Trade War: Good for America?
Below, we look at the latest topic-de-jour coming out of DC: tariffs and the first shots of a trade war . Real question: is there more to think about today than Tariff headlines?
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Trump, flanked by Wilbur Ross and Peter Navaro, recently announced a $50B tariff attack, targeted primarily against the Chinese—and their steel and aluminum markets in particular.
After the announcement, Asian markets took a dive (Shanghai down 3.5%, the Nikkei down 4.5% and China’s Tech exchange down 5%).
Many feel this type of tough talk and tough measures are precisely what America needs. I’m not so sure. Perhaps yes, perhaps…no.
But one thing remains certain: America is broken at its core, despite the superficial and debt-driven good times of rising markets since 08.
Rather than a trade war, what America needs more immediately is a reality check on: 1) its central banking cartel (controlled and owned by private families not Congress), 2) an historically unprecedented deficit; 3) equally unprecedented debt levels, 4) political entropy, 5) a resigned mindset of permanent war, 6) an Orwellian “security state” of crazy and 7) a Facebook-lead aura of manipulated rather than meaningful dialogue on everything from love to election results.
In short: a trade war at this point is just icing on an already ugly cake.
Any Teeth to these Tariffs?
Furthermore, if you were watching the televised bubbleheads rather than the fine print of this recently announced tariff move, you might have missed a few things—namely the list of “interim” exemptions from the so-called “steel tariffs.”
In fact, nearly 28M tons of the 36M tons of steel imports to the US (from places like the EU, South Korea, Australia and basically the remainder of the Western Hemisphere) was technically exempted from the “attack.”
Needless to say, representatives from these other postal codes will be keeping the lawyers and lobbyists (aka legalized bribery squads) quite busy in the DC swamp buying “extensions” and House votes to effectively make this “trade war” more of “trade negotiation” among western powers.
In other words, the real target here is China.
Feels Good at First
It feels good, at first, to fight back and “stick it” to China in particular. In fact, Trump is right about China’s massive trade imbalance; the $510 billion per year of Chinese exports to the US does not even come close to the ideal of fair trade with the US.
Again: it feels kinda of right to poke a stick at Shanghai.
After all, China (and Chinese labor) has been destroying the US manufacturing base ever since Clinton announced the “great China deal”—which was promoted as creating new markets for US products but in reality, did nothing more than replace American manufacturing (and jobs) with cheaper, off-shore factories and labor pools in China.
In the End, It’s the Little Guys Getting Hit—i.e. Main Street
So, if you are flag-waving proud of Steve Jobs (or even Elon Musk) for making America great, keep in mind that their American “stuff” (from iPhones and Tesla batteries to nearly everything else [95%+] that you buy at Walmart) is, well…
…“Made in China.”
This hidden fact is not so great for the state of American jobs, but real great for the estate of Steve Jobs…
You can therefore be certain that lawyers for Apple and Walmart et al will be rolling up their sleeves to fight the list of the nearly 1000 products slated for big fat tariff charges coming into the US.
Everything these American giants sell, and nearly everything you buy, is about to get slammed with higher cost stickers for US buyers and thus lower margins for US retailers.
That’s the part that’s not good for America or Americans.
Similarly, don’t think for one second that exports coming out of the US won’t feel the sting of tariff retaliations from the centralized Politburo of the Chinese trade department. As of today, that’s already begun. Everything from US soybeans to aircraft parts is about to get “tariff hit” like the marines landing at Normandy.
That means higher prices on Main Street.
Same Ol Story—Lots of Money Going Nowhere as Real Issues Are Ignored
In sum: wars, including trade wars, hurt everyone. Furthermore, trade wars, like the war on terror and the war on drugs, are all as absurd as they are un-winnable.
But such “wars” do make great political hay for budget appropriations and millions for military contractors—you know: that great big military industrial complex that Ike warned about in 1961…
But trade wars today are like the nuclear cold wars of old, as they are based upon the concept of mutually assured destruction—or “MAD”; namely the notion that nobody wins once the first warhead is launched.
If we hurt the Chinese too much (i.e. with tariffs or embargos), we merely end up shooting our own economic foot and visa-versa, as both the US and China mutually rely and depend upon each other’s massive supply and demand markets.
But even a watered-down trade war, alas, ought to impact prices, which means it ought to impact the securities market, no? We certainly saw a taste of that on Monday…
Needless to say, the sell-side salesmen and cheerleading prompt-readers in the financial MSM are already dishing out the “don’t worry” chants and “buy the dip” mantras. That’s to be expected.
But keep it simple: tariffs mean higher prices, which means lower margins, lower profits and thus weaker balance sheets in the US. This should mean weaker markets.
Expect more volatility folks.
Then again, current markets run more on blind faith and hype than on balance sheets, so this crazy (or “MAD”) can continue as long as hype and momentum trump common sense or even Trump himself.
The Real Issue
But the bigger question regarding trade wars, tariffs and free trade barriers is, of course, not part of the media focus.
The bigger question is this: why does the US import so much more than it exports?
In other words: How did the US go from being the world’s leading exporter in the 1970’s to the leading importer? How did we slide from having the world’s leading trade surplus to the world’s leading trade deficit?
In short: How did America get so “Un-Great”?
Did the good folks in the Midwestern rust belt suddenly forget how to make stuff? Has Main Street USA lost its work ethic? Did the generation who beat the Nazi’s and saved the world from fascism suddenly grow soft and their offspring softer? Did America’s heartland lose its values?
Nope. That’s not what set America backward.
From my four-part breakdown of market history, it wasn’t the backbone of the American heartland that let America down; it was the banks, politicians and Fed academics spawned in Manhattan and DC (who have no backbone) that ruined—and continues to ruin—America.
I know, I know…that sounds gratuitous and cliché…Just blaming bankers and politicians and lawyers seems too easy.
But sometimes easy is easy for a reason…
And how did these well-dressed folks cripple American markets and manufacturing?
In the broadest terms, they did so by legally, legislatively, and financially enacting policies and agendas that replaced a production-based economy with a debt/fiat-currency/easy credit-based economy (and mentality).
Over the last three decades, our business and political “leaders” have slowly yet methodically taken money and policy focus away from labor, productivity and Main Street and instead shoveled it right into the cess pool of the Executive C-suite, cheap overseas sweat shops and the trading desks of Wall Street.
I was there. I saw it. Many of you did too…
Net result, CEO’s salary multiples over labor have risen from 40X to 400X while bankers’ bonuses (and Fed Chairmen book deals) defy any moral compass as to being remotely reasonable or merit-based.
Ugh…
Steel and Aluminum—Just Another Example of Crony Capitalism?
Take the recent “heroic stand” on protecting US Steel and aluminum. Those industries provide about 200,000 jobs in the US, but the executives who run those industries make more in individual salaries than the combined weight of their labor pool salaries.
Guess which executives have been in Trump’s ear lately? Do you think these tariffs are about job protection for a tiny sliver of the US labor pool, or more about wealth protection for an even tinier sliver of industrial executives?
Perhaps the recently announced tariffs are less about making America great, and more baldly about handing the elites (i.e. at AK and US Steel) a policy path to getting richer.
Meanwhile, Main Street loses again. The bubbleheads praising tariff tough-talk have neglected to remind their American audience that the steel and aluminum tariffs are now going to make automakers charge more, and you pay more while wages for auto-workers goes down.
Again, nothing is clean and easy in war—even a trade war.
It’s pretty simple: when you raise the cost of steel and aluminum, you raise the cost of manufacturing. Is this good for America? Time will tell…
Meanwhile, Back in the Swamp…
Furthermore, we are already seeing the swamp thicken. The CIA/NSA/Homeland Security deep state which Obama deepened and which Robert Mueller is pretending didn’t try to rig the 2016 election against Trump, who (love him or hate him) is indeed the ultimate witch of this political witch hunt.
In short, partisan feathers are flying in an already highly dysfunctional DC and its McCarthy-like aura of crazy and fear of all things “Russian.”
Furthermore, both parties have lost any sense of fiscal sanity when it comes to domestic appropriations, as Pelosi and Schumer recently boasted over an annual domestic spending increase (pork) of $68B in exchange for granting the Donald an $80B annual defense (hawk) increase.
Ike is rolling in his grave…
In sum: The swamp just borrows and spends and borrows and spends. Billions and trillions seem to mean nothing.
Adding It Up
If you add up: 1) a totally broken political climate, 2) lower tax revenues, 3) stagnating GDP, 4) record-breaking debt levels , 5) a warfare state (Bolton loves war {with Iran, Syria, N. Korea and Russia] even more than the recently fired McMaster), 6) rising rates along with 7) a broken central-bank-lead “recovery” (fiat money printing, rate fixing and $68T of levered/bad LBO’s, bond bubbles, stock over-valuations, real estate bubbles, pure-pork budget resolutions and debt gone wild), well things look bad.
Toss a tariff/trade war into this already dangerous mix, and well, things can just go from bad to worse, no matter how much we/you should resent the Chinese trade imbalance—which I certainly do.
Sabers Rattling—A Good or Bad Thing?
Think about it folks (be you red or blue): Trump now has war hawks surrounding him in DC: Bolton (National Security), Pompeo (State Department), Mattis (Defense Dept.), and Haspel (CIA). This is the most militant and interventionist White House we’ve ever seen.
Some like this. Some don’t.
If you didn’t like the Iran deal, good for you, because this trio is likely gonna kill it. If you liked the Iran deal, well, sorry, get ready for more war talk, expenses, and potential chaos in the middle east in our never-ending “war on terror.”
[By the way, if 9-11 is the reason (i.e. the “first pitch”) for this war, I don’t recall any Iranian faces among the culprits, though our ally in Saudi Arabia provided a few… And ask yourselves this, what actual foreign policy interests (other than AIPAC) do we Americans really have today in the quagmire of the middle east, whose first inning began in an Iraq that ironically had no WMD or Osama Bin Laden…]
Hmmm… But war, we’ve noted elsewhere, is good for the markets—for a while at least. But nationalism (masquerading as patriotism), from America to Afghanistan, France to Fresno, Iran to Indiana, is bad for history, and history seems to be repeating itself.
I guess all of this is my way of saying tariffs and trade wars, as bad or satisfying as they can be, sadly aren’t even close in importance to everything else that is wrong in the current landscape…
Any lower trade deficits will lead to less demand for US Treasuries which would coincide wth a large increase in supply from lower taxes, increased spending and (maybe?) fro the Fed reduction of “its” balance sheet.