Market Hissy-Fits, Tariffs, and Chinese Trade

I am fascinated by business and the investment world. Those of you who know me personally know that. But two attributes of the investment world that are tiresome and troubling to me and many others are its excessive short-term focus and its selfishness.  It’s a “what’s in it for me attitude?” along with a “what’s in it for me today?” angle. Or, maybe even “this morning!” In the long run, the market gets things right; but in the short run, we have to put up with a spoiled child’s regular propensity to throw hissy-fits.

The tariff issues with China are a great case in point. China has had higher tariffs on US goods for years, stolen our technology, and made US companies agree to onerous terms to play in their markets. Average tariffs on Chinese goods, until recently, coming into our country were about 3%; ours going into China, about 10%.  Recently, the 10% has dropped to 7.5%. We’re making progress, in other words even without a final agreement.

But the stock market seems breathless over this matter. Yes, our consumers are paying more for a raft of goods coming into America, and our farmers are hurting over China’s retreat from buying our agriculture. We’re looking at a few hundred billion dollar problem set over against a $20 trillion national economy. At one point, it made perfect sense to look passed China’s trade abuses. After all, China was a new international economy, exiting, we thought the worse of communism, and going to change into a more democratic, open nation, as it succeeded. Now, it’s the second largest economy in the world. It’s still a communist nation, rough on its people and those with whom it trades. It’s time it grows up  in international trade and stop the bullying others trying to do business with it.

This has been a rough up and down market this month, supposedly, among other things, because of China and tariffs and a looming trade war.

“What if this goes on and on?”  “Who’s likely to win?” I believe the odds are in favor of the U.S. winning, especially since a trade deal with China to satisfy Trump is likely to end up being a win-win for both nations and their economies.

Clearly, the best trade policy is free trade, with no tariffs, barriers to entry, or subsidies. Free markets and global trade have proven to be the best way to promote global prosperity for nations and their people. Tariffs are best viewed as a tax on imports, with the cost being paid by the consumer, not by the producer. Taxes, or tariffs, serve only to reduce private consumption in order to fund government consumption, which in the end is less efficient. The country that taxes its imports least is, therefore, the country that will benefit most from trade. By the same logic, countries that subsidize their exports only hurt themselves while benefiting those who buy their subsidized goods and services.

Most economists would also agree that there are “second-order effects” that stem from tariffs. By making imported goods more expensive, countries that impose tariffs on imported goods give domestic producers a degree of “protection” to the extent domestic producers can charge higher prices and still compete with imports. But this only reinforces the argument that at least part of the cost of tariffs is born by consumers. Protectionists also argue that tariffs save jobs—and to some extent they do, in the “protected” industries—but only at the expense of consumers and international competitiveness. Tariffs, in short, benefit a relative few at the expense of the many.

Even though many feel Trump is an idiot and a liar, he understands all this – trust me – and said so, last year, at the G7 summit meeting: “That’s the way it should be, no tariffs, no barriers … and no subsidies. … that would be the ultimate thing.” His fellow national leaders at the G7 were not listening. The only way to understand Trump’s apparent love for tariffs today is that they are, as Larry Kudlow, his Director of the National Economic Council, noted a few months ago, “a negotiating tool. They are part of his quiver.” Nothing more, nothing less. And tariffs are a policy tool over which Trump has direct control. That makes tariffs irresistible to deal-maker Trump.

A war of escalating tariffs between the US and China would be damaging to both countries. If carried to an extreme, a tariff war with China would most likely endanger the global economy by weakening both the huge U.S. and Chinese economies. Bad stuff, indeed! And in that sense Trump is crazy to be engaging in a tariff war with China. Worse, he falsely argues that his tariffs are paid by the Chinese and that the money goes straight to the federal government’s coffers. To his credit, Trump’s economic advisor Larry Kudlow correctly admits that tariffs are in fact paid by U.S. consumers, not the Chinese. But he also correctly adds that higher U.S. tariffs will hurt the Chinese as well (because their exports will become more expensive when they arrive in the US, causing Americans to consider other product offerings). So the question then becomes, “Who will suffer the most?” “Who will likely back off from this game of chicken the first?”

Many believe, and I’m among them, that China is in the more fragile economic position in this cat fight, even though it is clear that Trump’s higher tariffs on Chinese imports impose burdens on U.S. producers and consumers.

Next time you hear that the costs of the trade war are simply being borne by Americans, be suspicious. In their zeal to make Trump look stupid or completely wrong on tariffs or other issues, too many commentators pick and choose their arguments. A more fair and complete economic analysis indicates that China is also a big loser in this trade skirmish. Trump’s threats are exerting real pressure on China.

