What The Trump-Russia Scandal Means For The Markets (RSX)

From Martin D. Weiss, Ph.D.: Russia scandals and paranoia continue to dominate the news cycle, disrupt Congress and plague the White House. Yet, ironically, it seems there are still few people inside or outside the Beltway who truly understand Russian-American relations.

Seven days ago, I presented three alternative theories: (1) Russia as an ally, (2) Russia as a Cold War adversary, and (3) Russia as enemy #1.

I asked you to tell me which theory you feel most accurately reflects today’s reality.

And in order to help translate this crisis into investment strategy, I promised to give you my own answers here today.

Within hours, page after page of insightful and valuable reader comments poured in, starting with …

Theory #3
Russia as America’s Enemy #1

“I spent 15 years in the Gulag,” writes Mikhail K., “and ended up the last political prisoner released in the USSR. No terrorist presents an existential threat to the United States. No country other than Russia. Given the recurrence of Russian public support for its totalitarian regime, the Russian Federation cannot be responsibly classified as anything but a mortal enemy.”

Thank you, Mikhail. I’ve read about your work as director of the Human & Civil Rights Organizations of America. And although it was many years ago, I still remember The New York Times column about you, Man in the Window. I admire your courage and cannot dispute your personal experience. Nevertheless, as I’ll explain in the next two sections, there’s also strong reason to believe, or at least hope, that there are other alternatives.

Phil agrees with Mikhail. “The answer,” he says, “must take into account the person running Russia, not the country per se. Putin has grand ambitions not only to re-establish the Soviet empire, but to also undermine Western democratic values. He’s another Hitler with more weaponry and shrewdness.”

Meanwhile, on the other extreme, I was surprised by the number of people who lean toward …

Theory #1
Russia as an American Ally

Erik R. writes: “I emigrated from Russia in 1992. I was born in St. Petersburg and can tell you with 100% certainty that Russians want neither confrontation nor war with the USA or anybody else in the world. No other country in the world suffered as much as the Soviet Union during World War II. If not an ally, I would definitely call Russia a business partner and nothing else.”

Norman L. weighs in on the same side: “We have missed many opportunities, and I think we are about to miss another, to benefit from mutual cooperation with Russia. Russia-phobia has always dominated our thinking and blinded us to the real possibilities.”

“Russia is not a natural enemy of the United States,” writes John. “The Washington fixation on Russia is like nothing I have seen in my lifetime; it is bizarre and damaging. It is all about checkmating President Trump. The Democratic Party was never as concerned about Russians when they were an actual threat, and a driven, Communist dictatorship. The entire affair, and Washington’s reaction to it, is simply ‘off,’ bordering on the truly weird.”

Bill takes the argument one step further: “The Globalists, including those here in the U.S., want Russia to be enemy number one, and if that doesn’t work, China will do. The war industry needs a BIG boogeyman so that they can justify the huge amount of money that flows their way.”

My comment: This discussion reminds me of the fiery debates I used to hear in New York’s Union Square in the 1960s.

Back then, it was also about the West vs. the East, but with one big difference: The East was behind the Iron and Bamboo curtains. That meant virtually no trade flowing in either direction, very few investment dollars and almost zero participation in global financial markets by the Soviet Union, China and their allies.

In the 21st Century, that picture has changed dramatically. Russia is now the third-largest trading partner of the European Union, while the EU is Russia’s largest.

Russia depends heavily on the EU for machinery, transport equipment, chemicals, medicines and agricultural products. The EU, for its part, relies on Russia for oil, gas and other raw materials. Russian trade with the United States is much smaller, but still many times larger than it was under the Soviet Union.

With China, frequently mentioned in reader comments as the “real enemy,” trade has grown even more dramatically. During the Cold War, it was virtually non-existent. In 1985, a decade and a half after President Nixon became the first U.S. president to visit communist Beijing, it was it still less than $8 billion. By last year, it had grown 75-fold, to over $578 billion, transforming China into America’s largest trading partner, even surpassing Canada and Mexico.

