During almost three decades as an equity portfolio manager, I used to tell myself as I entered my office to take off my hat as a human being and put on my hat as an investor. My main job there was to try to make my customers’ savings grow so they could send their children to college and retire comfortably (the two main investment goals for most Americans). That’s all that counted.
On the other hand, I also knew that companies that sold socially-destructive products like tobacco or firearms would always trade at low PE multiples–and that those PEs would be more likely to contract than expand and that earnings weren’t going to grow at a fast pace. Also, companies that treated employees badly, cheated suppliers or customers, falsified their financial statements or actively discriminated against women or minority groups were, almost by definition, run by incompetents and were doomed to eventual failure. Avoiding such serial clunkers would put me ahead of the game. This was just common sense.
The real point of my mantra was for me to tell myself to focus on the economics of the current situation and ignore everything else.
How do I see things today?
The US has really been the only game in town for years. When Xi, a Mao-style Communist Party functionary replaced Deng, an advocate of Western-style capitalism, as head of the Party in 2012, that produced two decades of strong economic growth there, the writing was on the wall for the Chinese economy. The suppression of Jack Ma and Alibaba more than half a decade ago made the return to something like Maoism clear. Around the same time halfway around the world, Brexit, the UK’s failed attempt to restore its 19th century glory, happened. Economically, the EU was kind of a weird duck anyway, but the self-destructive withdrawal of the UK highlighted the shakiness of the Copntinental economies.
Those two shoot-yourself-in-the-foot moments left North America as effectively the only place to look for growth stocks.
The same anti-growth political development appears to have popped up here in the US, as well, where the electorate decided the better candidate for president was a convicted felon espousing a white supremacist, anti-immigrant agenda, with an economic plan based on the policies of the 1890s that didn’t work back then but somehow are supposed to be better now.
Trump has acted aggressively to destroy all evidence in the criminal cases against him for trying to overthrow the government and for his misuse of top secret documents. He’s tried unsuccessful so far, to end food stamps and Medicaid. And, in his most important economic move, he’s imposing tariffs on imports from Canada, Mexico and China. In what I see as a maneuver to avoid the mediation provisions in the US Mexico Canada (USMCA) trade agreement he negotiated in 2020, Trump is maintaining that fentanyl imports from both countries constitute a national emergency. This last is only interesting in that it shows someone has put considerable thought into these maneuvers.
A real political mess, with a lot more to come, I presume.
The two big domestic headwinds I see:
—tariffs
–tariffs are taxes placed on goods imported into a country. In the very short run, the cost of the tariff is split between the maker/seller and the buyer–the latter paying somewhat more and the former making a somewhat smaller profit. The hit to each side depends on its relative market power.
Sooner or later, both will begin to look for cheaper substitutes, with the seller looking for new, tariff-less markets (like Canadian oil producers looking to the Pacific Basin instead of the US) and the buyer different products (like switching to gas heat instead of oil). The speed with which the sides move depends on the situation. A Canadian oil company will probably want to keep its output at a steady rate to avoid damaging its fields or having equipment remain idle, so it will likely move more quickly to find other markets. Same thing with the US refineries tuned to accept Canadian crude. In the short run, retail customers may just pay the extra and turn down the thermostat for the time being.
—government layoffs
Federal government spending represents just under a quarter of domestic GDP. That’s a huge chunk. Government employees, on the other hand, make up about 2% of the total workforce. As an overall economic issue (as opposed to an issue affecting the lives of thousands of Americans being laid off), cuts in government spending seem to me to present a much greater threat to domestic GDP growth than the layoffs in Washington. Of course, because the people now being so heartlessly laid off are the ones who have control of that spending, this may be a distinction without a difference.
To date, though, Trump seems to me to be at least as interested in seeing all evidence that would support future criminal prosecutions of him is destroyed as he is in closing down government socical programs..
more tomorrow