Friday March 2, 2018

The Tariff Nightmare Begins

This past week brought more early warnings of Trump’s simplistic ‘us versus them’ view of trade.

Last year the President set this potential disaster in motion by instructing the Commerce Department to investigate if steel and aluminum imports threaten national security under Section 232 of the Trade expansion Act of 1962. As instructed, Commerce concluded they do.

The stock market remains the same.   The previous high of DJIA 26,600 still stands.   Unless the February 16high of 25,432 is taken out, the more likely direction for stocks is down. Leadership is ever more narrow with just three stocks moving the NASD.

This column, February 23, 2018

Readers can’t say I did not warn them. Columns in this space on January 26and as noted above, and February 23, warned of the danger of impending tariffs. Now the immediate results are clear to see.

Far more industries which use steel and aluminum will suffer from higher prices than an offset in jobs created in US steel and aluminum industries.

President Barack Obama was informed that lowering corporate tax rates would bring in more tax revenue, and bring back more investment dollars from over seas. He stubbornly ignored that advice and left the corporate tax rate at 35%. The result of course was that no companies chose to pay the tax. Obama’s emphasis on what he called fairness brought neither tax revenue nor investment.

In similar fashion, President Trump believes a tax on 25% steel and a 10% aluminum import tax will stimulate demand for American steel. Politicians cannot force market behavior.   Faced with higher domestic steel prices, American companies will likely import completed goods built from foreign untaxed and therefore less expensive steel and aluminum. Today’s Wall Street Journal reports that steel using industries (like our Permian Basin oilfield) employ some 6.5 million workers. Steel makers employ about 140,000.  Clearly the larger group will be disadvantaged.

Immediate results are apparent. The Dow Industrials dropped over 700 points intra-day. Boeing, Caterpillar, and the auto stock prices all tumbled. Ford was down 3%. Halliburton HAL is down 1.63% pre-market this Friday and drooped .84% yesterday.   Every company from HVAC makers to autos to appliances to pipelines is affected.

China supplies but 2.2% and Russia 8.7% of the steel we use. Ironically Canada imports 50% of US steel exports. But whacking Canada with various tariffs and continuing to snit about NAFTA will surely result in far fewer US steel exports. Frankly I would not be surprised to see a 50% tariff from Canada on US steel.   This is precisely what we warned about in recent columns.   Other countries are not going to sit idly by and be shut out of this market. They will ink their own Trans Pacific deals with China as the deal maker.

Last week we allowed that if the Dow Industrials took out the previous 25,432 high, a shot at the all time January high of 26,600 was possible. It was not to be.   The index reached 25,759 and then began falling. All the 2018 gains have now been wiped out.

After yesterday’s official 400 point loss, the Industrials are already down another 277 points at 24,343 in Friday pre-market trading. Yes steel and aluminum shares rose but I mean, does anyone you know own any of those shares?

There was a clear winner-gold. The gold price fell right into the predicted low time frame of early March to $1,305. This morning it has rebounded $18 to $1,323. Just two days ago it fell $18 in one day. There is yet another example of how social mood towards an investment can turn on the proverbial dime.

I thought both Trump and the Saudis would be losers. Falling world markets will make it more difficult to sell 5% of ARAMCO. Trump will lose much of what Republican support he has, gain no more support, and will have to defend a now falling stock market. His personality will not allow him to regret taking credit for the stock market advance. Instead he will no doubt blame that on those who do not ‘understand the wisdom of his policies.’

Higher prices on steel and aluminum will no doubt eventually raise oil prices. Gasoline prices are also rising. Stop and think about the impact of higher steel prices on oil refiners! There will be no choice but to pass along the higher steel prices via higher gasoline prices.

It is said the hallmark of a bad movie is one written, directed and produced by the same person. That warning is being played out with Trump’s disastrous tariff plan.

Friday March 2 2018

The Real Worry is not the Wall or Russia

Lawmakers have stressed caution regarding Trump’s dissatisfaction with NAFTA. This has also been the case with multiple Chambers of Commerce, Governors, and both Mexico and Canada. Senator John Thune R-S. D. remarked that “withdrawing form NAFTA would be a disaster.

This foolishness has a historical antecedent. By the spring of 1930, the stock market had recovered about half its losses from the fall of 1929. The Tariff Act of 1930 aka the Smoot-Hawley Tariff was signed June 17, 1930. These retaliatory tariffs cut both imports and exports by half during the Great Depression. In fact the Depression would not end until its repeal via GATT, the General Agreement on Trade and Tariffs signed In October, 1947.

The actual tariff on dutiable goods soared by 1932-33. to 59.1% in 1932. By 1933 imports decreased 66% and exports decreased 61%. Unempl0yment was 8% in 1930 but jumped to 25%. Roosevelt began lowering tariffs upon his election. But real reform waited until the Bretton Woods Agreement of 1944.

This past week brought more early warnings of Trump’s simplistic ‘us versus them’ view of trade.

Last year the President set this potential disaster in motion by instructing the Commerce Department to investigate if steel and aluminum imports threaten national security under Section 232 of the Trade expansion Act of 1962. As instructed, Commerce concluded they do.

This is in spite of the 164 anti-dumping duties on steel already in effect. There re two dozen tariffs on Chinese steel and more on aluminum. Canada accounts for 43% of our aluminum imports, but more on that later.

The tax reform act is brining money back to the US. But more tariffs will only increase the cost of doing business in all industries using steel and aluminum. Indeed more workers lost jobs (200,000 due to Bush’s 2002 steel tariff than were employed by the entire steel industry (187,500).

As we warned January 26, this ‘strategy’ plays right into the hands of China’s goal of becoming the new manufacturing super power in the world. Withdrawing from the Trans Pacific Trade Partnership puts China in that driver’s seat, free to make global arrangements. The Trump idea of a separate trade deal for each nation is foolish when so many products, like autos, are built from material imported from multiple nations.

One hopeful example is the creation of a pro-Nafta website by Mexico , no less. check out www.naftamexico.net. This English website allows one to click on each of our 50 states to see the NAFTA advantage. Columns and letters continue to sprout advocating the benefits of NAFTA. But I was discouraged again reading the latest in the US Canada trade talks.

The US runs a $12.5 billion dollar trade surplus with Canada. Apparently Canadian Prime Minister Justin Trudeau does not care for the politically incorrect President Trump. Nor does the Canadian Parliament. As a result Canada has done little to sell the trade deal Canada. We have not seen full page ads bulwarked by newspaper editorials demanding continuation of the 20 year NAFTA trade boom. Canada has been America’s closest ally and trading partner, well ever since there has been an America and Canada.

Meanwhile Trudeau has inked deals with the European Union and the Trans Pacific Partnership. Is this a literal snub, aiming to reach the same conclusion as Trump, better no deal than any perception of a flawed deal?

Then get serious about avoiding another Smoot Hawley fiasco.

I am posting three of my recent newspaper columns warning about the danger of a tariff war.

Friday January 26, 2018

Word Count 745

The Trade War Begins, Oil Prices Look Toppy

Inconsistent remarks by President Donald Trump and his Treasury secretary about the dollar this week sent the US Currency on a roller coaster ride that was shadowed in reverse by crude oil prices.

The greenback had fallen to three-year lows earlier in the week after Treasury Secretary Steven Mnuchin’s comment that a “weaker dollar is good for trade,” buoying oil prices, only to have sentiment do an about face late Thursday after Mr. Trump said he wants to “see a strong dollar.” Comments by both Messrs. Trump and Mnuchin came during the World Economic Forum in Davos, Switzerland.

The U.S. currency tends to have an inverse relationship with dollar-denominated commodities like oil.

But by Friday morning, the dollar was losing traction, once again sending oil prices north.

Wall Street Journal Energy Report Friday January 26, 2018

Chief of Staff John Kelly stayed home to deal with immigration issues. Left on their own, the world got directly conflicting messages from President Trump and his Treasury Secretary Mnuchin. Considering the Davos Switzerland meeting is the CEO event of the year, one would wish the two could have gotten their stories straight. But such is Life with Trump.

Chart wise the dollar has hit a new low. The Euro has hit a new high. But another event occurred which may well forecast the inevitable top in the stock market.

On Wednesday President Trump signed executive orders raising tariffs on solar panels and clothes washing machines. Does Whirlpool need Presidential intervention? Are Samsung and LG dumping washing machines at Home Depot?

Republican senators were quick to respond. They disagreed with the idea of a retaliatory tariff war. As Roy blunt R-Mo. Put it, “I think we need to be more positive about our trade opportunities.”

Lawmakers also stressed caution regarding Trump’s dissatisfaction with NAFTA. This has also been the case with multiple Chambers of Commerce, Governors, and both Mexico and Canada. Senator John Thune R-S. D. remarked that “withdrawing form NAFTA would be a disaster.

This foolishness has a historical antecedent. By the spring of 1930, the stock market had recovered about half its losses from the fall of 1929. The Tariff Act of 1930 aka the Smoot-Hawley Tariff was signed June 17, 1930. These retaliatory tariffs cut both imports and exports by half during the Great Depression. In fact the Depression would not end until its repeal via GATT, the General Agreement on Trade and Tariffs signed In October, 1947.

The actual tariff on dutiable goods soared by 1932-33. to 59.1% in 1932. By 1933 imports decreased 66% and exports decreased 61%. Unempl0yment was 8% in 1930 but jumped to 25%. Roosevelt began lowering tariffs upon his election. But real reform waited until the Bretton Woods Agreement of 1944.

Oil prices are up about twenty cents this Friday Morning. But energy shares are looking toppy. The Energy ETF XLE reversed course over the last three days, stalled at $78. Energy Service XES is turning down at $19. Momentum is also rolling over. Brent is still about five dollars higher than West Texas Intermediate.   But momentum indicators for both appear to be peaking.

A canary in the coal mine warning was issued by the reversal in price of Cliffs natural Resources CLF. Cliff announced decent earnings Thursday. The stock price had rallied form $5.75 to $8.75. The price jumped to $9.15 on the news. Then price immediately reversed closing at $7.89, just over the low at $7.60. Technicians refer to this as an outside reversal day. CLF is involved in production of iron ore. An expanding economy would need more of just that. But this reversal suggests otherwise.

So what is the bottom line? Energy prices have had a great run. We suggested last week that it was time for a pause. That pause may be much more profound than we had thought.   Mixed messages from the President and his Treasury Secretary never help markets. Now we have the President feuding with his own party and the Democrats, always on the side of their unions, favoring protectionism. Both Canadian and Indian leaders criticized the tariff idea at Davos this week.

Look for energy prices to peak for the time being. All attempts at calling a top in the stock markets have failed thus far. But the actions this week could eventually put the brakes on stock market party.

Wednesday Feb 21, 2018

The Mexican Government has produced an English language website explaining the benefits of NAFTA.

One can click on any state in the US Map to see the benefits of NAFTA. My newspaper column this weekend will examine the dangerous game President Trump is playing with trade policy.