A lot of investors are getting burned by President Donald J. Trump’s (R-New York) phony trade war. The S&P 500 dropped by 0.4% after Trump threatened to put $200 billion worth of tariffs on Chinese goods on 19 June.
Those investors will get burned because there is no evidence the trade war is real. The president did not impose any new tariffs Wednesday, he just made a threat.
The available statistics show that there is no trade war, China exported $1.84 trillion worth of goods to the United States in 2017. The White House imposed tariffs on just $50 billion worth of Chinese goods on 15 June 2018 or less than one half of one percent of those imports.
Even if Trump made good on his threat, the tariffs would only cover around $250 billion worth of Chinese goods, or less than 25% of the total volume. This hardly looks like a serious trade war, despite Chinese threats to “strike back hard.”
Trump’s Trade War is all about the Elections
The Trade War looks like a political stunt being staged to help Republicans in the 2018 Congressional elections rather than a real conflict.
It is no coincidence that the trade war started about the same time that political strategists started predicting that Republicans would lose control of the U.S. House of Representatives in the midterm elections. The consensus among pundits is that the GOP will lose 20 to 40 seats and control of the House on November 6.
Trump is trying to prevent that catastrophe with a replay of the successful strategy he used in 2016. The Donald won the presidency and gave Republicans majorities in both houses of Congress, by mobilizing older, white, working-class voters with tough talk on trade and immigration.
The President hopes that tough talk on trade and China will mobilize just enough of his fans to give Republicans a small majority. In particular, the Grand Old Party (GOP) needs to defend seats in “Red States” in the Midwest where trade and China are hot issues. As I have noted elsewhere, Trump’s militancy on trade issues reawakened shortly after Republicans suffered a humiliating defeat in a close House race in Pennsylvania’s 18th District (which the Donald won by 20% in 2016).
The game plan is to convince voters that Trump is making good on his presidential campaign promises “get tough” on China. The President has done very little on that score – Chinese exports to the US grew by 15.9% in 2017.
Politically, Trump’s strategy is pretty good, it worked well in 2016. Only election results will tell us if that success can be duplicated.
The Fake Trade War
Therefore it is likely that the trade war will end on November 7, 2018. A likely scenario is that President Trump will wake up, eat breakfast, and start Tweeting about the wonderful new trade deal he intends to sign with China.
Both investors who sold stocks because of the trade war, and Trump voters will have egg on their faces. Neither group should be surprised but they will be, because they fell for the scam being perpetuated by Donald and his stooges in the media.
Something for investors to remember is that Trump is an expert at manipulating the media and reporters. The President understands that he does not need to risk a real trade war to win votes. All he needs to do is get the media talking about one, which has happened.
Disturbingly, the Chinese might be participating in the work or scam Trump is pulling. The Chinese government responded to Trump with threats of its own. This lends credibility to Trump’s scheme, and enables the Chinese leaders to tell their people how “tough” they are being on America.
How Value Investors can Profit from Trump’s Fake Trade War
Value and contrarian investors that understand what is really going on are in a good position to profit from Trump’s fake trade war. Some really great stocks are trading at a discount because of the hot air coming from the White House.
Here are some stocks contrarian investors can buy to cash in on Trump’s phony trade war:
- Caterpillar (NYSE: CAT) – It fell from $148.69 on June 18 to $140.35 on June 22. Cat makes earthmovers, heavy equipment, diesel engines, and diesel generators that are sold to China.
- The Boeing Company (NYSE: BA) – The aerospace giant’s shares fell from $354.80 on 18 June to $339.23 on 22 June. The People’s Republic is one of the main markets for Boeing’s airliners.
- Apple Inc. (NASDAQ: AAPL) – The investor favorite’s share price fell from $188.86 on 18 June to $185.81 on 22 June. Most of Apple’s popular consumer products are made in China. China is also an important market for Apple.
- Walmart Inc. (NYSE: WMT) – This stock’s value actually went up slightly rising from $83.23 on 18 June to $84.66 on 22 June. Walmart is heavily dependent on cheap consumer goods from China, especially toys, shoes tools, electronics, and clothing.
All of these companies stand to benefit heavily from any China trade deal that Trump plans to make. Their stock prices are likely to rise, once Mr. Market realizes that he has been had by Trump.
Investors might have to pounce fast because Mr. Market is a lot smarter than the media. Walmart and Apple’s stock prices indicate that Mr. Market is already getting wise to Trump’s latest charade.
There are some stocks for those who think that Trump’s trade deal is for real. Persons that want to bet on the media being right and trade war being imminent might purchase Airbus SE (EPA: AIR). The European aerospace giant stands to profit if Trump tariff’s cut Chinese orders for Boeing airliners.
Basic Value Investing Proved Right Again
Trump’s fake trade war once again demonstrated that basic value investing wisdom is correct. The classic Graham-Buffett wisdom is that investors should ignore the news because it is often inaccurate.
Those investors who understand that the Trump trade war is a farce being conducted for political reasons will make money. Persons who sell stocks or buy bonds because of hysteria about a trade war will lose money.