Wall Street Journal on Trump tariffs

Today’s Wall Street Journal contains an article on how the US has fared as result of Trump’s tariffs on imported steel. Btw, great photographs in it.

The story, in brief, is:

–tariffs made older, non-competitive blast furnace steel operations temporarily viable, saving for a time 6,000 domestic jobs–which have since been lost

–the price for this grace period–the elimination of 75,000 jobs in domestic industrial firms faced with higher steel input costs

–the firms “saved” by tariffs are still facing the same competitive pressures as before, but are in a worse position for not having begun to deal with them four years ago.

Nothing surprising about all this, except maybe to Trump. Just look at today’s American auto makers, who have been protected from foreign competition by Washington for most of the past forty years. Mediocre products, massive loss of market share and periodic visits to Chapter 11.

What the article doesn’t mention is the additional loss to America from foreign firms putting off manufacturing expansion plans here because of tariffs–and the erratic and thoughtless way they appear to be conjured up and applied.

If, as I think is the case, China is the chief economic (and political and cultural) rival of the US, driving in reverse for the past four years hasn’t exactly helped our cause. Nor has the increasingly parlous state of government finances, due to: a tax cut for the ultra-wealthy, who tend to save, not spend; GDP growth suppression through tariffs; and the trillions of dollars that will be needed to overcome the negative effects of Trump’s continuing efforts to spread the coronavirus.

Trump’s failing trade strategy

Trump sped up the industrial job decline

According to Bloomberg and the Wall Street Journal, domestic jobs in the US industrial sector have dried up at a higher pace during the Trump administration, pre-covid, than during Obama’s. The US trade deficit is expanding, as well, not contracting, as Trump claimed it would. In other words, Trump’s central economic effort, to compel pre-computer age manual labor jobs that started leaving the OECD for lower labor-cost destinations forty years ago to return to the US–and to shrink the trade deficit by doing so–isn’t working. In fact, according to portandterminal.com and Bloomberg, even an industrial controlled by Wilbur Ross, Trump’s Commerce Secretary, is in the process of pulling up stakes and relocating to Mexico.

a win for China

The composition of the trade deficit has changed, however, as Trump tariffs have pushed firms to exit China for Vietnam and other similar destinations. This is an unexpected gift for China. US levies are forcing Chinese businesses to make higher value-added products, a result Beijing had keenly desired for years but had been unable to achieve without Trump’s tariff assistance.

not a surprise, except maybe to Trump

None of this should be a surprise to anyone involved in international economics. It’s the textbook outcome. It’s also a big reason why the NASDAQ (dominated by large multinationals) is +105% since last inauguration day and the Russell 2000 (mid-cap domestic firms) is up only a fifth of that, at +21%. For 2020 to date, the figures are: Nasdaq +21%, R2000 -3.5%.

the stock market knew

Actually, the stock market has been expressing this skeptical view of Trumponomics from the beginning.

2017 2018 2019 2020, to date

NASDAQ +28% -4% +35% +21%

R2000 +14% -11% +23% -3.5%

Looking at a chart back to 2000, NASDAQ, S&P 500 and R2000 were more or less neck-and-neck until deep into the recovery from the 2008-09 financial crisis. During the final two years of Obama, the R2000 begins to lag–but nothing comparable with the persistent, and large degree of underperformance so far under Trump.

Three points:

–the most important for us as investors is whether/how trade policy will change if Biden becomes president–and the implications that would have for NASDAQ vs. R2000. Although just ending the current idiocy must be good for the R2000, the negative effect on the economy of Trump’s continuing coronavirus containment failure will likely be hard to counter and the effort may last a long time. This is a question of when the R2000 will perk up, not if, though.

–no news source seems that interested in this story

–it has been reported in the Wall Street Journal, however, even though that newspaper is a member of the Rupert Murdoch media stable that stars Fox News and the New York Post, both highly partisan Trump boosters. Just as strange as Mark Zuckerberg’s sudden realization that legitimizing QAnon and anti-vaxxers might not be such a great idea.

Facebook (FB) as the new News Corp?

My first full-time portfolio management job was investing $100 million for TIAA in Australia in the mid-1980s. Doesn’t sound like much in today’s terms but back then that made me the largest foreign investor in Australia after the Kuwaiti Investment Office.

That’s where I heard for the first time about Keith Murdock, who had created a nationwide newspaper chain in Australia. In its simplest form, the Murdock strategy was to provide favorable coverage to right-of-center politicians in return for help in getting regulatory approval for his company’s expansion. It worked very well.

At that time, Keith’s son, Rupert, was in the early stages of applying the same formula abroad–first in the UK and then in the US. Here, Murdock maintained his right-wing focus, but supported politicians of all stripes in his regional newspapers so they would assist his drive to build Fox, a third national television network with a film studio.

The original News Corp no longer exists. The Fox studio was sold to Disney and the newspapers separated from the tv network, presumably as part of Murdoch’s succession planning.

