Mike Lipper’s Monday Morning Musings
It May Be Early
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
A Usual Trap
A classic mistake in making future plans is focusing mainly
on the present. In search of an investment policy for the next few years or longer,
one should look at the causes of the main trends, not the size of the tariffs
that have been announced.
The key force behind the announcements on tariffs is Donald
Trump. His background is one of complex negotiations evolved from materially
different views of how he sees the present and the future. I believe The President
saw a critical problem of unfair trading terms facing the U.S. and saw a way to
change the terms in favor of the country. He saw a way to solve the problem through
meaningful discussion with the powers on the other side. The key was getting
the right people around the table.
The core elements of unfairness are to be found in non-tariff
trade barriers (NTB) erected by commercial interests with official or
unofficial government support. (A number of examples were listed in last week’s
blog, copy available.) While there is no published total of each country’s NTB
effects, some experts believe their impact is twice the level of tariffs
applied.
Mr. Trump’s way of dealing with foreign countries is to make
the host nation an ally by using the size of US tariffs as a hammer. This is
the reason behind the high announced tariffs, which is where President Trump
expects the real bargaining to begin. I expect negotiations with major trading
partners to take most of the summer. We may never fully understand the various
changes to NTB’s, but a good clue will be changes to US tariffs.
Clearly there is another element to the aggregate size of
the final US tariffs, the amount of cash expected to be paid to the US
Treasury. This needs to be meaningful enough to keep the growth of the annual
deficit acceptable to an unknown number of Republican Senators.
Most of these should be settled in the fall and early winter,
so they do not unduly impact the mid-term elections. The economic background to
the elections may be influenced by layoffs and the administration’s attempt to
expand the economy. Additionally, further international actions may be the cause
of how some state elections turn out.
The current crosswinds shown below may also impact the level of markets during this period:
- After a period of outflows, T. Rowe Price is cutting staff.
- Freight railroads are growing from China to Iran and Spain, for US continental trains, and other trains from Canada to Mexico.
- Tariffs may encourage smuggling.
- The latest weekly American Association of Individual Investors (AAII) sample survey showed a 39% positive and negative 6-month outlook.
- A study of structural bear markets shows the average breakeven to be about 9 years.
- The critical operating problems facing the US government is no different than those facing commercial and non-profit activities, a focus on effectiveness, not efficiency.
- Jaimie Dimon has shared the following thoughts:
- Tariffs will be inflationary
- US reserve currency status rests on military superiority
- Markets are not low
- Lessons can be learned from the turnaround of Detroit and problems created (and elongated) during the 1929 crash
- Dollar weakness helps US multinationals
As usual, I hope you will share your insights on the various
thoughts expressed.
Did you miss my blog last week? Click here to read.
Mike
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