This may be the single most important weekend of the year.
What happens after will determine the fate of not just the stock market, but the entire global economy.
In fact, the aftermath of this will determine how much time we have left to make money in the stock market.
It will determine whether we should exit our positions, or continue to risk our money for profit.
And I say this without hesitation.
That’s because yesterday, the two most powerful people in the world met one-on-one to discuss the fate of the global economy.
In this month’s Equedia Letter, I’ll go over:
➡ The trade war between China and the U.S.
➡ What to expect for marijuana stocks now that legalization has happened in Canada and how to invest in the volatile sector.
➡ One imminent event that will set a new sector on fire – an event that’s all but guaranteed to happen before this year is over.
So regardless of your take on global politics or your stance on marijuana, I strongly suggest you read this Letter in its entirety.
The Battle Between Two Super Powers
Since World War II, no one has been able to challenge the might of the United States – not militarily, not economically and not politically.
Today, things are starkly different.
China’s meteoric rise since 1983 has now made the once emerging market not only a challenger to U.S. dominance but an imminent threat.
China’s economy is now two-thirds the size of the U.S.
From a Purchasing Power Parity perspective*, China has been the world’s largest economy since 2014.
*The purchasing power parity calculation determines how much things would cost if the cost of goods and exchange rates were equal. It describes what each item purchased in a country would cost if it were sold in the United States.
And unlike the U.S., China has done all of this without the need for war, or intervention in other world politics.
That’s because China’s rapid growth has been fueled by significant government participation through state-owned banks and enterprises, focusing on government spending and fiscal policy, rather than the U.S. approach of monetary policy.
But more importantly, it has been fueled by the United States.
It’s no secret that China’s economic growth has been driven by the influx of capital from the U.S.
It’s also no secret that its success in global trade flourished because the U.S. allowed it (see my Letter, How Money Works).
And for the first time in modern day history, the U.S. – under the leadership of President Donald Trump – is fighting back.
The War Begins
Earlier this year, I told you how President Trump began to fight back by imposing billions of dollars worth of tariffs on Chinese goods entering the U.S.
“…Last Friday (July 2018), Trump imposed tariffs on US$34 billion of Chinese imports.
…Almost instantly, China fought back with tariffs of its own totaling US$34 billion against American goods.
… the trade war intensified when Trump released a list of thousands of goods worth US$200 billion that could face tariffs.
If these tariffs are implemented, the global market could be in for a very big transition.
That’s because many expect these tariffs to slow the growth of the world’s top two economies while creating financial issues for some of the world’s largest corporations.
And if they go down, you can bet the rest of the world will follow.”
And the ripple effects of these tariffs are already affecting some of the biggest U.S. companies.
GM, Ford, Walmart, and even Coca-Cola all rely on buying steel and aluminum to make their products – many of which have been subject to tariffs as they come in from China.
As a result, both GM and Ford have increased prices to maintain profit margins, all during a time when sales are slumping.
It’s no wonder shares of both Ford and GM have been affected as a result, with both companies down 25% and 9% respectively on the year.
But share prices aren’t the only thing the tariffs have hurt.
When big companies struggle, the first thing to go is jobs.
GM just announced that it will cut 14,000 jobs in North America and idle five factories – the biggest restructuring of the Company since its bankruptcy in 2009.
But it doesn’t end there.
It’s not just the big boys that are being affected…the little guys are too.
More than 80 farms in the upper Midwest have recently filed for bankruptcy and farms all across the U.S. are seeing the biggest decline in net farm income not seen since 2002.
Now, to be fair, many of the farming bankruptcies happened before Trump’s tariffs, with many grain and dairy farmers beginning to see a repeat of the ’80s farm crisis as prices continued to drop this spring.
And despite the US$12 billion in farm aid from Trump, if the trade war continues, many farms across the nation will be lost.
Take note of this as something big is about to happen.
But don’t think the U.S. is the only one suffering.
China: Worst Year Since the Crisis?
Make no mistake, China is also feeling the pain of the trade war – perhaps maybe even more so than the U.S.
China’s glowing light on the world stage over the last decade has been its super speed economic growth.
But since the tariffs – although not necessarily because of it – growth has slowed to a pace not seen since the global financial crisis.
