The Trade War Is Over, Long Live The Trade War

On Friday, Phase One of the Trade Deal was agreed to, with the Trump Administration originally stating that Phase Two would not begin until after the 2020 election.

Then reality set in. 

Since 2018, President Trump has come to understand that if the market declines, a “tweet” about a “trade deal coming” would spark a market rally. Without a “trade deal” to negotiate, there is no catalyst to support asset prices heading into the election. This is why on Friday, Trump immediately declared that “Phase Two” of the trade deal would begin immediately. 

Long live the “trade war.” 

In our “Macro View” piece below we go into much more detail about the “trade deal” and what to expect next. However, from an investment view, the agreement is clearly about two things:

  1. Boosting exports of Agricultural Products; and,
  2. Devaluing the Dollar. 

With the Fed giving up on their mandate to maintain price stability,(they recently stated they will let inflation “run hot,”)the path was cleared for the Trump Administration to devalue the U.S. dollar (which is inflationary) without worries the Fed will start hiking rates. 

This is one of the reasons we have started laying commodity exposure into our portfolios with the recent positions in precious metals and energy. We recently published a thesis “Collecting Tolls On The Energy Express” for our RIAPRO subscribers. (You can download the full report with a FREE 30-Day Trial.) 

“This model forecasts the price of MLPI based on changes to the price of XLE and the yield of U.S. Ten-year Treasury Notes. The model below has an R-squared of .76, meaning 76% of the price change of MLPI is attributable to the price changes of energy stocks and Treasury yields. Currently the model shows that MLPI is 20% undervalued (gray bars).  The last two times MLPI was undervalued by over 20%, its price rose 49% (2016) and 15% (2018) in the following three months.”

The Demise Of The Dollar

As shown in the chart below, the dollar has broken below both its rising trendline from its previous lows and the 200-dma. 

(We cover the dollar and positioning each week for our RIAPRO subscribers because the dollar impacts exports which makes up about 40% of corporate profits.)

Currently, the breakdown is very early in it potential progress. As we saw in June, that breakdown was short-lived before it reversed as foreign dollars continue to poor into USD denominated assets for both safety and higher returns than elsewhere in the world. 

We previously discussed this important point in The Great Cash Hoard Of 2019.

“As it relates to foreign positioning, it is worth noting that EURODOLLAR positioning has been surging over the last 2-years. This surge corresponds with the surge in dollar-denominated money market assets.

What are Euro-dollars? The term Eurodollar refers to U.S. dollar-denominated deposits at foreign banks, or at the overseas branches, of American banks. Net-long Eurodollar positioning is at an all-time record as foreign banks are cramming money into dollar-denominated assets to get away from negative interest rates abroad.”

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