Markets, in spite of their repeated hissy-fits in the short term, are usually efficient at discounting the future, if only because they reflect the consensus of millions of participants with skin in the game. Right now, those millions of economic actors, investors, and thinkers are saying that although both the U.S. and Chinese economies are hurting, the Chinese are hurting more.

Blessings to you all.

Posted in economic recovery, fear, retirement investing, trade | Leave a comment

“A Recession is Ahead” – or so “they” keep telling me

A friend of mine and a reader of my blog spoke to me recently about the coming recession.  He thought “moving assets to cash” would be the right thing to do.

We hear much about “fake news” in the political sphere, but the term is less often applied to the financial world, where the term would also be very apt. Financial cable news and much –  a great deal! – of free, web-based investment advice is, at least to me, fake.  It’s filled with people who are sure of their predictions that are meant to scare you to death. And they’re wrong!

I read a few stories on Seeking Alpha every day.  In fact, I get their morning news feed, highlighting their top stories.  They are, morning after morning, largely and very negative, sometimes hysterically so. Negative news grips the human mind heart far more deeply and quickly than does good news, let alone neutral news (which is what most of life is).

And that’s one of the problems.  If we’re really honest, we don’t know what’s ahead.  And most times, what’s ahead is hardly worth reporting. It’s little stuff.

So, is a recession ahead?

Yes, absolutely.

But as to when, that is far more problematic. Wouldn’t we all like to know when!  Alexandria Ocasio Cortez can tell me that we have only 12 or 13 years left on this planet.

How does she know?  She doesn’t.  But the posturing that she takes and her biases get attention. And AOC is, if nothing else, a showman – or a show woman – an actress every bit as consequential and honorable as Jussie Smollett.

I know this post is supposed to be about the “coming recession,” but fake news isn’t just undermining the journalism of politics or finance.  Here are some fun, fake predictions on climate, population, and environment – fortunately, failed ones – from not-so-long-ago geniuses who got plenty of air time – fear-mongering air time – back in 1970, with the first Earth Day. This list has been compiled from Mark Perry at AIE. (Skip to the bottom if you just want my concluding thoughts on the “coming recession.”)

  •  “We are in an environmental crisis which threatens the survival of this nation, and of the world as a suitable place of human habitation,” wrote Washington University biologist Barry Commoner in the Earth Day issue of the scholarly journal Environment.
  • The day after the first Earth Day, The New York Times editorial page warned, “Man must stop pollution and conserve his resources, not merely to enhance existence but to save the race from intolerable deterioration and possible extinction.”
  • “Population will inevitably and completely outstrip whatever small increases in food supplies we make,” Paul Ehrlich confidently declared in the April 1970 issue of Mademoiselle. “The death rate will increase until at least 100-200 million people per year will be starving to death during the next ten years.”
  • “Most of the people who are going to die in the greatest cataclysm in the history of man have already been born,” wrote Paul Ehrlich in a 1969 essay titled “Eco-Catastrophe! “By…[1975] some experts feel that food shortages will have escalated the present level of world hunger and starvation into famines of unbelievable proportions. Other experts, more optimistic, think the ultimate food-population collision will not occur until the decade of the 1980s.”
  • Ehrlich sketched out his most alarmist scenario for the 1970 Earth Day issue of The Progressive, assuring readers that between 1980 and 1989, some 4 billion people, including 65 million Americans, would perish in the “Great Die-Off.”
  • “It is already too late to avoid mass starvation,” declared Denis Hayes, the chief organizer for Earth Day, in the Spring 1970 issue of The Living Wilderness.
  • Peter Gunter, a North Texas State University professor, wrote in 1970, “Demographers agree almost unanimously on the following grim timetable: by 1975 widespread famines will begin in India; these will spread by 1990 to include all of India, Pakistan, China and the Near East, Africa. By the year 2000, or conceivably sooner, South and Central America will exist under famine conditions….By the year 2000, thirty years from now, the entire world, with the exception of Western Europe, North America, and Australia, will be in famine.”
  • In January 1970, Life reported, “Scientists have solid experimental and theoretical evidence to support…the following predictions: In a decade, urban dwellers will have to wear gas masks to survive air pollution…by 1985 air pollution will have reduced the amount of sunlight reaching earth by one half….”
  • Ecologist Kenneth Watt told Time that, “At the present rate of nitrogen buildup, it’s only a matter of time before light will be filtered out of the atmosphere and none of our land will be usable.”
  • Barry Commoner predicted that decaying organic pollutants would use up all of the oxygen in America’s rivers, causing freshwater fish to suffocate.
  • Paul Ehrlich chimed in, predicting in 1970 that “air pollution…is certainly going to take hundreds of thousands of lives in the next few years alone.” Ehrlich sketched a scenario in which 200,000 Americans would die in 1973 during “smog disasters” in New York and Los Angeles.
  • Paul Ehrlich warned in the May 1970 issue of Audubon that DDT and other chlorinated hydrocarbons “may have substantially reduced the life expectancy of people born since 1945.” Ehrlich warned that Americans born since 1946…now had a life expectancy of only 49 years, and he predicted that if current patterns continued this expectancy would reach 42 years by 1980, when it might level out. (Note: According to the most recent CDC report, life expectancy in the US is 78.8 years).
  • Ecologist Kenneth Watt declared, “By the year 2000, if present trends continue, we will be using up crude oil at such a rate…that there won’t be any more crude oil. You’ll drive up to the pump and say, `Fill ‘er up, buddy,’ and he’ll say, `I am very sorry, there isn’t any.’”
  • Harrison Brown, a scientist at the National Academy of Sciences, published a chart in Scientific American that looked at metal reserves and estimated the humanity would totally run out of copper shortly after 2000. Lead, zinc, tin, gold, and silver would be gone before 1990.
  •  Sen. Gaylord Nelson wrote in Look that, “Dr. S. Dillon Ripley, secretary of the Smithsonian Institute, believes that in 25 years, somewhere between 75 and 80 percent of all the species of living animals will be extinct.”
  • In 1975, Paul Ehrlich predicted that “since more than nine-tenths of the original tropical rainforests will be removed in most areas within the next 30 years or so, it is expected that half of the organisms in these areas will vanish with it.”
  • Kenneth Watt warned about a pending Ice Age in a speech. “The world has been chilling sharply for about twenty years,” he declared. “If present trends continue, the world will be about four degrees colder for the global mean temperature in 1990, but eleven degrees colder in the year 2000. This is about twice what it would take to put us into an ice age.”

