I saw a replay of an interview with Trump’s eccentric economic advisor, Peter Navarro, this morning. In it, he was explaining that Ford, founded by an American, still owned by an American family and developer of the idea that there should be a mass market for autos, is not an American company. In contrast, Toyota, a highly traditional (meaning anti-woman, anti-foreigner) member of the samurai-created zaibatsu that fomented WWII, is. Honda, too.

The only sense I can make out of this is that although Ford assembles most of its autos in the US, its engines come from Canada. Toyota and Honda, in contrast, both make engines in the US.

As far as I can tell, Navarro, whose area of academic expertise the internet says is electric utility regulation, maintains that raising tariffs high enough will force car manufacturers to move engine manufacturing plants from abroad to the US and that this will create a wealth of high-paying domestic jobs.

Three issues:

–the only car manufacturer with wholly domestic production is Tesla. So it’s hard not to see dots connecting the administration’s proposal to Elon Musk’s company. This would also certainly upend BYD’s plans to deliver its moderately priced offerings to US customers from Mexican plants

–plants moved from abroad to the US would likely be highly automated, therefore producing (my guess) surprisingly small number of new jobs

–let’s suppose the effect of tariffs is to raise the average retail price of a new car in the US by $5000, or about 10%. If anything, my hunch is that the actual price increase would be higher. Given that 16 million cars and light trucks are sold in the US each year, on this assumption, tariffs would raise $80 billion yearly. The actual total number could be lower, since the higher price would likely reduce total demand.

Toyota produces a million engines a year in its Alabama plant (one I selected kind of at random, figuring it would be very efficient) with 2000 workers. Manufacturing another 5 million engines in the US to replace imports would create 10,000 new jobs here. If these were the only new jobs created, the cost in tariff payments to Washington for each job created would be around $8 million. Suppose (I’m just making up numbers in all of this) we’d need, say, 10,000 new assembly workers, too. That drops the cost/job to $4 million. Still seems like an awful lot. If new job creation is 10x what I’ve been assuming, i.e., 200,000–which would be about a 20% increase in total US auto making employment, the cost per job is still $400,000, or 5x what the industry average wage is.

In other words, it’s hard to make up numbers where, taken by themselves, the tariffs don’t end up reducing economic growth. Presumably, the administration’s plan is to use the tariff income to fund tax cuts for the ultra-wealthy. Given that this group is the most likely to save and the least likely to consume, the net result still seems to me to be contractionary.

what it is

Private equity project developers buy companies, very often ones that are not publicly traded. They intend to hold them for, say, five years. During that half-decade, the private equity principals polish the companies up. They improve management practices, expand the acquired firm’s market reach, sometimes by combining it with other, similar private companies to achieve critical mass. They may also aggressively shrink the workforce, something a publicly traded corporation, fearing damage to its brand name, may be hesitant to do. The end game is either to sell the remodeled company to a large corporation–who may have already indicated an interest in, and signaled the desired shaping of, the end product being shaped–or take it public.

As I see it, the late David Swensen of Yale is the person who put private equity on the map when he took over management of that university’s endowment in 1985. I was particularly interested in how he operated because I’d spent six years at Yale after the army and was also finding my own way on Wall Street at that time.

I think Swensen’s most basic observation was the simple one that a university endowment had a very long investment horizon–decades, in fact–and therefore didn’t need the daily liquidity that’s a key feature of publicly traded stocks and bonds. So why pay for that liquidity? Instead, buy shares in privately held companies, which could be had at considerably lower valuations. In addition, Yale’s injection of capital would in itself enhance the intrinsic value of the target company. Another win. In addition, in the pension world of the 1980s Swensen had the field more or less to himself.

On the view that there’s no “free lunch,” there are two offsetting factors to the apparent gains. The first is near-term liquidity, which wasn’t an issue for Yale. The second is how to value the portfolio positions in the absence of a market quote.

Forty years ago, this was not a burning issue, since Yale was the only game in town for private sellers. The key was/is careful analysis of audited financials. And Yale had no endowment rivals offering target companies a better price. I do recall one instance where Yale owned part of a company in Africa, whose business was so obscure that the endowment decided the best (only?) parties able to assess the company’s value was its top management. Not a good look, but presumably a tiny position (I have no clue how this worked out, though.) In any event, the overall results have been extremely good for a long period of time.

today’s world

The landscape has changed significantly. Virtually every large traditional pension or endowment organization seems to have a significant portion of its assets devoted to private equity. I find that in itself to be worrying, since the number of organizations looking to sell in the event of some adverse development is now enormous.

In addition, I read the emergence of etfs with a portion of the assets in private equity to be worrying in itself. A basic axiom of marketing is that there’s no reason to offer chocolate ice cream until the market for vanilla is saturated. Similarly, the emergence of strawberry (my favorite, but #3 behind #1 vanilla and #2 chocolate) implies that the market for chocolate is also saturated.

I also read this as saying that demand for private equity from traditional sources has dried up. If so, pension funds and endowments won’t act as a buffer to mitigate the potential decline in private equity prices in times of market stress.

If my analysis is anywhere near the mark, these new etfs are riskier than they might appear at first glance. Again, if so, great to buy at the bottom of a sharp market decline, not so much near a market top.

COBOL (COmmon Business-Oriented Language) was invented in the late 1950s as an easy-to-use computer language for business. It was adopted as a standard for its mainframes by IBM in 1962, as the internet tells me, making it the de facto industry standard back then.

It would be tempting to say that no one uses this horse-and-buggy-whip technology any more, but that wouldn’t be right. The COBOL-mainframe combo continues to be the mainstay for banks, insurance companies and the government.

I’ve never been interested enough in financials to find out for sure. It sems to me, though, that the primary reason is cost. Presumably a company would build a more modern system, run the two in parallel for a while and then shut the mainframes down.

