‘The trade war is consuming all the oxygen in the room.’
So wrote my colleague Steve Sjuggerud in a recent piece on China.
How true. Down the markets go again. US oil — WTI — took an especially big whack.
Should you bail out and go to 100% cash? Hardly.
I view these bouts of volatility as opportunities to acquire shares you want to own long term.
Be rational about this. There are industries all over the place that have nothing to do with China, or trade between it and the US.
They’re likely going down today, too. Markets get spooked. Stocks get dumped. It happens regularly.
It is important to know what type of investor you are here. If you’re trading short term, then today’s action won’t be friendly (unless you’re short!).
But those with an eye to the longer term can’t take their eye off the main prize: Growing your wealth over time.
If you let every bit of volatility shake you out, you’ll never hang on long enough to realise the big gains that are possible in the stock market.
Granted, it’s the volatility that can make the stock market so difficult. I could be wrong also. Maybe we’re getting close to another ‘big one’.
But I doubt it. Major collapses like 2008 are rare.
What astonishes me is how many times I still see references to 2008 when someone is trying to warn investors.
It was 11 years ago!
Don’t you see the implication? With so many people still so paranoid about another 2008, we’re less likely to see that sort of crash.
People aren’t stupid. They keep more cash on the sidelines. Companies act more prudently. Everyone watches like a hawk for similar conditions to form — which means the risks are well understood.
Here’s an example. Last year, the possibility of the US yield curve ‘inverting’ was bandied about all over the place. The implication was that recession was not far behind.
I said at the time that with so many people watching for it, the effect just wouldn’t be the same.
And so far, the US economy has chugged along…and US stocks bounced back from their big drop in December.
It’s not the known worry you should worry about. It’s the unknown one.
The thing that blindsides the market is something nobody is watching for…a risk not understood…a devil lost in some minor detail.
Are you following these stories?
The trade war has been front and centre for over a year now. It brings volatility… But the chaos of 2008? I don’t think so.
Here’s a thought. With so much focus on China and America, where are people not looking?
India springs to mind. Did you see the news? India’s Prime Minister Narendra Modi has trounced the opposition party to win a second term in government.
His party is likely to have more seats than those won in the previous election in 2014.
It’s worth noting because India is the world’s fastest growing economy. It certainly doesn’t scream ‘distress’ to me.
We can run with this line of thought. In Indonesia, the incumbent government was retained at the recent election as well (though some locals don’t seem happy about it).
Last year, a tremor ran through the global markets about how much US-dollar debt these economies were carrying.
The perception at the time was that the Fed’s proposed rate-hiking cycle could cripple them.
Maybe that’s still a problem — but it hasn’t shown up so far.
One reason is that the Fed backed off on raising interest rates.
Point being, these situations are fluid. Maybe Trump negotiates a peace deal tomorrow. The markets would go up in the blink of an eye.
I just pity the American taxpayer. The US government is now organising a US$16 billion bailout of American farmers. This follows on from US$12 billion last year.
Naturally, Trump has nothing to give. The American republic just sells more debt and adds to its already-monstrous deficit.
Trump is paying farmers to produce soybeans and corn nobody now wants. That’s the idiocy of his trade policy.
He’s also putting a noose around US oil production. The American energy sector gets about 5% of revenue from China. That’s more likely to fall now.
That’s not all. The trade war is killing sentiment towards commodities and growth…
Peak shale: 2019?
That’s going to make it more difficult for US producers to sell forward their production…which is how they finance their drilling.
US shale has an average cost of US$50 a barrel (with a reasonably wide variance depending on the location).
If WTI stays under $60 a barrel, that’s not leaving much fat for US producers to invest in the future.
Take note of this story. A major shale company in Texas just revealed it has cut 25% of its workforce.
From Reuters: ‘Shale firms have pushed U.S. oil output to record levels. But years of heavy spending led to investor pressure to reduce spending and use the cash to provide payouts, rather than produce more oil.’
I expect to see more stories like this.
Don’t forget that the physical oil market is already tight. The US is now relied upon as the world’s swing producer.
The more Trump pressures China, the less likely the US energy business can fulfil its growth projections in terms of oil production.
I don’t worry about the trade war so much. I worry very much about the price of oil in 12 months’ time.
It now only takes one further wildcard — rebels in Libya and Nigeria, an attack in Saudi Arabia or Russia’s contamination issue — to remain unresolved…and the world has a big problem.
I hope I’m wrong. But that’s the way I see it. Go here for more.