These are horrifyingly, laughable predictions that were given serious voice by the press and media, just as much as Ocasio Cortez’ nonsense is given honorable hearing today, just as more recent Al Gore and Michael Mann predictions on ice melts, temperature, and flooding are today.

But as for these, above, as with guesses about recessions, almost all are wrong.

Here’s what we do know about recessions.  They, typically, are accompanied or preceded by: commodity spikes (high oil prices, for instance), nasty, unexpected, geopolitical events (think 9/11), rising interest rates, aggressive FED tightenings, extremely-high asset valuations, or asset bubbles (excesses that need to be worked off).

What does the above list – look at it again – have to do with facts on the ground, economically, today? Not much. Yes, debt is increasingly getting out of control.  There is long-term trouble brewing there.  But we are increasingly living in a post-fact, post-logic world.  What scares people sells or what demonizes the positions or beliefs of your political enemies gets print or air time.

As I say, there is a recession ahead.  I don’t know when, but the laws of economics have not been repealed. Nor is the fact that a recession has not descended upon America since 2009 – ten years ago – sufficient reason to believe that one is “around the corner.” Oh, for sure, one is closer. But the fact that US economic growth since the last recession has been so disbelieved and sluggish, and the hatred for Trump so pronounced that many in media, journalism, and academia will say and do foolish things to avoid any credit being assigned to our odd and highly unorthodox president.

Yet there is much credit to assign – in stocks, employment, economic growth, business confidence, deregulation, tax policy, and more

So whether we are talking about predictions about the next recession or the end of life on this planet as we know it, be skeptical.

Posted in economic recovery, environmentalism, fear, investment myths, investment wisdom, market corrections, news biases, political considerations, retirement investing, saving, stock rallies, Successful living, The Great Recession, unemployment | Leave a comment

Typically, a good time to be in the market

Welcome to March.

While it may still be blustery outside my door in Indiana, it’s more typically a good time to be in the stock market, where a nice slug of our retirement funds ought to be.  Stocks tend to do well in March and April before going into hibernation from May through October.  That’s the custom, what’s usual.  But every year can, and will, be different.

In fact the best time to be in stocks is the period from Nov. though April.  Except last year!

In what is typically a very strong month – December – we experienced the worst December since the Great Depression, when thousands of banks failed.

 

 

 

 

 

 

 

 

 

This neat chart from Bespoke Investment Group tells us a lot.  Study it for a few minutes.  The next two months look good. We need more healing in stocks after their suicide dive of last Oct. through Dec., when they lost 19.78%.  That’s less than a quarter of a point from having inaugurated a brand-new bear market.  Whew!

Posted in economic recovery, fear, investment myths, investment wisdom, market corrections, Market falls, market volatility, Personal Finance, retirement investing, stock rallies | Leave a comment

Who would have thunk?

In the last month, especially early on, I had several calls from friends and associates who wondered about the markets.  Given the autumn of 2018’s pummeling and especially December’s mauling, I heard, “Should I get out?”

