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(Trade) War… Good God, Y’all!

(Trade) war, ain't nothing but a heartbreak. - Edwin Starr

bantam inc jack duval multi-family office new york - edwin starr image

Edwin Starr knew everything you need to know about war.

On Friday I wrote about how China could devalue the Renminbi in response to President Trump’s September 1 tariff threat. While few commentators were expecting this, I pointed out that it would be seen as a move of strength for fighting back against Trump, instead of a move of weakness.

It would appear that Xi is in the move-of-strength camp because China devalued the Renminbi by about 1.5 percent against the dollar Sunday night.

Chart 1: Dollar/RMB Cross

Source: Bloomberg

Trade War Goes Hot

The trade war is now officially on and hot. The two biggest kids on the block started off by talking trash, then there was some pushing and shoving, and now the first punches have been thrown.

It’s risk-off as equity markets panic. The KOSDAQ (Korea’s NASDAQ) was down 7.5 percent on Monday and another 3.21 percent on Tuesday and most of Asian equity markets were down between three and four percent over the past two days.

The S&P 500 shed 2.9 percent yesterday. Investors should be prepared for more downward price movement as we enter the toughest part of earnings comp cycle and the effects of the (original) tariffs are only now beginning to show up in corporate revenue and earnings numbers. Those will be reported in Q3 earnings.

Capital expenditures should slow dramatically as no one wants to expand into an accelerating slump, which will only make corporate profits slide further.

As I’ve discussed here, back in January, amateurs watch equities, pro’s watch bonds. The volatility of U.S. Treasuries has picked up significantly (the MOVE Index), as have junk bond spreads. This will have the effect of choking off capital to indebted companies.

Chart 2: MOVE Index

Source: Bloomberg

Chart 3: Bloomberg Barclays US Corporate High Yield Average Spread

Source: Bloomberg

There is a huge wall of refinancings on the horizon. If bond spreads are blowing out when those debts come due, look for a lot of bankruptcies in indebted sectors of the economy.


As an aside, of the limited equity holdings we have positioned, the only positive performers from yesterday were two of the five cannabis names we own.

As the economy continues to slow, every state in the union will be under increasing fiscal pressure as their revenues drop. Medical and recreational cannabis revenues are a popular way to supplement state budgets, reduce crime, unclog courts, and spend less on prisons.

Why let $50 billion of black-market cannabis sales go untaxed? I can’t think of one good reason, and neither can your local congressional representative or state senator.

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