Markets

Don’t Fear the Trade War

By Charles Sizemore  |  May 31, 2019

May has been a brutal month.

I joked earlier this month that “sell in May and go away” was an infantile nursery rhyme you should ignore, and I stick by that today. If you’re investing the right way, the calendar month doesn’t particularly matter.

But if you’re a “buy, hold, and pray” investor, this month was a real doozy. At the heart of the volatility is the ongoing trade war with China and what it might mean for our investments.

Let’s take a look at a headline from Financial Times: “Trade War Sparks Fears of China Weaponizing U.S. Treasuries.”

According to the FT, China sold off $20 billion of its U.S. Treasury holdings last week, setting the stage for the “nuclear option.”

If China were to wholesale dump U.S. Treasurys, so the thinking goes, it would blow up the world financial system. U.S. yields would rise, making it more expensive for Uncle Sam to pay his debts. Borrowing costs around the world would rise, as nearly everything is tied, one way or another, to U.S. interest rates.

Well, it’s a compelling narrative. And it makes for fantastic scare copy. But I’m not remotely worried about this.

I honestly believe the U.S. and China will get into a real, bullets-flying, hot war before China dumps its U.S. Treasuries en masse. And even if were in a hot war, I’m not entirely sure they would do it even then. They can’t sell their Treasurys without destroying the value of their own reserves and blowing up the dollar would make it a lot harder to export their manufactured goods.

Mutual assured destruction was what kept the United States and Soviet Union from nuking each other during the Cold War. Well, the stakes here aren’t quite so dire. We’re talking about economic calamity and not the literally destruction of humanity. But it’s still a mutual assured destruction of sorts for China to “nuke” our bond market.

But let’s say the lunatics take over the asylum and China decides to do it.

What Then?

Well, there’s this little thing called the Federal Reserve. As the Fed proved in 2008, they’re willing to break all rules of financial orthodoxy when they perceive the stakes to be high. If they bailed out the Wall Street banks a decade ago, don’t you think they’d bail out our government by vacuuming up any bonds that China dumped on the market?

Furthermore, in the upside-down logic of the markets, China dumping our debt might perversely cause rates to fall rather than rise. If investors feared the world as we know it is ending, they would likely run to the safety of Treasurys. Think back to 2011. Standard & Poor’s downgraded the bond rating of the United States citing political impasse and the potential for default. US Treasury yields actually fell on that news. Normally, you’d expect yields to soar higher on a downgrade. But not when you’re talking about the world’s safe haven.

Now, this isn’t to say that there is no risk of the trade war spiraling into something nasty or causing a recession. That’s a real risk, and I’m legitimately worried about it. But China going rogue and dumping Treasurys? Not a chance.

But let’s say we get that recession. What then?

My advice: Focus on quality income investments. One of the beauties of income investing is that you can ride out mild market turbulence while still getting paid. Sure, your portfolio value might bounce around a little. But so long as the dividend checks keep coming in, you don’t need to worry all that much.

And my Peak Income recommendations have been weathering this storm nicely…

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Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR