Category Archives: tariffs

America: a weakening brand

August 19, 2019 By in bond market, brands, currency markets, Current Market Thoughts, Foreign markets, foreign trade, Recent Market Action, securities markets, stock market, Strategy, tariffs, Trump, taxes and trade, Uncategorized Tags: , , , 1 Comment

When I first became interested in Tiffany (TIF) as a stock years ago, one thing that stood out was that the company was doing a land office business in almost all facets of its rapid international expansion.  One exception:  the EU.  I quickly became convinced that the reason was because TIF is an American company.

For Europeans, France, Germany, Italy, and to a lesser extent the rest of the EU, are the font of all knowledge and culture.  As local literature and philosophy make clear, being situated on the sacred soil of (fill in any EU country) is the key to its superiority.  The US,  lacking requisite hallowed ground, is a semi-boorish johnny-come-lately.  Sporting a piece of jewelry from an American firm therefore implies one has suffered a devastating reversal of fortune that puts “authentic” jewelry out of reach.

 

In the rest of the world, however, the US is a symbol of aspiration.  America stands for freedom, opportunity, cutting-edge technology, the best universities and an ethos that prizes accomplishment not heritage.  It’s “all men are created equal”  “give me your …huddled masses yearning to be free” and “I am not throwing away my shot.”  Wearing, or just owning, a piece of American jewelry becomes a symbolic linking of the holder to these national values.  It hasn’t hurt, either, particularly with an older generation (paradoxically, ex the EU) that the US made a monumental effort to help heal the world after WWII.

 

The “brand” of the United States has taken a real beating since Mr. Trump has become president.  Surveys, one of which is reported in INC magazine, show a sharp drop in US prestige right after his victory and continuing deterioration since.   I don’t think the biggest negative issue is the president’s insecurities, his constant prevarication, his very weak record as a real estate developer or his (hare-brained) economic policies while in office.  I see the worst damage coming instead from his love of leaders with poor human rights records and his disdain for women and people of color …plus the whiff of sadism detectable in his treatment of both.

 

Whatever the precise cause may be, the deterioration of the America’s reputation under Mr. Trump is a very real worry for domestic consumer companies.  Damage will likely show itself in two ways:  weaker sales to foreign tourists, and the absence of positive surprises from foreign subsidiaries.  For domestic retail firms, it seems clear that economic recovery has finally come to the less wealthy parts of the US over the past year or two–witness the profit performance of Walmart or the dollar stores.  On the other hand, it seems to me that people who have trusted Mr. Trump in the past–like the banks that lent him money, the contractors who built his casinos, those who bought DJT stock and bonds, farmers who voted for him–have all ended up considerably worse off than the more wary.  So while they may be good temporary hiding places, holders should be nimble.

One final thought:  brands don’t deteriorate overnight but the cumulative damage can be enormous.  The first to react will be younger consumers, who have the least experience with/of the “old” brand.   They will be the most difficult to win back.  As well, as time passes, their views will be increasingly important in commerce.

 

 

 

$30 billion in new tariffs–implications

August 2, 2019 By in administration economic strategy, Current Market Thoughts, Recent Market Action, Strategy, tariff protection, tariffs, Uncategorized Tags: , , , , 1 Comment

Yesterday Mr. Trump announced by tweet that he intends to impose a 10% duty, effective next month, on all US imports from China that are not yet under tariff.  That’s about $300 billion worth, which would produce an extra $30 billion in tax revenue for the government, were imports to continue at the pre-tariff rates.

What’s different about the current move is that tariffs will be predominantly on final goods, that is, stuff that’s completely made and ready for sale, things like like toys and everyday clothing.  For the first time, tariffs won’t be disguised.  Up until now, they’ve been mostly on raw materials or parts, where the connection between the tax and price increases of the final product is obscured–the political fallout therefore milder.   The new round will be more visible.

 

Standard microeconomics will apply:

–the cost of the new tax will be borne in part by US companies and in part by consumers, depending on how much market power each has

–over some period of time, companies and consumers will both look for lower-price substitutes for items being taxed.  Firms will, say, offer lower quality merchandise at the current price point; consumers will either buy fewer items or shift to cheaper merchandise

 

The new tariff amounts to a subtraction of about $250 from family discretionary income, meaning income after taxes and all necessities are taken care of.  That’s not a big number.  As with the other Trump tariffs, however, average Americans will be disproportionately hurt.  The bottom 20% by income have less than nothing after necessities now, so they will be the worst off.  Residents of the poorest states–eight of the bottom ten voted for Trump–as well.  So too anyone on a fixed income.

 

Netting out the positive effect of the 2017 income tax cut, the only winners are the top 1%, traditional Republican voters.  Other Trump supporters appear to be the biggest losers, although far they don’t appear to have connected the dots.  Nor does anyone in Congress seem to be questioning the administration rationale that national security does not require better infrastructure and education but does demand more expensive t-shirts and toys.

 

The stock market selloff underway today doesn’t seem to me to be warranted by the new tariff.  And it’s not exactly news that Washington is dysfunctional:  we’re led by a man who thinks our independence was won by controlling the airports; the leading opposition candidate somehow mistakenly thought his businessman/repairman/car salesman father was a laborer in the Pennsylvania coal mines.  So the most likely explanation is that in August human traders/portfolio managers head for the beaches, leaving newspaper-reading robots in control of Wall Street.

If that’s correct, the thing to do is to look for stocks to buy where the selloff appears crazy, getting the money from clunkers, which typically hold up in times like this or from winners whose size has gotten too big.

 

 

 

 

 

 

 

 

 

 

Trumponomics and Huawei

July 8, 2019 By in foreign trade, Strategy, tariff protection, tariffs, Trump, taxes and trade, Uncategorized Tags: , , , , 1 Comment

Effective May 16th, the Trump administration placed Chinese tech company Huawei on the entity list, meaning no American company can sell products, hardware or software, to Huawei without government permission.  In addition, the presumption of the administrators of the list is that permission will be denied.

Being on the entity list seems to mean no Intel or ARM-based microprocessors for Huawei-built computers and telecom equipment, and no Android software for its cellphones.

The US  had already been putting pressure on US telecoms, big and small, as well as allies around the world not to purchase Huawei offerings, especially of next-generation telecom infrastructure equipment–a difficult sell, given that Huawei products are better and cheaper than EU or US alternatives.  But the entity list move is a huge escalation.  It seems to pretty much put Huawei out of business unless/until it develops alternate sources of supply.

It seems to me that this decision is qualitatively different from taxing Chinese products entering the US.  The near-term effects are likely to be strongly negative for Hauwei; long-term consequences, in contrast, are likely to be strongly negative for the US, in a number of ways:

–by saying the US will not tolerate significant Chinese competition in tech industries, Mr. Trump is reframing a dispute about terms of trade into a struggle for cultural/economic dominance.  Arguably, this is what is really going on anyway, but making it explicit gives China a cause to rally around

–Beijing’s response to the Huawei decision will presumably be to try to jump start its domestic chip business, an area that is (oddly, to my mind) totally unimpressive despite having been a national priority for decades.  The obvious course for the US today, it seems to me, is to retrain workers and improve our education system, with emphasis on STEM subjects.  That, of course, is a non-starter for both major political parties

–US tech companies must now begin to think about whether they are American enterprises (meaning: willing to forgo Chinese business as/when Washington dictates) or multinationals based in the US.  This may not be a burning issue for mature US firms like Microsoft or Google, although Washington’s white supremacism and nativism are already compelling companies like this to locate research centers outside the US (either because the US will not admit accomplished foreign scientists or they fear for their safety).  For startups, however, Mr. Trump is making a compelling case that, say, Canada is a better place to establish themselves

–tech companies of all stripes will have to think long and hard before building new manufacturing capacity in the US

 

Pre-Huawei, one main consequence of the Trump trade strategy has been to substantially weaken the Chinese status quo’s resistance to shifting that economy away from low value-added exports.  With developing economies, such resistance is, in my experience, an almost insurmountable obstacle to progress.  Huawei gives Beijing a clear mandate to create a high-tech component industry, however.  Making it a victim of malign foreign influences only increases its power, given China’s century of humiliation (at foreign hands) historical narrative.

Taking Huawei off the entity list, which the administration now seems to be in the process of doing, does not, I think, return us to the status quo ante.  The barn door has already been opened.

 

So far as I can see, the US stock market has not reacted negatively to what I consider to be a collosal blunder.  Wall Street does continue to deal with the possibility of more tariffs principally, I think, by focusing on firms it sees to be the most immune–software, especially cloud-based, and potentially industry-transformative new market entrants in a variety of fields.

 

 

 

 

 

Trumponomics and tariffs

July 2, 2019 By in economics, foreign trade, macroeconomics, microeconomics, tariff protection, tariffs, Trump, taxes and trade, Uncategorized Tags: , , , , , , 1 Comment

Note:  I’ve been writing this in fits and starts over the past couple of weeks.  It doesn’t reflect whatever agreement the US and China made over the past weekend.  (More on that as/when details become available.)  But I’m realizing that it’s better to write something that’s less than perfect instead of nothing at all..  I think the administration’s economic plan, if that’s the right word for a string of ad hoc actions revealed by tweet, will have crucial impacts–mostly negative–for the US and for multinational corporations located here.  I’ll post about that in a day or two.

 

On the plus side, Mr. Trump has been able to get the corporate income tax rate in the US reduced from 35% to 21%, stemming the outflow of US industry to lower tax-rate jurisdictions (meaning just about anyplace else in the world).  Even that has a minus attached, though, since he failed to make good on his campaign pledge to eliminate the carried interest tax dodge that private equity uses.  The tax bill also contained new tax reductions for the ultra-wealthy and left pork-barrel tax relief for politically powerful businesses untouched.

 

At its core, international Trumponomics revolves around the imposition of import duties on other countries in the name of “national security,” on the dubious rationale that anything that increases GDP is a national security matter and that tariffs are an effective mechanism to force other countries to do what we want.  (Oddly, if this is correct, one of Mr. Trump’s first moves was to withdraw the US from the Trans-Pacific Partnership, thereby triggering an escalating series of new tariffs on farm exports to Japan by  our “Patriot Farmers,” many of whom voted for Mr. Trump.  I assume he didn’t know.)

If the Trump tariff policy has a coherent purpose, it seems to me to be:

–to encourage primary industry (like smelting) and manual labor-intensive manufacturing now being done in developing countries to relocate to the US (fat chance, except for strip mining and factories run by robots)

–to encourage advanced manufacturing businesses abroad that serve US customers to build new operations in the US, and

–to retard the development of Chinese tech manufacturing by denying those companies access to US-made components.

 

The results so far:

–the portion of tariffs on imported goods (paid by US importers to the US customs authorities) passed on to consumers has offset (for all but the ultra-wealthy) the extra income from the 2017 tax cuts

–the arbitrary timing and nature of the tariffs Trump is imposing seems to be doing the expected —discouraging industry, foreign and domestic, from building new plants in the US.  BMW, for example, had been planning on building all its luxury cars for export to China here, because US labor costs less than EU labor.  The threat of retaliatory tariffs by China for those imposed by the US made this a non-starter.

–Huawei.  This story is just beginning.  It has a chance of turning really ugly.  For the moment, inferior US snd EU products become more attractive.  Typically, such protection also slows new product development rather than accelerating it.  (Look at the US auto industry of the mid-1970s, a tragic example of this phenomenon.)   US-based tech component suppliers are doing what companies always do in this situation:  they’re  finding ways around the ban:  selling to foreign middlemen who resell to Huawei, or supplying from their non-US factories.  Even if such loopholes remain open, Mr. Trump is establishing that the US can’t be relied on as a tech supplier. Two consequences:  much greater urgency for China to create local substitutes for US products; greater motivation for US-based multinationals to locate intellectual property and manufacturing outside the US.

 

 

 

 

 

 

the Fed’s dilemma

June 6, 2019 By in Federal Reserve, macroeconomics, microeconomics, tariffs, Uncategorized Tags: , , , , , , 1 Comment

history

From almost my first day in the stock market, domestic macroeconomic policy has been implemented by and large by the Federal Reserve.  Two reasons:  a theoretical argument that fiscal policy is subject to long lead times–that by the time Congress acts to stimulate the economy through increased spending, circumstances will have changed enough to warrant the opposite; and ( my view), until very recently neither Democrats nor Republicans have had coherent or relevant macroeconomic platforms.

If pressed, Wall Streeters would likely say that Washington has historically represented a net drag on the country’s economic performance of, say, 1% yearly, but that it was ok with financial markets if politicians didn’t do anything crazily negative–the Smoot-Hawley tariffs of 1930, for example.

During the Volcker years (1979-87), money policy was severely restrictive because the country was struggling to control runaway inflation spawned by misguided policy decisions of the 1970s (Mr. Nixon pressuring the Fed to keep policy too loose).  Since then, the stock market has operated under the belief that the Fed’s mandate also includes mitigating stock market losses by loosening policy, the so-called Greenspan, Bernanke and Yellen “puts.”

recent past

We’ve learned that monetary policy is not the miracle cure-all that we once thought.  We could have figured this out from Japan’s experience in the 1980s.  But the message came home in spectacular fashion domestically during the financial crisis last decade.  As rates go lower and policy loosens, lots of “extra” money starts sloshing around.   Fixed income managers gravitate toward increasingly arcane and illiquid markets.  In their eagerness to not be left out of the latest fad product, they begin to take on risks they really don’t understand as  well as to forego standard protective covenants.

We could almost hear the sigh of relief from the Fed as the tax bill of 2017, which reduced payments for the ultra-rich and brought the corporate tax rate down to about the world average, passed.  Because the bill was so stimulative, it gave the Fed the chance to raise rates as an offset, meaning it could tamp down the speculative fires.

today

Enter the Trump tariffs.

Two preliminaries:

–tariffs are taxes.  Strictly speaking, importers, not foreign suppliers (as the president maintains (could it be he actually believes this?)) pay them to customs officials.  But the importer tries to ease his pain by asking for price reductions from suppliers and for selling price increases from customers.  How this all settles out depends on who has market power.  In this case,it looks like virtually all the cost will be borne by domestic parties.  Domestic economic growth will slow.  The relevant stock market question is how much of the pain consumers will bear and how much will be concentrated in a reduction of import business profits.

–I think Mr. Trump is correct that the US subsidy of NATO is excessive.  It represents the situation at the end of WWII, when the US left standing–or at best the time when the USSR began to disintegrate into today’s Russia (whose GDP = Pennsylvania + Ohio, or California/2).  I also think that China, with a population five times ours and an economy 1.25x as big as the US (using PPP), is a more serious economic rival than we have seen in decades.  It doesn’t have the post-WWII sense of obligation to us that we have seen elsewhere.  So we have to rethink our relationship.

Having written that, I don’t see that Mr. Trump has even the vaguest clue about how the country should proceed, given these insights.

To my mind, tariffs + retaliation mean both domestic and foreign companies will be reluctant to locate new operations in the US.  Tariffs on Chinese handicrafts may bring industries of the past back to the US, at the same time they force China to increase emphasis on industries of the future.  I don’t get how either of these moves should be a US strategic goal….

the dilemma

The question for the Fed:  should it enable the president’s spate of shoot-yourself-in-the-foot tariff policies by lowering rates?  …or should it let the economy slide into recession, hoping this will jar Congress into action?