It’s the start of the third quarter. The market ended slightly up for the first half.

We’ll see where it goes, but it’s promising considering the rising global trade war that Trump kicked off.

Apparently, the market has decided trade wars aren’t going to be so bad for the U.S. after all. In fact, I would note that very few companies delivered downward guidance as trade war rhetoric heats up.

In fact, the U.S. market is a beacon of strength compared to others: it’s flat for the year.

China’s Shanghai Composite is down 25% since February (when Trump began his attack.) The German DAX is down 10% in the same period.

The U.S. market is resilient because investors are looking past the sabre rattling and the Kabuki theatrics and public histrionics by all players.  

Investors see that Trump can’t lose by attacking our trade partners. Worst case scenario is some farmers get bruised. Best case is real change to these trade deals. Investors are actually betting on Trump winning some battles.

Fall Market Surge?

I agree with the market. Remember, the market is forward-looking. And I see the stock market surging again when Summer ends.

Let me explain.

To begin with, focus on timing: the market is pricing in what they expect from elections in November.

Is this good policy? Absolutely: patriotism sells at election time.

Trump’s base will love that he is following through on campaign promises to ‘fix’ NAFTA. Fix NATO spending. And stopping Chinese trade abuse. Even if he wins nothing but enmity from trade partners, the U.S. voter will love him for ‘sticking up for Americans.’

I would even argue this has been a two-year plan.  

Everyone thinks he’s an idiot. But I see a plan of attack that is effective in its simplicity.  

The first stage was a tax cut that was, not coincidentally, passed right as the holiday shopping season started.  

Santa came early last year. This primed the economy such that it could absorb the economic blowback of trade wars, which he then initiated.

It’s a series of self-supporting economic initiatives, with one launching every six months. I suspect he’ll introduce more tax cuts after the trade wars settle down. Followed by an infrastructure bill. It’s a coordinated economic blitzkrieg that will run up to the 2020 Presidential elections.

But let’s ask another question.

Why did Trump initiate a trade war months before a mid-term election? Because he thinks he will win and results will be visible by September (any later and he loses ground in election momentum).

So why does he think he can show off results by then?

For starters, because the U.S. has a lot of leverage.  

First, because there is a certain high moral ground to his approach. NATO partners are shirking their military and financial agreements. China does abuse trade with the U.S., and so on. I am no expert on the details of trade agreements, but it is odd that German auto tariffs are 10% while the U.S. is at 2%.

The main source of leverage is we have the market everyone wants to access. Trump is cutting off that access precisely when other economies are struggling.  

Germany’s growth has fallen to a standstill. China’s is slowing fast. China’s PMI is pointing to barely expansionary. Exports have fallen 3 months in a row. Europe’s latest production data (PMI) fell to the lowest since December 2016. Its future expectations fell to 2015 levels. 

So, on the one hand, we have a booming U.S. economy and a stable stock market. On the other hand, the U.S. has trading partners slowing down and stock markets falling. The only path out for them is access to the U.S. market – which Trump is starting to withhold.

Simply put, investors and businesses around the world agree: Trump really does have a lot of leverage and is willing to use it.

Another reason to expect success is the multi-front strategy: Trump is brawling with Canada, Mexico, the E.U., and China (plus a military battle with North Korea, Iran, and Russia) – all at the same time.  

This makes sense: in this divide-and-conquer approach, he is waiting for one entity to bolt and that becomes leverage against the others.

(At this point, some might question the entire wisdom of initiating these battles. It’s a cardinal sin, they say, to pick a fight with friends and to add to the misery by doing so in public. And yet…Reagan confronted Japan over its horrible trade and mercantile tactics – which worked. Germany has had multiple Presidents take them to task for failing to meet the minimum agreements on NATO spending, but they did nothing. Now, confronted by Trump and in public, they will finally move. When politeness fails, it’s time to get serious. Threats made in secret will only backfire because markets and people get even more surprised.

I don’t believe antagonizing our allies over trade will lead to some permanent scaring. Quite the opposite: it can be very uplifting and reinforcing. It’s like an example of couple’s counseling, where we have to do a little yelling and airing of grievances in order to move forward to remembering why we are in a relationship to begin with. At the end of the day, the E.U. has no better partner than the U.S. The same goes for Southeast Asia, Asia and India.)

This is why Trump is winning this campaign. Germany and China are already scrambling to assuage him. Germany has quickly agreed – behind the scenes – to lower their auto tariffs. China is trying to figure a way to do the same.

This makes September the month this all comes to a head – that’s when the tariffs kick in. It’s also when Trump wants to show some gains for his efforts. (Which, by the way, is also his weakness. Everyone knows that he needs something soon.)

In any case, here’s a way to invest on the likelihood that it plays out in Trump’s favor:

1. Military & Aerospace: The easiest way for the E.U. to get Trump off their back is to buy a lot of military gear. Buying a few billion dollars of U.S. military hardware is the easiest way to (1) move the spending dial fast and (2) meet NATO spending agreements. It’s easy to buy a few big ticket items and quickly rack up billions in spending. Germany could buy 50 new planes and stop Trump from talking.
2. Long the dollar, short gold.
3. Long bitcoin. It is easier to smuggle your wealth out with crypto than it is with bullion. The fear trade will favor crypto over gold.
4. Long the S&P 500. Crazy as it sounds to buy the market when the dollar is rising, the U.S. will be a safe haven as other economies start to stumble. An end to the trade sabre-rattling will bring a relief rally.