Why Trump’s zero tariffs & zero subsides is a pipe dream

Trump campaigned on getting better trading deals starting with the renegotiation of NAFTA.  The loss of U.S. manufacturing jobs is the main reason that the Trump administration has criticized NAFTA and other trade deals. According to the CFR, the U.S. auto sector lost roughly 350,000 jobs between 1994 and 2016. Many of those jobs were taken up by workers in Mexico, where the auto sector added over 400,000 jobs in the same period.

A few reasons why zero tariffs alone don’t work

  • Labour intensive manufacturing will tend to locate where employee wages and benefits are the lowest.
  • Local and federal tax rates are another factor when it comes to plant locations.
  • Input costs like regulations, transportation and power rates are just a few examples of factors in plant location considerations.
  • It makes economic sense to locate near the biggest market for the product or service.

Bottom line, can the Trump administration force China and Mexico to pay $25.00 a hour to assemble cars? Are American consumers willing to pay an extra $1,400 to $7,000 for a new car if Trump imposes 25% tariff on the auto sector? How about $3,000 for a new I-phone that is made in America?

For argument sake, I do believe that reducing tariffs among developed countries does make sense. However, the other problem is fluctuations  in currencies which governments in general have little or no control over. For example, only yesterday, President Trump doubled the tariffs on Turkish steel and aluminum because of the drastic fall in value of the Turkish lira.

The hard fact is zero tariffs are not feasible and corporations are not patriotic. Corporate executives are more concern about keeping their shareholders happy and ensuring a very generous executive compensation package. Wage growth in the U.S. has been stagnant for many years and there are no signs that the corporate tax cuts have trickled down to employee wages.

Is eliminating government subsides even possible?

My short answer is no. The great recession of 2008-09 would have turned into another great depression if governments’ world-wide didn’t bail out their troubled banks. How many jobs would have been lost in the auto sector if the U.S. government didn’t bail out Chrysler and GM? (Does too big to fail, sound familiar)

Severe weather conditions make it difficult for governments to get rid of agricultural subsidies. Plus, governments can use subsidies to ensure that farmers produce the right amount of crops or meat to serve their population. There is also a safety issue and a cost benefit to using your own food sources rather than relying on importing food from other countries.

I could go on and on with other examples of industries that require some form of government help. Not all subsides are bad. Think about the millions of people who use public transportation. How expensive would it be, if it wasn’t subsidized by government?

All comments are welcome!

 

 

 

 

 

 

 

 

 

 

 

 

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Trump criticized the Federal Reserve’s interest-rate increases, it’s the economy, stupid

President Trump blasts the Federal Reserve’s interest-rate increases last week, breaking with more than two decades of White House tradition of avoiding comments on monetary policy out of respect for the independence of the U.S. central bank.

The Fed has raised interest rates five times since Trump took office in January 2017, with two of those coming this year under Chairman Jerome Powell, the president’s pick to replace Janet Yellen.

“I am not happy about it. But at the same time I’m letting them do what they feel is best,” Trump said. In the interview, Trump called Powell a “very good man.”

Since 1977, the Federal Reserve has operated under a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”, what is now commonly referred to as the Fed’s “dual mandate.”

The GOP’s tax cuts put the petal to the metal in an already accelerating U.S. economy. The unemployment rate which was heading lower got some extra juice. A 4 percent unemployment rate is very close to the Fed’s goal of maximum employment. However, wage inflation hasn’t show up yet as corporations are increasing dividends and buying back shares instead of increasing employee wages. (So much for trickle-down economics)

The real threat to the U.S. economy is inflation which has started to rear its ugly head due to a rebound in oil prices. The Fed is concern that the Trump administration’s use of tariffs to get better trading deals from all its trading partners will eventually lead to higher inflation. The Federal Reserve can let inflation run a little hotter temporally but it may be forced to accelerate interest rate increases.

Powell addressed Congress last week and told lawmakers that “for now — the best way forward is to keep gradually raising the federal funds rate.” Fed officials have penciled in two more hikes this year. That is one more rate hike then when Yellen was heading the Fed.

The probability that investors assigned to a Fed rate hike in September was little changed near 90 percent after the president’s remarks, while the probability of a December hike was also holding near 65 percent, according to trading in federal funds futures.

Will tariffs clause more inflation and or job loses?

The impact of tariffs takes time to make its way through the economy. Corporations will try to pass on higher input costs to their customers. Higher prices could lead to a decease in sales, causing corporations to cut costs by reducing their work force.

In my humble opinion, it all depends on the amount of the tariff. A 10 percent tariff will add to inflation but a 25 percent tariff will clause job loses.

