“Concision in style, Precision in thought, Decision in life.” —Victor Hugo
We are a nation of consumers and investors, hemming, hawing and hedging with Trump, who flaunts law and principles. Unsure of securities? Avoid panicky flight to historically low-paying interest investments; seek principle. But balance domestic stocks with disharmonious investments that Modern Portfolio Theory uses to lower risks on strong shouldered returns—as my article on turtle bonds elaborates principle. Still unsure? Take your eggs out of one basket. Hedge with stock options, REITs, Real Estate, Foreign Investing and Commodities.
Trump hedges Draconian tariffs on most of the world with hasty suspensions; but he haws tariff resumption if world leaders won’t cut hundreds of deals in time. China refuses to kowtow and suffers 145% tariffs before 125% retaliation. Trump appointed Jerome Powell Fed Chair, who hemmed on interest rate cuts before hawing that Trump’s unprecedented tariffs will promote “higher inflation and slower growth.” So Trump says “Termination Cannot Come Fast Enough”—but doesn’t fire the man with Congressional hawing to fight both inflation and unemployment.
Trump’s threats may be mere bargaining ploys that let him score paper victories (replacing NAFTA)—but the damaged American branding may be irreparable. Deregulation also brings uncertainty and it is hard to invest with immigration fights, high taxes and Social Security recipient tax cuts in one breath. “Investors will not invest in the United States when Donald Trump is playing ‘red light, green light’ with tariffs,” concluded Democrat Elizabeth Warren, who sided not just with Barack Obama, but Mike Pence and Ted Cruz. David Ricardo argued On Principle a century ago that market forces best direct capital and labor to countries with “Comparative Advantage.”
If Trump terminates or intimidates Powell, lower rates may stimulate corporate growth, ease government spending and facilitate home purchases short run—but ending Fed independence may wreck securities markets. Homes hedge stocks with values that depend on the Valley economy, insurance, building and zoning, rent controls and materials costs—while Reverse mortgages let owners hedge against home ownership risks. If 30-year interest rates fell from 6.86% (April 17) to 5.86% and you borrow a million, expect monthly payments of $5,893—$800 less—just for principal and interest. Some sprinting borrowers line up refi deals with interest rate triggers.
Many of us yearn to own shining office towers, commercial storage space, fancy hotels, middling apartments or doctors’ offices; pick REITs wisely knowing that office space gets overbuilt and hotels fare poorly in recessions. Real Estate Investment trusts let us buy in at low cost and avoid legal and managerial hassles. CEM Benchmarking says REIT performance correlates with large cap stocks just 53%, but 91% with private realty. “For investment periods of 20, 25 and 30 years, the compound annual returns from equity REITs have exceeded those of the S&P 500 Index … investing in REITs helps lower risk and increase returns on a portfolio of stocks and bonds.” —Stephanie Krewson-Kelly, Educated REIT Investing.
Or imagine a flight to commodities like gold, silver, oil, aluminum, cocoa or hog bellies if the worlds of paper stocks and paper money seem to fail. Herein lies rare earth minerals like Scandium and Ytrium, used for industrial processes, glass, lasers and magnets. Possession gives China edges in trade and military production. In general, commodities seem to fluctuate negatively from stocks, but the jewelry demand for gold varies greatly from the industrial demand for platinum. Don’t think of trading short term to industry insiders on hunches, but do invest long-term investors with diversified investments in rare earths, precious or industrial metals. In boom times, consider industrial metals but think of precious metals in hard times or currency crises. Commodities come in ETFs.
“Flee this country?” some ask before hemming. Non-US Equities showed lagging 89% correlations to US equities, so they are not ideal hedges in an integrated world economy. Morningstar surmises: “…developing-markets equities have demonstrated a lower correlation with the US market than the developed markets’ correlation, albeit with higher levels of volatility.” If Trump walls off world trade, probably creating uncompetitive domestic monopolies or viable enterprises weakened by retaliatory tariffs, some will find opportunity abroad—and perhaps renewed faith.
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