All in all, News Corp seemed to me to be an unsavory nineteenth-century approach to the news that, surprisingly, worked very well in the last half of the twentieth. As a stock, though, after some initial success on listing in the US, News Corp was never anything to write home about. Part of the weak performance was due to the deeply partisan political nature of the Murdoch business, part to the large amount of financial leverage News would at times employ, part to missteps like its involvement in book publishing.

The other day I was thinking about FB, a stock I don’t own, and wondering if Mark Zuckerberg is quietly following the Rupert Murdoch playbook. FB’s curious tolerance (until just recently) of harmful conspiracy theories, from QAnon to anti-vaxxers, suggests this is so.

In Murdoch’s case, he was ultimately able to find enough like-minded journalists to run his enterprise. They were content to do work of dubious merit, and that the relatively low price earnings multiple Wall Street assigned to News Corp would make their stock options–if reporters and editors had any–much less valuable.

If Zuckerberg is in fact mirroring Murdoch and has tied FB to Trump’s star, it would be reasonable to figure that this would be a negative for the stock. In Murdoch’s case, he could not find enough American reporters to carry out his strategy. He had to import writers from his businesses in the UK. Could FB do likewise? Another question might be that with stock options less valuable could he attract any skilled tech workers?

if we take economic competition with China seriously

The population of the Peoples Republic of China is about 1.4 billion. The population of the US is around 330 million. So China is about 4.2x our size. If we assume that brainpower is distributed more or less evenly around the world (I’m not sure why we’d assume otherwise), China has over 4x the really smart people that the US does.

How can the US overcome this disadvantage in numbers? Two ways:

–persuade really smart foreigners that the US is a land of opportunity and induce them to emigrate, and

–ensure that everyone in the country has an opportunity to get a good education, so they can contribute to economic growth afterward graduation.

To my mind, the poster child for how not to do things is Japan. There, a hidebound, traditionally pro-business, right-of-center party has controlled national politics for decades. It’s basic agenda: anti-women, anti-minority, anti-immigration (gaijin = human-like things that emerge from the darkness), protection for the politically powerful heavy manufacturing industries whose prime was in the 1970s-1980s. The result for Japan has been thirty years and counting of economic stagnation, a now massive national debt and a substantial decline in living standards due in part to a 30% depreciation of the national currency.

The plan that spawned this epic disaster is remarkably similar to the Trump agenda. Several exceptions: the industries Trump favors had their heyday in the 1950s; Trump’s white racism is overt; he advocates violence against domestic political opponents as well as foreigners and minorities; his incompetence as a businessman, so his 1930s-style tariff “protection” has ended up hurting the industries he favors as well as the rest of the country.

An ugly picture–made worse by his insinuations that he will use right-wing extremist militias to overturn the election result if he loses.

What is perhaps most surprising is that until the pandemic struck a majority of Americans approved of Trump’s orchestration of this incipient economic train wreck.

A major source of Trump’s appeal, I think, has been his promise to improve the lot of chronically economically depressed areas of the country still suffering from the demise of heavy industry that began over a quarter-century ago. The US has been unique among world powers in its failure to provide economic assistance to these regions, with both Democrats and Republicans complicit. As has been the case throughout his career, Trump’s promises have been empty. In fact, he has made the situation worse–although the harm he’s done has been offset somewhat by belated arrival of recovery from the 2008-09 downturn in these areas in 2016-17. Two implications: if we are to keep pace with China we can’t allow this large fraction of the population to remain unproductive; and continuing the abandonment of the rust belt keeps the door open for the next poleznyy idiot who comes along.





Bad Ideas Report

As you may know, my family and I own a number of actively-managed, investment theme-oriented ETFs run by Ark Invest. I consider myself an aggressive investor, so I like the focus and the (relatively high, in my view) degree of concentration in what ARK considers its best ideas. My one hesitation–hesitation may be the wrong word, since I own a bunch of ARK products (a risk to keep in mind might be better)–is that a given name may be prominent in more than one ARK products. Square, for example, is a 6% position in both the Ark Innovation and Ark Next Generation Internet funds; it’s also a 12% position in the Ark Fintech fund.

The position sizes don’t bother me, both because I’m aware of them and my younger son has convinced me of SQ’s appeal. The potential worry I see is the interconnectedness of the fund holdings in a time of extreme stress. If say, the Fintech fund were to have heavy redemptions requiring it to sell holdings, that could put some downward pressure on the other two through SQ. Not a worry for today and not a high probability scenario, but it’s my main concern. How to respond? …either be prepared to do nothing or to buy more.

Anyway, ARK has just issued a white paper titled Bad Ideas Report that I think is interesting. I found the autonomous driving sections the most in-depth. My reaction to the physical bank branch part is that this issue has been around since the emergence of the ATM in the 1980s. The US is way behind the rest of the world in consumer banking, so we can see the future just by looking abroad. Yes, this is bad for banks, but how bad?