Some argue that China has the U.S. government over a barrel because it holds over $1 trillion of its surplus cash in U.S. Treasuries. True. But it’s a two-sided barrel: China also relies heavily on American consumers for the primary source of those same surpluses — $463 billion in exports to the U.S. last year alone.

This massive trade is a game-changer for foreign relations. And so far, I’ve been talking strictly about trade. If you also consider the massive back-and-forth of capital flows, the mutual economic dependence is much greater … all raising a very simple question:

How can a country be a major trade partner with the West and an archenemy of the West at the same time?

The answer takes us back to …

Theory #2
Russia as a Cold War Adversary

This is the broad middle ground that takes into account elements of both alliance and hostility; cooperation and competition; hopes for peace and fears of war.

It presumes a delicate balance between friendship and force. Like walking a tightrope, policymakers must stick to a disciplined, narrow path. Anytime they try to overplay their hand or lean too heavily toward one side or the other, they risk an adverse reaction that tips the balance in the opposite direction.

We don’t even have to talk about allegations of Russian hacking of the U.S. election or Trump campaign collusion with the Russians. Trump’s public praise of Putin and public favoritism for Trump are already examples of leaning too far.

Those actions alone raised expectations in Moscow beyond what the American government could actually deliver. Worse, they have invoked a virulent Russo-phobic response in the U.S. Congress, which has just voted overwhelmingly in favor of more sanctions. Both Putin and Trump broke the tried-and-tested rules of no-drama balance and moderation.

This is why veteran strategists advocate a very cautious, step-by-step, friendly-but-tough partnership approach to Russia. And this is where the majority of our readers also fall.

Chris writes: “After living through the Cold War, I came to the conclusion that Russia was really defending itself against the Western countries. Why America has this very large chip on its shoulder, I do not understand.”

Trevor B weighs in, saying: “I visited Russia regularly following the end of the U.S.S.R. Over the next eight years, I met many intelligent, capable people. Engagement is essential on all levels. Originally from Northern Ireland, it is noticeable to see how, over time, dialogue softens edges, even if dark forces still exist.”

“I would pick the Cold War adversary,” adds Ernie. “Putin is not one to back down, as this is a sign of weakness. Trump must stand up strong to Putin, but in a way that both can save face. I have been in Russia too, doing mission work in 1996-’97, and they are a very hospitable people and were so open to the West and to the Bible, which was a forbidden book for most of the last century.”

John D. also espouses theory #2. “If Russia were looking for provocation as a prelude to war, President Trump provided it with the destruction of several of Assad’s MiG fighters on the ground and the recent downing of a MiG fighter for encroachment into an area where American forces were on the ground. As in most important decisions of this kind, economics is the final arbiter. Russia is not in a position economically to mount what could be a long and protracted military conflict with the United States. So they will continue the less-expensive cyber activity and aggravate U.S. foreign relations when opportunity is present.”

George C. feels that both theory #1 and theory #2 are too extreme. “Although we can never trust Putin,” he writes, “any comparisons to him with Hitler and Stalin are unwarranted. Russia is part of the world economy, but not an ally except where our interests coincide. His annexation of Crimea as seen from Russia eyes was a takeback of a predominately Russian section of the Ukraine. Should he do anything with Estonia, Latvia or Lithuania, where Russians are only a significant minority, then we must defend.”

John B. writes: “Having lived and worked with Russian military officers in Egypt in the ’70s (under UN auspices), I believe the Russian people admire and envy the USA. If they could ever escape totalitarianism, they would be a great partner to Western society.”

Christopher B. has a similar experience and is on the same page: “I attended Army Language School, worked in the Soviet area in the Defense Intelligence Agency, and respect the great Russian people, especially for their sacrifice and courage in WWII. I think McCain and Graham should either shut up or submit a Declaration of War against Russia. Putin pursues national interests as he sees them. He is neither friend nor implacable enemy.”

