Well, that escalated quickly…
As you might’ve heard, President Donald Trump got the weekend off to a lively start with a series of blockbuster tweets.
The tweets were in response to news that China would be slapping some tariffs of its own on $75 billion worth of US imports.
Though he also took aim at the Federal Reserve Chairman, Jay Powel, too.
From The Sydney Morning Herald:
‘“As usual, the Fed did NOTHING!” Trump tweeted, adding, “We have a very strong dollar and a very weak Fed.” He went further by saying: “My only question is, who is our bigger enemy, Jay Powel (sic) or Chairman Xi?” – a reference to China’s President Xi Jinping.’
But China was the main story.
Things just escalated a notch…
The nuclear option
‘We don’t need China, and frankly would be better off without them.’
Then he followed up with an order for US companies to move their operations out of China.
‘The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China…’
As the world’s media questioned whether the White House had the authority to issue such a demand, Trump doubled down on Sunday night by reminding everyone of the ‘nuclear option’ at his disposal…
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The IEEPA act gives Trump extraordinary powers.
As Citibank explained to its clients in a recent note:
‘IEEPA allows the President to investigate/regulate/prohibit any foreign exchange/financial/trade transactions, and to block during investigation/regulate/prohibit/nullify any use of rights/power or acquisition/holdings/trade of any property subject to US jurisdiction.’
In other words, Trump can completely cut off trade with China if he wants. A very scary thought for Australia as I discussed in Money Morning last Monday.
China is our biggest trading partner and the main source of demand for our exports.
The tail end of the US market caught Trumps tirade last week and plummeted 2.4% on Friday. It won’t look pretty for our market today either, I’d wager.
But before you pack up and head for the hills, today I want to remind you of a basic strategy that is still probably the best way to deal with the current situation…
The sleep at night strategy you should prepare today
The doomsayers will be out in force today telling you to sell out of everything and move into cash.
But the reality is no one knows what the future will bring. Not me, not you and certainly not any self-appointed guru.
No one has a crystal ball.
What we do know is that if the economy does start to slide, then the Federal Reserve will decrease interest rates.
That could lead to a stock market rally as cheap money flows through the system.
Or maybe Trump will use his ‘art of the deal’ and secure a new deal with China?
For all his tough talk, he’s got an election next year and it’s in his interests as much as anyone’s to keep the economy — and the stock market — rolling along.
Or maybe there will indeed be a crash for the ages?
How can you prepare for all eventualities?
Rather than trying to guess, one easy way to manage this situation is to make sure you have a foot in both camps.
In other words, make sure you have a diversified pool of investments in each type of asset class. So, some shares (Australian and international), some bonds, some cash and some property.
The key is to work out which percentage of your portfolio you have in each asset class in advance.
If you’re relatively young, then generally it’s better to have more in shares and property, and if you’re relatively old (closer to retirement), to have more in bonds and cash.
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This isn’t anything revolutionary, it’s basic financial planning 101.
But it’s probably the most important decision you can make. Getting this right means you can sleep at night through most situations.
The perfect mix depends on the person.
But this being Money Morning, we would also add a golden twist…
Don’t forget these
What you won’t hear about in your average financial planner’s office is to add gold, bitcoin and small-caps to your investment mix.
But I think they’re all crucial investments for the times we live in.
Both gold and bitcoin are economic hedges. That is, they have an inverse correlation to the economy.
As I’ve spoken about many a time, in a world of negative interest rates and easy money, gold and bitcoin offer scarcity value outside the traditional financial system.
Which means if times do get worse, these could both surge in value.
Certain types of innovative small-cap shares can be crucial additions to your portfolio too.
You see, certain small-caps exist in their own little world. They’re developing new ideas that don’t necessarily rely on the ‘general economy’ for their success. Unlike say a big bank or retailer.
Professionals call these non-correlated assets.
Incidentally my colleague Greg Canavan has found three gold small-caps which could be the perfect addition for a small part of your portfolio today. You can read that report here.
Whatever you do, plan your asset mix ahead of time, and then you can get through what comes next.
Editor, Money Morning