Kirk’s Weekend Review: Mini Trade-Deal, Conflicting Economics, Fed Standing Pat, Brexit And Investing In Alt Energy & The Smart Grid


This week we finally got the well publicized “phase 1” trade deal with China. We also got more conflicting economic data and news on Brexit. My webinar this week was about investing in alternative energy and the smart grid in the 2020s.

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Mini Trade Deal

President’s Trump and Xi announced that the “phase 1” trade deal was complete. It’s not signed and sealed yet, but appears to be on solid footing. 

The main components of the deal were: 

  • A mutual rollback in some tariffs and the United States agreeing not to put on more tariffs. 
  • China will increase agriculture orders from the U.S. to new record levels.
  • A mechanism to reduce forced technology transfers and open China’s financial industry more.

The bottom line on the deal will not end up being particularly consequential in any way. As I discussed in early 2018, China was not likely to make any structural reforms outside of their game plan. They did not with phase 1. 

The agriculture imports are a minor concession to the U.S. With the swine flu in China, they needed more access to food stuffs. It is not unlikely that China reneges once they have their fill. In the short run, our favorite fertilizer company, Nutrien (NTR), stands to benefit. 

The technology transfer issue remains up in the air and follows a pattern of decades of promises on the issue. Will this time be different? Don’t bet on it. 

Opening up China’s financial industry more is a direction China was moving in anyway, so no big give there. However, investors should really worry about whether getting more involved in an industry likely to come under major pressures from bad debt and an aging population is something to get more involved with. 

Here is Russell Investments summary of the trade deal.

I’ll have a fuller piece on trade in coming weeks.

Conflicting Economics: What’s The Signal? 

Here I will refer to New Deal Democrat from the Bonddad Blog who does a weekly check of the long, short and coincident economic indicators. If you get hung up on his screen name, you’re missing out and doing a bad job of separating ideology from analysis.

The short-term is indeed seeing a slow down in the economy. I have predicted for over a year now that Q1 of 2020 would see a very disappointing economic print. The mini-trade deal could change that, but it’s hard to tell if several billion in farm goods will make a difference. I can see the disappointing print coming in Q1 or Q2. Either would jolt the equities market.

I have suggested that we would see a “skip-straight recession.” What is that? Essentially, I think it will be hard for the economy to slow to the point of back to back negative quarters, but we could see 2 negative quarters spread over a year or a year-and-a-half. 

The official definition of a recession by the National Bureau of Economics Research is: 

“The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” 

Here is a snapshot of business cycles:

Business Cycles

It should not be lost on anyone that this expansion, which started under President Obama, is one of the longest on record. Coming off of such a massive recession, that started under President Bush, a long recovery makes a good deal of sense if policy didn’t prevent it.

The long leading indicators are neutral to positive. Here I think it is important to remember that the long-term for America is always positive, but long-term for these indicators is about a year or two out, so really, intermediate term. 

There is no visible financial crisis on the horizon, but cracks could be forming due to the monetary and debt conditions globally. I’ll have a lot more to say about the silly things you hear about the dollar soon.

Brexit

After another vote in the UK cemented the nation’s Brexit plans. A solid Brexit summary is offered by Franklin Templeton Group. 

Ultimately, I don’t see Brexit as being as consequential for the world or the U.K. as people think. Ultimately, I believe the U.K. will cut a deal with the U.S., Canada and Mexico to join the New NAFTA. They will also likely join a trade agreement centered around Asia that the U.S. is a part of at some point. 

The real take away from Brexit should be less integration, but not much less, with Europe and a pivot to more comprehensive integration with North America and Asia. Pivoting to Asia is very in line with American policy. 

The short-term will be choppy for the U.K. Ireland and Scotland will have to make some adjustments that could cause enough uncertainty to stunt their economies for a bit. In my opinion, they should take Great Britain’s lead and pivot towards Asia and America. 

Investment Takeaways

None of the news of the day changes the massive secular trends towards alternative energy and the “smart everything world.” We should embrace rallies to sell old economy stocks and funds full of old economy stocks, like the S&P 500 ETFs (SPY) (VOO). We should embrace corrections to buy newer economy stocks like the Nasdaq 100 (QQQ) and other more newer economy focused ETFs and company stocks. 

If we do get a “skip straight recession,” then the last chance to see investment rise in resources, particularly metals, minerals and fertilizers, will be missed and we can expect a mini-return to scarcity in the 2020s. That means, underlying inflation will not just be monetary in nature, but also at the base input levels.

A lot more coming on how to play juxtaposition of rising costs for many resources, but peaking (early 2020s), then falling prices for energy (late 2020s). Make sure to watch this week’s webinar.

Disclosure: I am/we are long NTR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a Registered Investment Advisor, but publish separately from that entity for self-directed investors. See relevant terms and disclaimers at the website of Bluemound Asset Management, LLC. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.