A lot of investors are thinking that everything would be fine if the US and China could just negotiate a deal to end their trade war. Even some savvy metals investors who know there are deeper problems with the global economy are thinking that copper and other industrial metals in short supply will rebound when the major players declare trade peace.
This is a dangerous mistake.
- The deceleration of the global economy isn’t helped by the trade war, but it precedes it. Unless something else changes, it’s likely to continue even if the trade war ends within a year.
- If the US-China trade war ends, that would not be the end of US efforts to renegotiate trade arrangements with the EU and other trading partners.
- The US-China trade war is doing damage to businesses and global supply networks now. The war could end, but it would take time to rebuild what’s being destroyed by the war.
- The record boom in the US is more likely to come to a cyclical end that keeps going forever, regardless of what happens with the trade war. The talking heads on financial media keep dismissing the inverted yield curves, but I’m convinced recession is coming to the US, perhaps before the 2020 election. This will only exacerbate the global downturn.
And of course, the trade war may not end at all—or not until Trump is out of office and his successor gives the Chinese whatever they ask for to make the pain stop.
Well, there are several implications:
- If Trump and Xi were to announce an end to the trade war, I think the euphoria on Wall Street would produce spectacular gains on mainstream equities—which would be a superb time to take profits and head for the exits on mainstream investments that have met or exceeded expectations. It’d be a good time to get rid of dogs with smaller losses as well.
- An end to the trade war might similarly produce a temporary increase in industrial commodities, including oil, metals, and other minerals. I don’t think it would last, making it a good chance to exit any related trades that would do poorly if the global economy continues deteriorating.
- Very specifically, I would not look to go long on copper, zinc, aluminum, iron, and other industrial metals. The one exception might be nickel, as there could be a real shortage shaping up there—but even that might not be enough if the global downturn is bad enough.
- Uranium would be the exception. As I’ve recently outlined, I see uranium as being largely recession-proof.
- Precious metals, of course, would benefit greatly from the massive fear trade that would accompany the global recession that’s shaping up.
Short and sweet:
- I’m looking to use whatever volatility we’re lucky enough to have in gold and silver to add to my positions there.
- I’m not looking for oil or industrial metals plays.
- I remain confident that the uranium speculation will work out, even if I have to weather some pretty ugly months in the near term.
That’s my take,
Wednesday, August 28, 12:45pm, EST, 2019