While the deceleration in China is likely the consequence of policies designed to rein in credit risk and bring on debt stabilization, the added tariffs – like the U.S. farmers – further deteriorate the economy.
And just like the aid given to U.S. farmers, China has also stepped up both fiscal and monetary support.
China’s manufacturing Purchasing Managers’ Index (PMI), an indicator of economic health for manufacturing, fell to 50 in November – the weakest print since June 2016 and right at the brink of an economic contraction.
Furthering the damage, its Shanghai Composite Index is down over 20 percent this year, making it the worst performer among the world’s major stock indices.
The 90-Day Countdown Starts Now
Luckily for investors, U.S. President Trump and Chinese President Xi Jinping just called a temporary ceasefire in the trade war yesterday – a ceasefire that is to last 90 days.
Furthermore, the language used in the ceasefire appeared to be quite promising:
Via the WhiteHouse:
“…Both parties agree that they will endeavor to have this transaction completed within the next 90 days. If at the end of this period of time, the parties are unable to reach an agreement, the 10% tariffs will be raised to 25%.”
And more notably, Trump and Xi have struck a temporary deal that would have China buy a lot more agricultural, energy, industrial, and other products from the United States to reduce the trade imbalance between the two countries.
Trump even had Xi agree to designate fentanyl as a Controlled Substance, meaning that people selling fentanyl to the United States will be subject to China’s maximum penalty under the law.
I won’t get into the importance of that in this Letter, but I am confident everyone shares my view that the fentanyl problem needs to be dealt with – this is a good start.
That means, for now, the market has been spared – and is likely to find support.
With this trade war ceasefire, we now have a few more months to profit from this market.
And in just a bit, I’ll tell you about the one event that we can look to for profits – and its all expected to happen within the next 30 days.
The Fed Needs More Time
The ceasefire between Trump and Xi should come as no surprise. Both sides need each other to stave off a global economic meltdown.
But more importantly, the Fed needs more time to unwind the massive balance sheet it accumulated since 2008.
The Fed needs this rally to go on a little longer.
That’s because, as I have explained many times in the past, the Fed will indirectly unwind its balance sheet using profits from the stock market – the higher the stock market goes, the more money investors have to shift from stocks to bonds.
But if the stock market falls too quickly, there simply won’t be enough money to buy the bonds the Fed needs to unwind.
So it’s no wonder Fed Chairman Jerome Powell told us last week that he not only sees the Fed’s benchmark interest rate to be near a neutral level but also that the Fed’s policymaking arm is not on a preset hiking path and could adjust its plans as needed.
And while that means we will likely still see some minor rate hikes in the near future, it also tells us that the Fed Chair’s carefully crafted words mean the Fed needs more time.
I suspect we could still see a rate hike in December – especially if the market rallies next week on the trade war ceasefire. This may slow momentum in the market, but bring support nonetheless.
The End of the Marijuana Hype?
Not so fast.
While I agree that many marijuana stocks could be considered overvalued, I have always said that new markets tend to command much higher valuations and grow much more rapidly than established markets.
Marijuana stocks just witnessed a sharp decline, but it’s a decline that I believe could pave the way for another leg up.
With marijuana comes high risk and high volatility.
When the overall stock market is shaky, marijuana stocks almost always sell off. That’s likely because many of them already command high valuations and investors tend to sell off better performing positions first during times of volatility.
So when the overall market drops, marijuana stocks drop even more.
For example, between September 20 and October 29, the S&P 500 fell from 2930.75 to 2641.25 – a drop of nearly 9%.
During that exact same time, the Horizons Marijuana ETF (HMMJ) fell from 25.95 to 17.07 – a drop of over 34%.
With the market potentially stabilizing as a result of the trade war ceasefire, the marijuana sell-off could also stabilize and move higher with the overall market.
The big swings go both ways.
Over the last 40 years, December has historically been the best performing month for the S&P 500, followed by April, then January.
That’s precisely what happened last December.
Last year, the S&P 500 climbed from 2642.22 at the beginning of December to highs of 2872.87 the following year in January – a near 9% increase in just two short months.
And what happened with marijuana stocks during that same time?
The HMMJ climbed from 13.99 to 22.69.
That’s more than a whopping 62% climb in less than two months!