Case in point, American farmers are feeling the pain of increase tariffs levied by U.S.  trading partners.

Trade conflicts “are having a real and costly impact on the rural economy and the ability of rural businesses to keep their doors open,” said Wisconsin Senator Tammy Baldwin, a Democrat, asking Trump to develop a farm plan. “Without prompt action, we could lose farmers and the rural businesses they support and depend on at an even more rapid rate.”

The Trump administration announced that it will deliver US$12 billion in aid to farmers who’ve been hit by dropping prices for crops and livestock amid a burgeoning trade war in which agriculture is a main target for retaliation against U.S. tariffs.

I am confused, Trump wants U.S. trading partners to eliminate all tariffs and subsidies. Yet, he is threatening more tariffs and providing more subsidies.

 

 

Is Trump creating trade uncertainty to attract investment into the U.S. ?

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The Trump administration has lifted exemptions for Canada, Mexico and the European Union on its punishing steel and aluminum tariffs. Former Bank of Canada Governor David Dodge says the United States is deliberately creating global trade uncertainty to drive investment to its shores.

“The White House and the people around the president look at the world in a way that, if they can create uncertainty about investment elsewhere in the world, then both Americans and foreigners will come and invest more in the United States,” Dodge told BNN Bloomberg on Monday.

This strategy has partially worked over the past 18 months as unsuccessful NAFTA talks have caused companies to postpone or delay important investment decisions. Current Bank of Canada Governor Stephen Poloz said in an interview with BNN Bloomberg last Friday that the ongoing NAFTA negotiations threaten to drive investment in Canada away for good.

President Trump is headed for a showdown with America’s allies at a Group of Seven summit today in Quebec, with the European Union and Canada threatening retaliatory measures unless he reverses course on new steel and aluminum levies. The EU has threatened to retaliate with duties on everything from American motorcycles to bourbon. Canada and Mexico have also promised to levy their own tariffs on U.S. goods.

The White House appeared unfazed by threats from allies. Top economic adviser Larry Kudlow said Canadian Prime Minister Justin Trudeau was “overreacting” in response to the tariffs, and said the blame for any escalation lies with the U.S.’s trading partners. He said Trump is simply responding to decades of trade abuse.

The president believes that the tariffs being charged against other countries would help to fund the U.S. government and also believes that the U.S. could not lose a trade war in an international climate where the rules were already stacked against American business.

In my humble opinion, Trump’s bullying tactics may have worked in real estate negotiations with contractors and financial institutions. However, it seems to me that world leaders are not going to allow Trump to win concessions without a serious fight.

This trade dispute has triggered one of the biggest crises in the G-7 since the group’s formation by Canada, France, Italy, Germany, the U.K., Japan and the U.S. In a rare rebuke of a member nation, G-7 finance chiefs said the U.S. duties could “undermine open trade and confidence in the global economy.”

Trump’s “America First” policy could turn into “America Alone” as trade tensions escalate with allies.  So far the world stock markets have not reacted to the fact that tariffs will boost the inflation rate. Leading to higher interest rates and slower global growth.

Lets hope that cooler heads prevail and the world avoids another great recession.

 

 

 

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Trump Tariffs are all about politics and not national security

 

Canada and Brazil are likely to bear the brunt of any tariffs on steel imposed by President Donald Trump. According to the department’s International Trade Administration, Canadian and Brazilian steel comprised 16 percent and 13 percent of U.S. steel imports as of September 2017. China is not one of the top 10 importers of steel to the U.S. (take a good look at the above pie chart)

Top foreign sources of aluminum included Canada (56 percent), Russia (8 percent) and the United Arab Emirates (7 percent) between 2013 and 2016, according to the United States Geological Survey.

In my humble opinion, there is little justification on applying a 25% tariff on steel and a 10% on aluminium based on national security. The majority of steel and aluminium that the U.S. imports comes from military allies.

Now, the timing on this tariffs are somewhat suspect with a congressional election in the 18th district of Pennsylvanian next week. In case you didn’t know, Pennsylvania manufactures a lot of steel. This is Trump country, he carried this district by 20% in the 2016 election. The race is so tight that Trump had a rally in Pennsylvania supporting Rick Saccone.

“Do me a favor,” he said to the large crowd gathered in a hangar at the Pittsburgh airport. “Get out on Tuesday, vote for Rick Saccone, and we can leave right now.”

Trump also using tariffs as a bargaining chip in NAFTA negotiations

Canada and Mexico received a temporary exemption from the tariffs. It will depend on whether the changes that are made to NAFTA will satisfy Trump.  The seventh round of talks in Mexico produced very little process. The final round of NAFTA talks are schedule in Washington sometime in April. The Trump tariffs will put extra pressure on Canada and Mexico to give Trump a deal that will help him get republicans elected this November.