Another reader, using the screen name “mtspace,” supports my argument based on mutual economic dependence: “I don’t believe Europe can survive long without Russia’s raw-material inputs. And I think the U.S. will, in decades to come, be ever more reliant on raw materials from there. Just as Nixon sought a relationship with China to gain an advantage in the U.S. relationship with Russia, I think any wise U.S. leader will sustain a constructive relationship with Russia to gain a small advantage in U.S. relations with China. Our attitudes follow our wallets.”

Three Takeaways for Investors

The first takeaway is uncertainty.

Too much now seems to depend upon the unpredictable actions of a small number of wayward leaders. Too much of our current history seems to be driven by freak events. For investors, that raises the ante of risk. It mandates care, caution and cash.

By “care,” I mean careful selection of investments, based on careful attention to the facts that only solid, balanced research can uncover. Don’t respond strictly to headlines. Dig deep — like we do prior to making any new investment recommendation at Weiss Research.

Caution, meanwhile, is all about investing in moderation. Regardless of any new-fangled investment formulas or systems, the old tried-and-tested rules of diversification and investing in small increments still prevail.

Cash must remain a key component of any portfolio. Even if safe yields are still very disappointing … even if you think the risk of a market crash is still very small … cash gives you the ultimate in flexibility — to adapt quickly to unpredictable change.

The second takeaway is the continuing upward pressure on defense stocks.

With many aspects of the Cold War returning, leading defense stocks should remain at or near the top of your buy list. In my April 24 column “Urgent Quiz for Investors,” I cited Weiss Ratings analyst Mike Larson’s three top picks for the year. They were …

  • Raytheon (with a Weiss Rating of “A-“), which makes the Tomahawk cruise missile, used more than 2,000 times in combat over the past several years. On that day, the stock closed at $156.03, already up sharply from $132.97 on Nov. 4 of last year. Now it’s trading in the $170 area.
  • Lockheed Martin (with a Weiss Rating of “B”), America’s largest defense company, sells a wide suite of products that the president may call upon as global conflicts intensify. On April 24, it closed at $276.21. It then suffered a correction, which we said should be expected, giving latecomers a chance to buy. Now it’s over $288 per share, up dramatically from $236.28 on Nov. 4.
  • Northrop Grumman (rated “A-“) makes the Global Hawk drone and parts for the F-35 fighter jet. Its shares were selling for $237.64 on April 24. Now, even after a setback last week, they’re about 25 points higher.

The third takeaway is the impact on gold and oil.

As the new Cold War heats up, they’re likely to roar back into the spotlight.

Start with gold. Despite massive fund flows into equities, it has held up remarkably well all year long. It’s up 12% since it hit bottom on Dec. 15 of last year. It’s currently on an upswing. And any further slide in Russian-American relations could be the trigger for a new advance.

Also on the upswing is crude oil, with West Texas Intermediate advancing from $42-per-barrel just 40 days ago to over $49 last week. Most of the excess supply worries now seem to have been absorbed by the market. Not yet absorbed is the prospect for growing demand — let alone new threats to supplies posed by escalating conflicts in the Middle East and the Persian Gulf.

Plus, Weiss Research’s Mike Burnick adds three more reasons to expect higher oil prices: (1) U.S. crude oil inventories have declined steadily in 12 of the last 14 weeks; (2) our cycle model forecasts a substantial rally into late August; and (3) confirming that model, the seasonal pattern for oil is moving into a bullish phase over the next several months.

Just remember: Invest with care, caution and plenty of cash in reserve.

The VanEck Vectors Russia ETF (NYSE:RSX) fell $0.2 (-1%) in premarket trading Monday. Year-to-date, RSX has declined -6.79%, versus a 11.72% rise in the benchmark S&P 500 index during the same period.

RSX currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #63 of 77 ETFs in the Emerging Markets Equities ETFs category.


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