Forward Guidance: Matthew Carr on Investing During a Trade War
Samuel Taube (ST): Joining us today is Matthew Carr, the Emerging Trends Strategist of The Oxford Club and the editor of Switch Trade Alert.
Today, we are talking about the recent turmoil in the stock market and the escalating U.S.-China trade conflict. Matt, thanks for joining us.
Matthew Carr (MC): Thanks for having me, Sam.
ST: First of all, how much of the sell-off we've seen over the last few weeks do you ascribe to this trade conflict?
MC: I would say actually a great deal of it.
The question that we have right now is whether this trade skirmish is going to boil over into an all-out trade war.
We saw futures collapse more than 300 points on Wednesday morning when China announced $50 billion in retaliatory tariffs on a wide range of U.S. agricultural products, airplanes and autos.
I was watching it when it happened. In just a few minutes, the Dow ended up opening down almost 2%. So we're now in this period where the Dow is moving several hundred points up and down almost every day, whereas last year, we didn't have any sort of 1% moves on the Dow - but now this is the norm.
We've seen in the last seven out of eight sessions that the Dow has moved at least 1%, both up and down.
Earlier this year when we had our first big correction, I warned that this was just the beginning - that it was the first correction of 2018.
I also warned that one of the biggest culprits to market volatility going forward wasn't going to be White House turnover or corporate earnings or anything like that, but it was going to be these surprise policy announcements. And that's what's unfolding.
That's what's creating all this market uncertainty. We have China and the U.S. one-upping each other. And that's what's moving the market.
ST: It’s certainly a powerful force. How long do you think this could keep going? And realistically, what do you see as the long-term effects?
MC: As for how long it could go, I'm not totally sure because like I said, these are just proposals at this point.
But we’ve seen this escalate very quickly, and China right now has publicly stated it won't back down. It won't be bullied. It refuses to look weak at the moment. So there's this game of chicken going on. Who's going to flinch first?
And what surprised me was that China just slapped a tariff on soy. I thought that would be one of the last salvos because soybeans are a must in China - and the U.S. is the biggest exporter.
But the finance minister went after soy because he said it's important to the U.S. economy.
The new proposals would slap a 50% tariff on cars made in the U.S. that are shipped into China, including manufacturers like BMW and Mercedes. Those cars are made here in the U.S., - in South Carolina - and shipped overseas, and those are what's really popular in China.
So China has been very surgical with their tariff proposals. They're specifically targeting these industries in areas that heavily favored Trump.
Now, what about the long-term effects? Let me put it this way. Remember this whole line of analysts out there saying that first quarter numbers are going to be great, corporations are spending more, the economy is booming, etc.?
Well, at what point in the face of all this volatility do companies and consumers take a step back and pause spending?
Let's say for a moment there's an inkling of that during first quarter earnings, and consumers and companies take a step back. That would suck the oxygen out of the room.
So in my opinion, that's what investors need to start thinking about and preparing for. All this tariff stuff is just talk right now, but share prices are being impacted, which means retirement accounts, trading accounts and 401(k)s are all taking hits.
And eventually what we call “statement anxiety” will bleed over into the real world, and that's when we really start having problems.
ST: Right, and it's interesting that you bring up the optimistic expectations for publicly traded companies at the beginning of the year.
I remember last time we did one of these podcasts, you were making the point that that's kind of one negative effect of the tax reform - it has created this high bar for first quarter earnings. So I guess we'll have to see in the next few weeks.
But who do you see as the biggest winners and losers of this conflict? I know there are going to be a lot of losers, but do you see any particular stocks or sectors actually benefiting from this?
MC: Well the losers are pretty obvious right off the bat. Automakers GM, Ford and even Tesla. Tesla doesn't produce a lot of cars, but they sold almost 15,000 in China last year.
Heavy machinery manufacturers Caterpillar and Gear. U.S. soybean prices are tanking. Tyson Foods would be a loser, which I think is an interesting thing because the Chinese meat giant, WH Group, bought the U.S. pork producer Smithfield Foods a few years ago. Now China accounts for one-third of all U.S. pork exports, which is roughly about $1 billion. And the U.S. is the world's largest pork exporter.
ST: So is a Chinese company subject to Chinese tariffs if it produces through a U.S. subsidiary?
MC: That's a situation where a Chinese and U.S. company both lose.
You’re going to have losers in aluminum and steel. AK Steel and Alcoa will get hammered. Things people don't think about, like generic drug makers Mylan. It will have to pay higher costs for raw materials. So the losers will be widespread and vast.
Now, who wins? Nobody - at least, not in the U.S. or China. The winners are going to be companies in Japan, Taiwan and South Korea, who is already worried and warned that this trade skirmish is going to impact it and that its people should be prepared.
South Korea should see some benefit with its semiconductors.
But the soybean exporters in Brazil and Argentina are the big winners. China is the largest buyer of soybeans, purchasing 60% of the world's soybean crop. It could take out the U.S. and then go to every other soybean producer in the world to get new supply. The same with pork. This trade war benefits pork producers in Denmark, Germany, Spain and even Russia.
And as for European aircraft manufacturers, not everyone's going to switch from Boeing to Airbus immediately, but if the tariffs are long term, that's what you're going to see.
So if this boils over, investors would realign their portfolios by focusing on those Asian, European and Latin American counterparts. Because the biggest winners in a trade war are the countries and companies not involved in the trade war.
ST: As Matt said, there are likely to be a lot more losers than winners in this conflict.
With that in mind, check out his new research service, Switch Trade Alert, where he targets overvalued companies. Matt, thanks so much for joining us.
MC: Thanks for having me, Sam.
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