I told my panicked friends, “I don’t know what’s ahead. I don’t know why the market has been hit so hard. I doubt this will continue. but if you can’t sleep at night, you may have to sell. But as for me, and what I think is fair advice, do nothing.”

Well, January is over, and what a January it was after the worst December since 1931, a year in which 2291 banks failed, and we sat in the depths of the depression. What did late 2018 have to offer the investing public to rival the dreadful markets of Dec. 1931? Nothing! Absolutely nothing, except for a massive helping of fear and panic.

Take a look at this chart, below.  It’s from Bespoke Investment Group. It shows where the performance of the first 21 trading days of 2019 fit in trading history with those same dates since 1928. Read it as a running cumulative standing chart. In other words, on the 2nd trading day of January (January 3), 2019 was in 87th place of all years since 1928. Yet, by the last trading day of 2019, the 21st trading day, January 31st, 2019 was off to the 7th best start to a year since 1928.

Markets do that.

But no, we are not now guaranteed a great year for the rest of 2019.  But some of the excesses of late 2018 are being ironed out.

What this all tells me, again, is: (1) have a diversified, equity-oriented portfolio, (2) set your asset allocation based on who you are and the emotional system you have. It makes no sense to have too much stock when a rough patch comes and you sell out at a market bottom, and (3) stay the course.

God bless us all.

Posted in economic recovery, fear, investment myths, investment wisdom, market corrections, Market falls, market volatility, Personal Finance, saving, stock rallies, Successful living | Leave a comment

What in the world is going on in the markets?

If you haven’t noticed, the markets have gone from bad to free-fall. They can’t seem to catch a break or a bounce. 2017 was among the calmest years ever – no more than a 3% fall, up every single month of the year!

On the other hand, 2018 has been among the most volatile of years – two 10% + corrrections with, now, 50% of all stocks down 20% or more. Through late Nov., data show 90% of all 70 different asset classes were down, which is the worse performance in that data set since records began being kept around 1950.

How many different asset classes fell in 2017?  1%

Even more astonishingly, to me at least, December, 2018, has turned out to be the worst December since 1931, a year when banks were falling by the dozens each month.  And too, December is, historically, just about the best month for investment returns of the year.

Why this carnage?

I don’t know, but here some reasons offered:

  • Investors have grown increasingly concerned about a slowing economy and a possible near-term recession.
  • There is a growing sense that the Federal Reserve will raise interest rates too much (or perhaps that it already has).
  • The U.S./China trade dispute remains unresolved and has the potential to disrupt growth.
  • Programmatic trading and selling of ETFs and passive investments has exacerbated all of the above.
  • And, finally, these factors were magnified by a holiday-related low-liquidity environment.

But these elements are not new. And yet they are seen now as deeply threatening to the US economy as were the events of the fall 2008 – remember those? bank failures? AIG? Lehman Brothers? Fannie/Freddie? and more? Yes, we’re looking at numbers this month that rival that dreadful fall.

But how is USA doing this fall?

  • GDP was up 4.1% in the 2nd Q, up 3.5% in the 3rd Q., and 3.4%  in the 4th Q of 2018 vs. 2.2% per year overall under the prior Pres. administration
  • Corp. earnings have smartly – over 28% in the last year
  • Tax cuts are working
  • Inflation is modest
  • Unemployment is 3.7% in Dec 2018
  • There are more jobs than people to fill them
  • Deregulation is helping
  • Business/investment friendly environment as opposed to the prior decade

But none of this matters. None of it.  Today, all good news is bad news. All neutral news is bad news. And all bad news is very, very bad news.

So, the S&P 500 fell 7.1% this week, is down 9.7% this year, and is down almost 20% from its high this year?

Why? Again, I don’t know. It truly seems irrational, but being an investor means that, from time to time, we have to live through some irrationality. And we’re deeply in that right now. When we exit this financial nightmare is anyone’s guess. But exit it we will and likely with an explosion upwards.

Here’s a last thought. I’m not a conspiracy geek. But markets are so extraordinarily awful, with no bounces up amid great economic data, I can’t help but wonder, is there some state wealth fund out there that is trying to destroy US markets? inspire chaos? pull down an administration that threatens it?  Don’t know.  But China comes to mind.   Again, that’s not a conspiracy theory. It’s just a thought, a crazy thought, but not altogether crazy, given the squeeze Trump is putting on China.  We’ll see where and how this ends, but if you have not followed markets this fall and, more particularly, this December, you would best sit down when you open your retirement savings statements for the 4th quarter of 2018.

One final, final thought: Merry Christmas and Happy New Year. As Teresa of Avila once said: “Everything passes, patience gains all. He or she who has God has everything.”

Posted in fear, investment myths, investment wisdom, market corrections, Market falls, market volatility, Personal Finance, retirement investing, saving | Leave a comment