For big companies, this would be a huge out-of-pocket expense, probably making a big one-time hole in the income statement. Worse, from a pragmatic office-political point of view, who knows how top management bonuses would be affected and what the board of directors might think about a long-festering issue no one had told them about. Maybe it gets them thinking of looking for a new CEO.

In the case of government, what I’ve read (and believe) is that it takes ten years for any computer project to go from proposal to implementation.

Why take the risk? Why not cross fingers hoping do disaster happens on your watch and leave the problem for the next guy.

To be clear, I’m not saying this is what one should do. It’s what I think has been done.

An aside:

–in 1990 I was hired by a large financial company to turn around a global fund that had a disastrous performance record. When I arrived, I asked the computer people to create a performance attribution report to my specifications–something I’d had at prior jobs and that could be knocked out on a PC in a week at most. What I really wanted was for the program to be hooked up to a data feed. The programmers said the task would take a year to complete …and cost, in today’s money, $200,000. Welcome to COBOL and/or bureaucracy inc.

Why is this important today?

–there aren’t that many COBOL programmers around any more. People who know the language best from years of working with it are now in their seventies or eighties. So COBOL systems are increasingly hard to get repaired. And…

–DOGE is firing COBAL programmers working for the IRS, and presumably those working for other agencies as well. Those who choose to keep working will likely find that they can make much more money working in the private sector for financial firms. So who’s going to maintain the government’s computers?

Arguably, this phenomenon has no direct stock market relevance. On the other hand, it’s also conceivable that the lack of computer processing power that might result from inability to repair clunky old machines will slow the flow of funds into Washington’s coffers. Another reason to be concerned about higher rates/lower dollar.

For as long as I remember, meaning going back into the 1980s, the Merrill Lynch arm of Bank of America has conducted a monthly poll of global equity portfolio managers (global meaning both managers located around the globe and having a mandate to invest in stocks in any major stock markets), asking for their asset allocations by country.

As the structure of the world’s stock markets stood at the end of 2024, the US comprised about 3/4 of the total market cap of investable equity securities worldwide. This means the “global” market is basically the US with bells and whistles. According to BofA, the typical manager had substantially more than the market weighting in US stocks at the end of this January.

No longer.

According to Bloomberg, the survey taken in February shows a massive shift away from the US since the inauguration. Global PMs have moved from substantial overweights to equally substantial underweights. I haven’t seen the BofA figures myself, only the financial news reports, which are not very precise in describing what has occurred. What they seem to be saying, though, is that portfolio managers, who typically move in small, say, at most 5%, increments, shifted about a third of the money they’re managing from the US to other stock markets last month.

This action communicates two things: the large magnitude of the bad economic things PMs think will happen here and the urgency of the need to protect clients’ money by moving it elsewhere.

Other than the global flight from Japan during its lost decade of the 1990s, I can’t think of another movement of anything like this magnitude in the close to half-century I’ve been watching world stock markets.

The big question now is whether the worst of this capital flight is over. My guess is that for the moment it is. On the other hand, global managers still do have half their assets in the US.

The distinction I’m trying to make is between the tenor of a given stock market as a whole vs. the prospects for individual stocks whose home is in that stock market.

Take Germany, for example. Germany is a large, wealthy country, where investors turn out to have little interest in stocks. They prefer fixed income or property. So it’s not a place you’d go out of your way to explore, on the idea that profitable firms there will trade at high earnings multiples or that liquidity will be phenomenally good. There can be, however, considerable European investor interest in given German names. from time to time.

At the moment, as a stock market, I see the US as having two significant disadvantages to weigh against the fact that the market here has deep liquidity as well as a large selection of sectors, industries and individual names. The minuses I see:

–the Trump administration’s tariff agenda is anti-growth. The consensus seems to be (I have no strong opinion here, although I think this is directionally correct) that the economy will manage to avoid recession but will have some combination of lower than expected growth and higher than expected inflation. I’d put this another way–that Washington is putting a ceiling on growth prospects and that any surprises are more likely to be on the downside. Deportation of immigrant workers doesn’t hwlp growth, either.

–we call ourselves the land of the free and the home of the brave.

I was a soldier from 1968-72. My first duty station was as a platoon leader with the 5th Mechanized Infantry at Fort Carson, CO. Two older (28?) Vietnam veteran sergeants took me under their wing. As we got to know one another both told me that they were making the Army a career because they thought it was the only place in the US where a black man could get fair treatment. (One also gave me the tip that I should shoot a deer and freeze the meat at each new duty station, so I would have protein to eat that I couldn’t afford to buy on Army pay.) Although I have mixed feelings about what armies actually do, I felt proud to be in a place where all men would be treated the same way. So for me it was a tremendous disappointment (shock might be a better word) to learn that the Medal of Honor page for General Charles Rogers had been taken down by the administration and labelled a bogus award. Jackie Robinson’s army page apparently received the same treatment.

Although tis is an intangible, it seems to me that to the degree that the administration promotes the idea that we aspire to be an apartheid nation, the PE multiple investors are willing to pay for US stocks will contract.

China as a high-beta case in point?

When Xi became the head of the mainland Chinese government, he eliminated the “Communism with Chinese characteristics” of Deng and restored the policies of Mao. He ultimately extended his reach to Hong Kong, in violation of the 1984 handover treaty that had called for a 50-year transition period before restoration of Chinese rule.

The resulting economic collapse has been so bad that even a hardline Maoist like Xi has been forced to restore some elements of western-style capitalism.

The investment point here is not that I think the current US is going to be a reprise of the catastrophic Chinese experience. But I think it’s reasonable to guess that we’ll see more positive earnings surprises from China–especially Hong Kong–at the same time we’re at increased risk of negative ones in the US.