Syria is Trump’s calculated signal to Russia and China

There’s an old Buddhist story about leadership. A student approaches the Buddha and asks how should one lead most effectively.

The Buddha replies that there are three ways to lead. One is in front like a general leading his men into battle. The second is as a ship’s captain, who goes with his crew on the journey. Third is like a shepherd, where the flock is the priority and the shepherd follows them to keep the flock together.

The Buddha then says that a wise leader knows when to use each of these approaches.

Recently, after the bombing campaign in Syria, there’s a lot of talk about Trump deciding to lead us from the front as opposed to leading us from behind, as his erstwhile predecessor did regarding Syria and other military hot spots.

But as an investor, my interest is more where we are being led to, rather than the position of the leader.

But before I get to this, one quick note about my last column. I wasn’t expecting that events were moving this quickly, but it seems that Iran and Iraq (OPEC’s No. 2 and No. 3 producers) have broken with their OPEC partners and have raised their oil production. It’s going to be very interesting to see how Saudi Arabia deals with this.

To some extent, what’s happening with OPEC is in the news because oil is again making headlines since President Trump authorized a bombing raid on a Syrian airfield.

When I first heard the news, it wasn’t the fallout in Syria that came first to my mind but the fact that Trump was sitting down with China’s President Xi Jinping for a two day summit.

Politics is calculus, not simple math. Google defines calculus as “the branch of mathematics that deals with the finding and properties of derivatives and integrals of functions, by methods originally based on the summation of infinitesimal differences.”

And this move on Syria, as Trump meets with Xi, is the summation of “infinitesimal differences.”

What I’m saying is, by launching this attack it shows Xi that the U.S. is not worried about ruffling superpower feathers when the U.S. deems it necessary. That is a message not lost on China as it expands into the South China Sea.

Philippines’ President Rodrigo Duterte recently ordered his navy to deploy to the contested islands and defend them from Chinese incursion. Coincidence?

The message of the Syrian strike was a calculated message for President Xi. There was also a slight undertone meant to show the domestic critics of a too cozy relationship with Vladimir Putin that Trump doesn’t care about keeping Putin happy.

Now, we wait for the counter moves from Russia and China.

In the meantime, oil has jumped up, and other commodities have followed suit.

This is the kind of market you can expect as we move forward. Increased volatility and serious sabre rattling around the world as both super powers and their proxies test the new U.S. administration.

It will be interesting to see how Trump moves into his commander in chief role so early in his presidency. It could also be the reason for the shake-up of White House staff, including Steve Bannon’s removal from the National Security Counsel.

Regardless, it’s one more indication that we’re past the point of words now, and the Trump administration has the helm and its words mean distinct actions.

In the short term this will be good for commodity prices — oil hit a one month high the day after the bombing and gold hit a five month high. But beyond that, the winners look to be defense stocks and safety oriented stocks.

We’ve known for quite a while that the U.S. economy, while doing better, is by no means going gangbusters. And there’s little reason to think 2017 will be the year that changes. Rising rates will slow home sales and construction. Consumers will cut back on big ticket items and business spending is already slowing. And this is before we start talking about the collapse of the retail sector, which also hurts a number real estate investment trust (REITs) that own and operate shopping malls.

Like Iraq and Afghanistan, any conflicts will be conducted “over there” away from the U.S. and won’t generate a great deal of domestic concern initially. But these military incursions have a tricky way of escalating to the point where it’s far harder to get out than it was to get in.

And all this has its political costs. If you’re waging conflicts in Syria and North Korea as well as Afghanistan and potentially the South China Sea, it’s hard to get much momentum for tax reform or healthcare reform, much less infrastructure stimulus. The duties of a wartime president are much different than those of a peacetime president.

These are the times to hope for the best and prepare for the worst, at least as far as investments go. Avoid commodities for now, if you didn’t get in on gold or silver, you’re buying into an emotional rally here.

Look to build up your defensive stocks like consumer staples — Proctor & Gamble, Altria or Kimberly Clark — as well as defense stocks like Lockheed Martin and Northrop Grumman.

The trick is to work out the calculus, not the simple math.

— GS Early

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