This is all about tariffs.
A friend of mine works for a manufacturing plant producing essential parts for another manufacturing plant, which makes industrial air conditioning units used all over the world. Both plants are located in the United States. One is owned by Americans, the other has owners from different countries. My friend’s company buys parts from China and Canada. Those parts just went up a gazillion percent due to tariffs, and they can’t afford them. It will take about two years for someone to start making those parts in the United States. Even if someone does it faster, those parts will cost three times more, because we pay workers several times more than China plus benefits plus complying with regulations plus additional taxes…
The result is: Everyone involved is pissed off (this is a business term). My friend’s company has dramatically raised prices for their parts because their cost went up. They are looking for other suppliers, but they either don’t exist or they are abroad, or their quality is not up to par. The buyer is upset because their cost went up and they don’t have other suppliers. Production is stalled for now while everyone is trying to figure out what to do. The manufacturer of those AC units is not making good on their contracts to deliver the final products to customers all over the world, and now they have to pay tariffs and may potentially lose their customers. The final users are considering dropping the manufacturer and buying those units from countries not affected by tariffs. And so on and on and on.
The point of this story is that my friend is now seriously worried about being laid off and therefore spending a lot less just in case. That is the reason many airlines refused to give earning guidance due to the uncertainty and expecting fewer travelers. Airlines have nothing to do with air conditioning, but that is how the economy works.
The question is: who is the winner? The answer is: Nobody!
This will take years to resolve even with the modern technology and the ability of businesses to adapt. I understand that the purpose of tariffs is to boost American manufacturing, but in our interconnected business world, where America benefits the most, the isolationism only pleases people who have more guns than teeth. I fully agree with Jamie Diamon (CEO of JPMorgan) who said the following a week ago: I like the America First policy, but let’s make sure we are not going to end up as America Alone.
Let’s take a look at the current state of the financial markets and some asset classes.
Equities:
After falling 20% from all-time high, S&P 500 has been in a bouncing mode and finally got to the resistance zone of 550 – 570 (SPY) we talked about before. We believe this resistance will prove too problematic to overcome. This is the place to establish some short positions or some hedges. It is a bad idea to be naked long or naked short in this environment due to the fact that our current government refuses to provide stability. Any tweet can send the market up or down 5% in a matter of minutes. Be hedged!!!
US Dollar:
The Dollar is being sold by everyone in the world because our policies are now a laughingstock. Lower dollar can make American products more attractive, but the world is now boycotting our products, and the cheaper currency is nothing compared to the tariffs. A rebound is expected, but only a change in policy will reverse this trend.
Gold:
Gold is the asset that has benefitted the most from the latest mess. We have been long gold stocks, and our accounts are up 38% year to date. The following 20-year chart of GLD illustrates a near parabolic advance. We love gold and we are invested in it, but you don’t have to be a financial guru to see that Gold is very overbought. We are not expecting a major top, but a correction / consolidation lasting several weeks or months is now probable. Let’s not get greedy and sell some or hedge some. That is what we are doing.
Have a profitable week.
Dennis Leontyev
