Hostages

Guys have price targets for where they think the S&P 500 will end the year. That’s nice.

A lot of these targets are clustered around 3000, which is a big, fat round level that looks great in headlines – super clickable – and is easy to remember. All you do is take what you think earnings will be for the next two quarters and then your best guess at where next year’s consensus estimates will fall out come this November and you can back into a multiple from there: “Where will interest rates be, what might sentiment look like, add a little bit for repatriation of cash, subtract a bit for increased interest expense, factor in Europe, a dash of oil prices, discount a bit for the political noise, carry the one….THREE THOUSAND!”

Wishing everyone luck with their targets. Some will win, some will lose. Some were born to _____.

Anyway, the big monkey wrench circa the summer of ’18 is the trade war. Sorry, “tariff debate.”

We’re all hostages to what might happen, who might get screwed, who might turn around and screw us back harder, whether or not it cools off, whether or not it escalates, will it include the EU, NAFTA and China, what concessions and exemptions and for which industries, and on and on. There’s absolutely no reason for you to believe that you can predict the outcome for any of these questions. But the outcomes will absolutely be material for the sales and earnings of US stocks and even the consumer economy in the second half of this year. We can argue about the degrees of materiality and whether or not the red-hot domestic situation will dwarf any impact from it, but it’s the big question mark.

I think it’s part of the reason you’ve seen money pour into technology stocks and the Russell small caps all year. People think they’ll be immune or less susceptible to whatever’s coming. Okay, maybe, maybe not.

The Dow Jones Industrial Average being down on the year slightly while the S&P 500 has gained 4% or so makes sense. The word “Industrial” is literally in its name. Industrial is at the epicenter of the dispute, followed by automotive, agriculture, consumer packaged goods and energy. Apple’s at risk too, although China needs the manufacturing of the iPhone as badly as we need Fortnite.

Netflix, not so much. Large and small cap biotech, not so much. Payment processing stocks like Visa, MasterCard, Amex, Square, Paypal, not so much.

You’re seeing some separation between winners and losers in light of this.

Two thirds of the S&P 500 names are acting like hostages, and they are hostages. One wrinkle – the hostage takers have no idea what they’re doing. Contradictory statements every day. No clear aim other than to appear to have “won” something, although god knows what a victory would look like. No one actually wins trade wars, unless you’re keeping score based on who has seen the least amount of damage inflicted on their own economy.

There’s a simultaneous hostage situation going on at the southern border. The “zero tolerance” policy hinted at this past March by the White House Chief of Staff and confirmed by the Attorney General has led to thousands of children being imprisoned behind chain link fences and in tent cities that resemble internment camps. Last night, the AP reported on the existence of separate “tender age” facilities specifically to hold infants (!) and toddlers. Baby jails.

Kids who’ve either reached the border alone or who’ve been pulled away from their parents. They’re telling parents who arrive at the border looking for asylum from violence that they’re taking the kids for a bath. Then, when an hour or two passes and the parents ask what’s happened with their child, it’s too late. They’ve been taken away and the parent is jailed somewhere else. It’s the most disgusting thing you’ve ever seen happen in your life on US soil unless you were alive for World War II.

These kids are political hostages. The would-be autocrat and his henchmen think they’re going to use this trauma to induce Congress to give them the funding for a border wall. The policy, which began in April, could be stopped within an hour, all that would have to happen is the President admits it was wrong. He has never admitted to being wrong about anything in 70 years. The hostage situation may be ongoing for a long time.

Even if you believe that there should never be a legal immigrant coming in ever again, you can’t possibly believe that torturing parents and kids needs to be part of the solution. Half of the White House is saying that this policy was enacted specifically for deterrence and the other half is denying it. Is this divided front deliberate or just a function of the ongoing incompetent malevolence that almost resulted in a “Muslim ban” last year?

Who could know?

The trade war and the border war are not necessarily related, nor are they completely a separate issue. Both are symptomatic of the extreme unpredictability of the current moment. And the rest of us can only watch through a murky lens, with just a fraction of the information we’d need to feel confident in the endgame, like the hostages we are.