So, if Trump wants a win, where should he look? If a long cold war of attrition with China doesn’t look promising, perhaps bashing Europe—specifically Europe’s auto industry and lack of defense spending—could prove more attractive, especially as Europe is now politically rudderless and economically slowing. My bet would be that in the coming weeks, Trump stops speaking about China, and instead starts bashing Europe. And doubtless his favorite targets will be France and Germany, perhaps as payback for the slights he endured at last month’s commemoration of the World War I armistice. If nothing else, Trump has shown that he is a firm believer in the old adage that revenge is a dish best served cold.
I pay attention when Louis speaks. He often sees events that happen “around the curve.” His premise is simple: The automotive industry drives the German economy. Germany, in turn, drives the European economy. So if Trump decides to follow through on the car tariffs he’s threatened, it could be a serious blow. German auto executives met with him in Washington this week but the threat is still alive.
Oh, and one more thing. Deutsche Bank, Germany’s financial crown jewel, seems to be in deep trouble. Its shares, which never recovered from the 2007–2008 ugliness, dropped to all-time lows this week after German police raided the bank’s offices in a money-laundering probe. We don’t know exactly what the fire is but there sure is a lot of smoke. Other European banks are not exactly thriving but DB seems to be in particular trouble.
It is hard for us in the United States to realize how important European banks are. European businesses, particularly small ones, get almost all their financing from banks. When Italian banks have trouble funding their bonds, that means Italian businesses will suffer.
So add all this up. We could see Europe faced with monetary tightening, hard Brexit, an Italian breakdown, popular unrest not just in France but all over, a trade war and a German/Italian bank crisis all at the same time. Again, this is not a far-off possibility. It could all be happening in the next three or four months.
If some combination of these crises develops into a perfect storm, the pain won’t stay in Europe. United States, Canadian, Latin American and Asian companies that do business with Europe will lose sales and have to lay off workers. Lenders everywhere who own Euro debt will face losses. Highly leveraged derivatives could blow up, forcing bailouts and currency interventions. We don’t know where it would lead but certainly nowhere good.
And it will end up being played out in the equity markets all over the world. Stay tuned…
The markets have been quite volatile for the past few weeks. My preferred ETF trading strategy, called Mauldin Smart Core, has performed well in this environment. Full disclosure, I have recently closed my own personal investment advisory firm down and moved my registration to my longtime friend Steve Blumenthal of CMG. As a personal business strategy, he has all the infrastructure and team to support me, and it really does allow me to spend more time researching and reading and writing. I am co-portfolio manager for the Mauldin Smart Core strategies which is available as a mutual fund or managed accounts.
We have done a report called “Investing During the Great Reset,” which explains our strategy and rationale. If nothing else, it will show you how I want to deal with the risk of a coming potential bear market and give you ideas for doing it yourself or in your own firm. Of course, I hope that some of you will become clients. But I am perfectly willing to help you whether you do or not. I want as many people as possible to get from where we are today to the other side of The Great Reset.
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