, but they did nothing. Now, confronted by Trump and in public, they will finally move. When politeness fails, it’s time to get serious. Threats made in secret will only backfire because markets and people get even more surprised.

I don’t believe antagonizing our allies over trade will lead to some permanent scaring. Quite the opposite: it can be very uplifting and reinforcing. It’s like an example of couple’s counseling, where we have to do a little yelling and airing of grievances in order to move forward to remembering why we are in a relationship to begin with. At the end of the day, the E.U. has no better partner than the U.S. The same goes for Southeast Asia, Asia and India.)

This is why Trump is winning this campaign. Germany and China are already scrambling to assuage him. Germany has quickly agreed – behind the scenes – to lower their auto tariffs. China is trying to figure a way to do the same.

This makes September the month this all comes to a head – that’s when the tariffs kick in. It’s also when Trump wants to show some gains for his efforts. (Which, by the way, is also his weakness. Everyone knows that he needs something soon.)

In any case, here’s a way to invest on the likelihood that it plays out in Trump’s favor:

  1. Military & Aerospace: The easiest way for the E.U. to get Trump off their back is to buy a lot of military gear. Buying a few billion dollars of U.S. military hardware is the easiest way to (1) move the spending dial fast and (2) meet NATO spending agreements. It’s easy to buy a few big ticket items and quickly rack up billions in spending. Germany could buy 50 new planes and stop Trump from talking.
  2. Long the dollar, short gold.
  3. Long bitcoin. It is easier to smuggle your wealth out with crypto than it is with bullion. The fear trade will favor crypto over gold.
  4. Long the S&P 500. Crazy as it sounds to buy the market when the dollar is rising, the U.S. will be a safe haven as other economies start to stumble. An end to the trade sabre-rattling will bring a relief rally.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

 

What Is Trump Up To With All This Tariff Talk

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The market is really upset by the Trump Administration’s hawkish trade tariff talk.

But what he’s doing is simple. Trump is just playing for the midterm elections.

He has 3~4 months to pull a rabbit out of a hat and impress the voters with his ability to bring home the bacon.

Will it work? Maybe.

You see, Trump is in a position of strength from a negotiating standpoint.  

To begin with, Trump is mostly right when he says that U.S. trade agreements are imbalanced.

China does steal technology. It’s trying to acquire and steal more. European tariffs do exceed the U.S.’s.

This makes Trump’s timing for a trade war great: both China and Europe’s economies are slowing and both want and need access to the U.S. market.

Conversely, the U.S. economy is turbo-charged and looks to be able to weather short-term jitters.

But not China. Panic seems to have set in. Chinese KraneShares Bosera MSCI China A Shares ETF (NYSE: KBA) is down by about 15% in June. The Chinese stock market fell by $500 billion (B) last week alone. Money is flowing out.(The U.S. stock market fell a similar amount, but our market cap is ~3x that of Hong Kong and Shanghai’s).  

Regarding tariffs, Europe doesn’t have many cards to play. It’s why the rumor mill confirmed they will soon be rolling back tariffs.

I believe China will also capitulate. They have to buy agriculture products like soy and hogs. Banning U.S. products means they have reduced supply and will end up paying more for those goods elsewhere.

The U.S. farmer will then sell their soybeans on the global market at a higher price. Meanwhile, the U.S. can easily slow the purchase of smartphones without much pain (sorry Apple).

In a sense, Trump is spending the Summer ripping the band-aid off and letting things heal.

But he is also under the gun.  

He has to show results no later than September if he is to win votes in November. And that’s the leverage over him that China and the E.U. have.

There is a pot of gold at the end of the rainbow, but for now the market will be jittery.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics