autos, emissions and Trumponomics

I’ve followed the auto industry since the early 1980s, but have rarely owned an auto stock—brief forays into Toyota, later Peugeot (1986) and Porsche (2003?) are the only names that come to mind.


The basic reasons I see to avoid the auto manufacturers in the developed world:

–chronic overcapacity

–continuing shift of intellectual property creation, innovation, brand differentiation—and better-than-commodity profits–from manufacturers to component suppliers

–the tendency of national politics to influence company operations and prospects.


In addition, the traditional industry is very capital intensive, with a high capacity utilization required (80%?) to reach breakeven.  The facts that unit selling prices are high and new purchases easy to put off for a year or two mean that the new car industry is highly cyclical.

More than that, today’s industry is in the early stages of a transformation away from units that burn fossil fuels, and are therefore a major source of air pollution, to electric vehicles.  The speed at which this change is happening has accelerated over the past decade outside the US because pollution has become a very serious problem in China and because automakers in the EU have been shown to have falsified performance data for their diesel-driven offerings in a poorly thought out effort to meet anti-pollution rules.

California, which had a nineteenth-century-like city pollution problem around Los Angeles as late at the mid-1970s, has led the US charge for clean air.  It helps its clout that CA is the country’s largest car market (urban legend:  thanks in part to GM’s aggressive lobbying against public transport in southern CA in the mid-20th century).  CA has also been joined by about a dozen other states who go along with whatever it decides.  The auto manufacturers have done the same, because the high capital intensity of the car industry means building cars to two sets of fuel usage specifications makes no sense.


Enter Donald Trump.  His administration has decided to roll back pollution reduction measures put in place by President Obama.  CA responded by agreeing with Ford, VW, Honda and BMW to establish Obama-like, but somewhat less strict, requirements for cars sold in that state.  Trump’s reposte has been to call the agreement an anti-trust violation, to claim the power to revoke the section of the law that permits CA to set state pollution standards and to threaten to withhold highway funds from CA because the air there is too polluted (?).


Other than pollical grandstanding, it’s hard to figure out what’s going on.

Who benefits from lower gas mileage cars?     …Russia and Saudi Arabia, whose economies are almost totally dependent on selling fossil fuels; and the giant multinational oil companies, whose exploration efforts until recently have been predicated on demand increasing strongly enough to push prices up to $100 a barrel.

Who gets hurt by the Trump move?     …to the degree that it prolongs widespread use of inefficient gasoline-powered cars, the biggest potential losers are US-based auto firms and the larger number of US residents who become ill in a more polluted environment.  Why the car companies?  Arguably, they will put less R&D effort into developing less-polluting cars, including electric vehicles.  The desertification of China + disenchantment with diesel will have Europe and Asia, on the other hand, making electric cars a very high priority.  It wouldn’t be surprising to find in a few years a replay of the situation the Detroit automakers were in during the 1970s—when cheap, well-built imports flooded the country without the Big Three having competitive products.

It’s one of the quirks of the US stock market that it has very little direct representation of the auto industry.  So the idea that profits there will be somewhat higher as the firms skimp on R&D will have little/no positive impact on the S&P.  Even the energy industry, the only possible beneficiary of this Trump policy, is a mere shadow of its former self.  Like Trump’s destruction of the American brand—Apple has dropped from #5 in China to #50 since his election—all I can see is damaging downside.

I think the Trump policy is intentional, like his trade wars and his income tax cut for the super-rich.  The most likely explanation for all these facets of Trumponomics is either he doesn’t realize the potentially grave economic damage he’s doing or it’s not a particularly high priority.









long-term market themes (iv): Millennials vs. Baby Boomers

In a population of roughly 300 million in the US, about a quarter consists of Baby Boomers, born in the years immediately following WWII.  Another quarter are Millennials, born in the 1980-90 period.

During virtually my entire career, the economic behavior of Boomers has had the most important demographic impact on the stock market.  But the leading edge of this group is already entering retirement–and being gradually pushed off the Wall Street stage by Millennials who are just entering the workforce in force.

This phenomenon is already having an impact on the stock market, I think.  But we’re probably only in the early stages of what will be an increasingly important change.

Two thoughts:


1.  The standard economic toolkit for dealing with recession is to shift economic power away from savers (Boomers) and toward spenders (Millennials).

To some degree, this influence has been offset in the first post-Great Recession years by the difficulty Millennials have had in finding jobs as they finish school.  But employment is becoming progressively easier to come by.  And we know the Fed is planning on keeping an emergency recession-fighting regimen in place for at least the next few years.

Speaking in over-simple terms, the emergency plan of any central bank is to make interest rates negative in real terms.  During the emergency (we’re now ending year five) the elderly and the wealthy, who tend to save rather than spend and who have a strong preference for fixed income, lose out in a serious way.  Their wealth diminishes in real terms as they receive interest payments on their  savings that are less than the amount that inflation subtracts from their purchasing power.

Younger, less affluent people, on the other hand, get free lunch.  They can borrow at very low rates, sometimes less than the rate of inflation.  In the latter case, they get free money.  They can also easily be in the situation where, say, the condo/house they buy goes up in value, while the real value of their mortgage shrinks’

By taking money away from savers and putting it into the hands of people who have a strong tendency to spend, the government spurs economic growth.  Not fair, maybe, especially to Boomers, but that’s the way the system works.

Advantage:  Millennials.

the longer term

2.  Younger people want different things from what their parents have.

Some of this is, depending on your perspective, either the perversity of youth or boldly striking out in a new direction.  My parents lived in the suburbs, so I’ll live in the city.  They have PCs and flip phones (ugh!), so I’ll use tablets and smartphones–and I’ll become a social media guru.  They read newspapers, I’ll use the internet…

There’s also a stages of life component to this.

–Twenty- or thirty-somethings buy houses, furniture…, cars and suits (or other work clothing).

–Sixty-somethings buy jewelry and cruises.  They downsize their houses and move to low-tax warm-weather locales.  Or maybe they retire to the vacation house they bought ten years ago.

For my entire investment career, the changing purchasing patterns of Baby Boomers have been perhaps the most important factor in figuring out how to play the Consumer Discretionary sector–which is arguably the single most important one for a portfolio manager to outperform the S&P 500.

I think it’s still possible to hitch your star to the Baby Boom and outperform.  But not for much longer, as the Boom wanes and Millennials wax.

sketching out long-term stock market themes (ii)


1. Some (not many) domestic-oriented US companies are mentally living in a past that no longer exists, making them particularly vulnerable to competition.

How so?

WWII had two immediate effects on US industrial companies:  their domestic installations were the only plant and equipment  still left standing after the conflict in Europe and Japan, so they had eager customers, no matter what the quality of their output; and a generation of leaders abroad, grateful for American assistance in rebuilding, gave preferential treatment to American firms.

This wasn’t “normal,” and it’s no longer the case.  Those leaders are long-since retired.  When China thinks of the US, it thinks of the Boxer Rebellion, not WWII.

2a.  The Internet has destroyed many barriers to entry, or “moats,” as the academics like to say.

–It allows large, established firms to control far-flung manufacturing and distribution networks remotely.

–It allows them to stitch these networks together out of both owned and third-party pieces, so they can keep high value-added pieces in-house and farm out the rest.

–It allows fledgling firms to mount low-cost social media product awareness campaigns, to open their own online storefronts and also to distribute through third-parties like Amazon.

As a result, the embedded value of many years of past advertising campaigns no longer sets the bar for creating public interest in a new product.  Slowly building your own bricks-and-mortar retail presence, your own warehouses and your own fleet of delivery trucks isn’t needed to get wares into the hands of customers, either.  And you don’t need to lay out tons of your own capital to build an effective supply chain.

2b.  A recent article in the Financial Times points out that the US has about 5x the mall space per capita as the UK, 6x as much as in Japan and 8x as much as in Germany.  To the extent that retailers have signed long-term leases to rent this space, it can act as a ball and chain around a firm’s ankles, as online replaces bricks-and-mortar.

3.  Emerging economies understand that the ticket to entering the developed world is technology transfer.  That requires offering multinationals a low-cost workforce and state-of-the-art plants to induce them to open up in their country so locals can learn how to work in, and ultimately run, a manufacturing business.  This means a constant stream of new manufacturing plant coming into existence, undercutting the value of existing capacity (developing governments are looking for employment and technical education, not profits).  Developed countries’ only effective response is continual modernization and innovation.

4.  Hydraulic fracturing (“fracking”) is lowering the cost of producing natural gas and oil.  So far, fracking is happening mostly in North America.  So it’s principally a boon to manufacturers here, like chemical companies, that use hydrocarbons as feedstocks.  It’s also putting more money into the hands of American consumers, who (thanks to a uniquely misguided government energy policy in the US) use double the oil and gas per capita of anyone else.

We’re already seeing foreigners building new energy-intensive plants in the US to try to level the paying field.  Great for the balance of trade and for domestic employment.

The bottom line:  this is no longer a rest-on-your-laurels world for established companies.  For investors, this means the odds on backing younger “disruptive” competitors are better today than they have historically been.