A ‘Riff on the Ordinary Portfolio

As we move towards the end of what for investors has been a surprisingly difficult quarter – a period where earnings and scheduled macro releases have by and large run their course, the most prominent risks in our judgment fall under the realms of international relations, and, in particular, international trade.

There are many moving parts to consider. Two extraordinarily bloody and entirely pointless wars continue, with peace efforts coming in fits and starts. All of which has created enormous uncertainty in the markets. Is peace a viable option in Eastern Europe?

If so, can it be brought about as catalyzed by a massive, potentially enriching rare earth mineral/other natural resource trade deal? If not, how long will that war last, and at what cost? The Middle East, which has not enjoyed lasting peace in 40 centuries, presents perhaps an even more intractable conundrum.

In terms of trade, President Trump, who campaigned on the use of tariffs, announced their imposition, and, as we draft this note, has both postponed and re-upped them. Large tariffs appear to be in the cards within the next few weeks, though how large and for how long remains uncertain.

We have reviewed these conditions and determined a sustained pattern worth considering. In analyzing price action tied to the 2018 Chinese Trade War (tariffs) and the Russian invasion of the Ukraine just over three years ago, we find that these conditions of heightened international tension were met with a rising dollar and an increase in commodity prices. All as equity markets experienced some pressure based upon prevailing uncertainty.

Of course, we are not able to state with confidence the likelihood that these patterns will hold. However, we do believe that it is worth watching upside in the ETFs focused on either the USD FX basket (UUP) and/or a dollar-based Commodity Basket (DBC, DJP) which may offer nuanced hedging opportunities against a further selloff in financial assets catalyzed by increased international tensions.

By the same token, those holding the optimistic view that both shooting and trade wars will abate, might carry the opposite and bearish opinion of these very same ETFs.

This condition of heightened sensitivity to international risks is not permanent, and when it breaks down, the strategy described above breaks down.

However, while the focus remains where it is, these types of transactions can offer simple, intuitive means of sustaining core portfolio risks, guarding against dilutive contingencies and positively contributing to risk-adjusted return.