I am not expecting marijuana stocks to do the same thing again, but it does show correlation that marijuana stocks take bigger swings, in both directions, and climbs much faster when the overall stock market is healthy.
Furthermore, as I mentioned last month, marijuana demand is strongly outstripping supply.
And of course, let’s not forget the expansion of the U.S. cannabis market.
Michigan just passed a measure to legalize recreational use of cannabis last month, and both Missouri and Utah legalized medical marijuana.
President Trump just fired Attorney General Jeff Sessions, who was vehemently against marijuana.
But it’s not just North America who is becoming more accommodating to cannabis – it’s happening all around the world.
Take South Korea who just legalized medical marijuana.
Th question now becomes how to invest in marijuana in today’s market.
As I mentioned last month in my Letter, “The Great Debt Transfer“:
“…I suggest looking at retail plays that have deep roots in retail stores and chains, and not just brands.
That’s because these stores are going to be the next big drivers for marijuana. They will be the middlemen – the cash conduits – for the big Licensed Producers
Right now, very few retail chains exist.
But come next month, many of them will open, and the rush to buy legal weed will truly be on.”
I am looking at one retail play in particular but will share more as the Company matures.
One Last Gift Before Christmas?
Earlier, I spoke of a sector that is likely to thrive in the coming months as a result of the trade war:
“…And despite the US$12 billion in farm aid from Trump, if the trade war continues, many farms across the nation will be lost.
Take note of this as something big is about to happen.”
Despite Trump’s negotiation yesterday – convincing China to buy more agricultural products from U.S. farmers – and despite his US$12 billion aid, farmers across the U.S. will still struggle.
Which is why I previously stated that Trump’s administration will work tirelessly to pass a new Farm Bill ASAP.
Via the October Letter:
“The current United States Farm Bill (has expired), and many believe that its successor will include the full legalization of hemp across all of the United States.
If passed, the new Farm Bill may not only make hemp – and thus CBD-derived from hemp – legal, but it could open an entirely new market expected to be worth billions.”
On Thursday, U.S. lawmakers finally struck a deal in principle on a new Farm Bill, which includes provisions to federally legalize hemp growing, production and distribution.
If passed, the bill could allow states to regulate hemp, and hemp producers will gain access to financial services like federal crop insurance, as well as access to banking and traditional capital markets – just as marijuana companies in Canada have.
They have until the end of the year to finalize the Farm Bill, but if they do – and I suspect they will – it will pave the way for a new sector set to explode: the hemp market.
Watch your inbox for a full report on how to take advantage of this in the very near future – and hopefully before the U.S. Farm Bill passes.
Life is full of twists and turns.
From an investment perspective, the 2018 twists and turns were mostly predictable. It provided plenty of opportunities for traders to make a lot of money on the swings.
I believe another swing is coming.
But, as always, that doesn’t mean we should avoid thinking about the overall risks.
U.S. deficit spending is soaring, and the U.S. government is spending more on interest payments than ever, to the tune of $1.5 billion per day – a number that is surely going higher.
More importantly, the world is still on edge when it comes to political stability.
Less than 100 years ago, the world transitioned from a time of war to a time of peace.
Today, global politics tell a different tale, appearing to transition from a time of peace to a time of preparation and defense.
China and Japan are both adding to their defensive infrastructure. China recently confirmed the building of a third warship aircraft carrier, with plans to add a fourth in service by 2030.
Meanwhile, Japan just ordered another 100 F-35 stealth fighter jets from the U.S.
Ukraine just held military drills after a Russia sea confrontation, and India
just signed a deal in October with Russia to acquire five S-400 air defence missile systems.
It’s no wonder IMF Chief Christine Lagarde recently warned that “darker clouds are looming.”
Take advantage of the market while it’s still here.
Seek the truth,
The Equedia Letter
Disclosure: We own shares of many marijuana stocks and will benefit from their rise in share price.
Equedia.com and Equedia Network Corporation are not registered as investment advisers, broker-dealers or other securities professionals with any financial or securities regulatory authority. Remember, past performance is not indicative of future performance. This article also contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements made in this article. Just because many of the companies in our previous Equedia Reports have done well, doesn’t mean they all will. Furthermore, we are biased toward marijuana stocks as we own shares in many of them.