The Dividend Cafe - Trumpian Tariff Tango

Episode Date: July 6, 2018

This week, David upacks this holiday week in markets..... Topics discussed: Trade/ Tariffs Emerging Markets Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe podcast, we're recording a video doing both at once because it is, after all, 4th of July week. Believe it or not, I'm actually recording right now in my oldest son Mitchell's bedroom at our house. He himself is quite a video editor. He's doing podcasting and he has all this equipment. And because we were at our house this morning, we're getting ready for a little family trip. I told him I wanted to record in his equipment. So he is playing director, editor, producer, et cetera, this morning. So listen, we are not doing an advice and insights podcast this week because I am gearing up for a very big one, long one, significant one, next week,

our advice and insights podcast. We'll be sending the link out and doing the whole deal. But I want to do a full recap of year-to-date market action and just kind of walk through from January to the end of June, where we are here at the mid-year point, what things have been working in capital markets, investment markets, and what things have not been working. There's some really kind of surreal surprises in some of that, but mostly talk about what the right forecast looks like for the remainder of the year, the right positioning, and some of the big hinge questions that exist in the macroeconomics of it all. That is going to be the subject of a very special Advice and Insights podcast next week.

But in the meantime, in this kind of shortened 4th of July week, markets were only open half day on Tuesday in preparation for the 4th of July holiday, and then of course closed all day Wednesday. And yes, markets are technically open Thursday, Friday here this week. But to the extent that you think those trading desks and asset managers and so forth that represent the big bulk of market activity at normal days, if you think they are fully manned these two days here after the 4th of July, I have a bridge to sell you. So it's definitely very light week. So far markets are up, but there's been a lot of kind of movement, zigs and zags. And I don't want to put much read into that because I've learned over many, many years that these kind of holiday weeks are somewhat skewed, not a lot of normalcy embedded in volumes and in price direction. But again, I do think that what is sort of moving the markets directionally is what has been moving the markets, and that is either concerns on trade and tariff or relief about the same. And it kind of provides a little breath of movement in a refreshing way.

But the volatility doesn't go away because the issue, the cloud, continues to kind of linger. The volatility doesn't go away because the issue, the cloud, continues to kind of linger. As it stands right now, and who knows what will happen by the time you're actually listening to this, technically the first batch of the Trumpian tariffs in China are supposed to kick in officially tonight with China. Now, you talked about $50 billion, and that number has come down to only $32 billion. has come down to only 32 billion. There's something like 868 products that have thus far been exempted as different companies have come and asked for exceptions and so forth.

So that's the other thing, by the way, is I talk all the time about trade being a good thing by definition and tariffs as a tax being a bad thing by definition. But this whole thing also brings out the worst of crony capitalists, because then you have every company, understandably, trying to go carve out their own exception to things. But I'll have to say, I don't know if we're going to 400 billion of product imports from China being tariffed, or it stays at $32 billion and even that drops to zero.

We have the silly steel aluminum issue that's already been kicked in, but we don't know where we're going with other aspects of Canadian trade, where we are with Mexico and their new president and what they do with the NAFTA deal. Listen, the range of potential outcomes around the trade tariff side is monumental. And so we expect continued volatility around it. We think the outcome is likely to be more of a median type case where there are indeed some contractionary and we think non-productive outcomes and not the best case where all of it just goes back to full blown trade and whatnot. Or even maybe some of the trade deals get better.

We think most of the improvements are going to be more superficial and cosmetic. But the possibility is not zero percent that the whole thing really does escalate to a much even worse trade war. Although that escalation and the negative results from that, I think, would be the antidote to the escalation. I think that the administration at that point would be called out in this little game of chicken that they're playing. But I don't know how exactly that plays out. I have no interest in carving an investment policy for a client capital around that speculation. speculation. What we do know is that the Fed continues its normalization path and that the dollar is strengthened and that the combination of rising deficits here in the U.S. and Fed normalization, particularly their balance sheet reduction, has resulted in a removal of some liquidity of U.S. dollar liquidity, from the global financial system.

There's nothing real profound or unknown about those conclusions and observations. The impact has been tremendous price volatility to the downside in emerging markets in the last five months. And our position is that most of that bad news or most of that fear and short-term noise is reasonably priced, if not overpriced. And yet these continuous organic growth rates of good quality companies in emerging markets continues. So I would argue that we don't know how much worse Fed-oriented, dollar-oriented, monetary, policy-oriented issues continue to affect emerging markets, whether there is one inning to go or four innings to go. But we do know that those are the things that we really do not consider in how we go about investing in emerging markets. And so we're seeing an even more price attractive formation in the emerging

market space. And we're watching that closely. We don't want to increase exposure. We've already been well weighted there to begin with, but we don't want to increase exposure there and then find out that there was another 10 percent to go down or whatnot. But we also know we can't time it exactly. But we believe that there is an opportunity for buyers in emerging markets. And we're looking at doing that constructively and diligently, of course. So I do believe that the dividendcafe.com this week will give you some very interesting charts around the Bitcoin phenomena year to date. I'm not going to go through that next week in my broader summary, but to see the utter bloodbath that's existed in this so-called cryptocurrency space

all year has been enlightening. And I think tell around a more permanent investor psychology reality that people get lured into malinvestment at the worst times. And this is, you just got to see the chart to see what I'm talking about. It's surreal. So yeah, trade, tariff, Fed, emerging markets, those are the things we're talking about.

But you've got to fill the time here for these couple of weeks till earning season starts. And then we're talking about. But you've got to fill the time here for these couple weeks until earnings season starts. And then we're going to be really focused on our individual company results. That's always what we really are concerned about. That's what you should be concerned about. That's what you should be focused on. The investor returns you get, the investment returns you get over the period of time that you care about your return will be a byproduct of how companies perform, how they execute, how they innovate. The cash flows they deliver and particularly cash flows they return via dividends and so forth.

Along the way, there's a lot of macroeconomic things that matter and we want to keep you posted and educated and informed. things that matter and we want to keep you posted and educated and informed and we continue to challenge our own theses around these things to try to optimize returns and the risk reward trade off um but i guess what i would say right now is that uh 2017 is looking more and more like the golden era that it was from an investment standpoint, this idea of virtually no volatility and really impressive and consistent returns. We don't have real negative returns here on the year so far. Some things are down a little, some things down more, some things up a little, some things up more.

But most asset classes are right in between up two percent and down two percent with a few exceptions worse or better that's hardly a bloodbath right but there's a lot of volatility a lot of hand wringing and a lot of noise and to just kind of be sputtering around moving in place we believe that these things will be resolved positively for risk asset investors, and yet their patience will be tried. We're going to continue doing that. Thank you. I hope you've enjoyed this new setup here. Listeners, we hope the podcast has been interesting. Please do subscribe to Dividend Cafe Podcast. If you can write a review for us and so forth, it helps some of the things we're trying to do, getting the word out on our weekly podcast communication. And for those of you

watching the video, I hope you've gotten a lot out of this. Reach out with any questions or comments. Hope you had a wonderful 4th of July. Thank you for listening to and viewing the Dividend Cafe. Thank you for listening to the Dividend Cafe, financial food for thought. The Bonsai Group is registered with Hightower Securities LLC, a member of FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or

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