The news flow over the last few weeks has centered on Trumps attempts to level the playing field with America’s adversaries and partners.  This would include China, Mexico, and much of Europe. The game at play involves global trade and Trumps desire to better position America as a major exporter of goods and services to the emerging middle classes in China, India, and Asia.  Investors are always worried about change and this game at play could put America back into a whole new cycle of amazing growth similar to the nifty 50s.  Thus far we have seen more pessimism rather than optimism. As a result the markets have fallen 5 to 7% on this recent news flow. Synthesizing the right decisions out of these developments is our challenge as we try to stay ahead of where investors will go over the next year as they watch Trump do what he does best – negotiate and deal. 

The opportunities that exist in the globe for American growth mostly involve Asia.  Latin America has been more of an annoyance for American government than an opportunity for export growth.  Mexico seems comfortable letting much of their nation sit in poverty and has unfortunately developed a tolerance for corruption.  It doesn’t appear any part of Latin America will ever be an empire of any sort or an economic superpower in this century.  Our neighbors across the Atlantic are having real problems working together on top of the fact that Capitalism is clearly missing in most of Europe and without it they will never lead the world in growth or economic strength.

America has been a sleeping giant for many decades and our leadership has acted carelessly for the last 20 years giving away much of the advantage that we work to achieve over the last century as the world’s economic superpower. Our past leadership allowed bad behavior to exist without consequences.  Trump seems bent on changing this and will give up short term growth opportunities in an effort to enable better long term growth.

China has become a dangerous threat to America’s economic strength and the democracies that value human rights in the world.  China’s communistic ruling party has behaved poorly for decades in their attempts to position China as an economic superpower.  China has a track record of human rights violations, disregard for law and ethics, and disregard for fairness in economic trade. They will lie, cheat, steal, and kill, all while maintaining a smile on their face and showing the world pictures of a country that seems all too good to be true.   American leadership has allowed China to behave poorly for decades and they have grown comfortable in this role.  As a result changing their behavior will be difficult despite the tremendous advantage we have over the Chinese in global trade, innovation, military power, and financial markets.

China is an interesting country as they are led by a communistic monarchy that utilizes capitalistic principles for their economy.  They enjoy an advantage over America in that the monarchy has a 60 member ruling party that is there for life that never has to embrace elections or allow the people to interfere with their decisions.  As a result they swiftly get things done – good or bad.  The ruling party however has had a track record of corruption in world trade and as a result China suffered for decades with growth that was far less than their potential.

China clearly wants to be the next Empire and unseat America as the globe’s superpower.  Historically they have been willing to fight needless battles for their twisted principles and stubbornly sit on positions that are not good for the country.  They have been willing to let their people suffer as a result of the ruling party’s stubbornness.   They clearly are in a bad position right now and their people will suffer from the trade battle they are embracing with the Trump administration.  The actual impact from the trade battle on America will be modest however the American investor and the American consumer’s lack of understanding of how this will play out for the economy could produce much more problems for our economy than the actual loss of trade from the tariffs. As a result it’s appears we may have a game of chicken that will get played out between the Chinese and the Trump administration. Who will give in first? One would think the Chinese would fight bitterly given their historical record, however the thinking in China is different today.  They have a vision of being the next Empire in the world and understand how this trade battle will deter their efforts to reach these goals.  If America falls into recession China will fall much harder and further and lose their ability to challenge America for decades.

So to summarize there is a game of confidence going on right now that must be understood and acted upon.  Do investors and consumers have enough confidence in what the Trump administration is doing to stand strong with consumption and invest opportunistically for growth? Americans are clearly the most confident optimistic group in the world as evidenced by past trends with consumption and investment in corporate America.

I do not believe there is recession on the horizon.  Recessions are almost always followed by problems with inflation, central bank policy, employment, consumption, or banking problems.  The Environment is currently benign for all of these factors.  Problems would have to develop before a recession would unfold and nothing is on the horizon at this time.  Consumption just doesn’t stop when interest rates are low, central bank policy is friendly, and employment is strong.

The leadership in the equity market needs to be addressed. The great growth companies in America (FAANG) have been under various attacks by political groups or government.  As a result investors have worried that these attacks may deter these companies growth prospects and as a result are repositioning capital in companies with modest or no growth potential.  We have weighed that trade and decided to stand firm with companies with great secular growth themes.  I see the declines in some of these great growth companies as opportunities that will be easily overcome as these political winds pass.  This strategy is much more appealing than moving capital to companies with really no secular growth advantages or tailwinds.

When the growth phase of this cycle develops inflation, overcapacity, and unfriendly Fed policy, we will move to treasuries and gold. However that is not on the horizon currently.

We remain optimistic!