President Trump’s decision to impose tariffs on foreign steel and aluminum likely precedes an exit from NAFTA, according to Goldman Sachs.

Stock Markets don’t like tariff wars

Tariffs will artificially boost input costs and increase the cost of imported finished products. The fear is an increase of inflation, leading to raising interest rates which would dampen economic growth. The other fear is that corporations will be unable to pass on an increase in input prices which could lead to job cuts.

I expect more tough talk on trade from President Trump because many American voters think that the wealthy will benefit the most from tax cuts. I believe that stock market volatility will intensify over the next few months.

 

It may be a good time to raise some cash and pick up some bargains.

 

My 200th post: Investing in the Second Machine Age

As a retired senior, I am having difficulty adjusting to ” the Second Machine Age”. The advances in technology are mind blowing. I would never have guessed that self-driving cars in science fiction movies like “Minority Report”  or “I Robot” could become available in my life time.  How about Elon Musk’s vision of offering a rocket ride of only 30 minutes to get to London from L.A., is that just science fiction or a potential reality?

China, the world’s biggest vehicle market, is considering a ban on the production and sale of fossil fuel vehicles in order to reduce pollution and boost the production of electric vehicles. The move would follow a similar ban by France and Britain but they have included a 2040 timeline. However, China has introduced draft regulation to compel vehicle manufacturers to produce more electric vehicles by 2020 through a complex quota system.

Some possible investments to consider

  1. Millions of dollars are pouring into the Global X lithium & Battery ETF (LIT). It has had a massive gain in value of 58% so far this year. It has also attracted short sellers who are betting on a pullback in price.
  2. For stock pickers, the top ten holdings of LIT include five U.S. listed companies, ticker symbols Tsla, FMC, SQM, ENS and ALB. A word of caution, some of these stocks have very high valuations and can be very volatile.

There is little doubt in my mind that advances in digital automation, robotics and artificial intelligence will change your living standards over the next decade. Just think how companies like Facebook, Amazon, Netflix, Google and Apple have already influence our lives during the past decade.

A 2013 study by Oxford University’s Carl Frey and Michael Osborne estimates that 47 percent of U.S. jobs will potentially be replaced by robots and automated technology in the next 10 to 20 years. Those individuals working in transportation, logistics, office management and production are likely to be the first to lose their jobs to robots, according to the report.

Some possible investments to consider to capitalize on this trend

  1. Robotics and Automation ETF (ROBO) which contains three U.S. listed companies in their top ten holdings. Ticker symbols, AVAV, HOLI and CGNX
  2. Global X Robotics & Artificial Intelligence ETF (BOTZ) which contains three U.S. listed companies in their top ten holdings. Ticker symbols: NVDA, ISRG and TRMB
  3.  Semiconductor ETFs like SOXX or SMH which include companies that provide key components for self-driving vehicles, automation, robotics and artificial intelligence. The top ten holdings of these ETFs are places to look for individual names that could outperform the overall market.

There is also an interesting book that I am thinking about buying.

Synopsis: According to the authors, the book has three sections.

  • Chapters 1 through 6 describe “the fundamental characteristics of the second machine age,” based on many examples of modern use of technology.
  • Chapters 7 through 11 describe economic impacts of technology in terms of two concepts the authors call “bounty” and “spread.” What the authors call “bounty” is their attempt to measure the benefits of new technology in ways reaching beyond such measures as GDP, which they say is inadequate. They use “spread” as a shorthand way to describe the increasing inequality that is also resulting from widespread new technology.
  • Chapters 12 through 15, the authors prescribe some policy interventions that could enhance the benefits and reduce the harm of new technologies.

You can also search you-tube “The second machine age” to listen to the authors speak. 

 

Disclaimer: Do your own research, these investment ideas can be very volatile. 

Is Basic Income the answer to a new AI world?

I am so glad that I am a retired senior. I don’t have to worry about a robot taking my job. Since I have lots of time on my hands to think, I wonder what a new AI world would look like. For example; will my 2 year old granddaughter even need to get a driver’s licence? Will the Uber or cab that she orders even come with a driver?

Now I have always been a big fan of science fiction movies. There is a scene in the movie “Logan” where Wolverine has to dodge driver-less trucks to cross the highway to help some people. Installing AI in 16 wheeler trucks could replace the need for a lot of truckers.

Fast food restaurants have been the training ground for teenagers and young adults.  I used to tell my kids that they better get a good education or you will end up using the phrase “would you like fries with that” while working at MacDonald’s. However, even MacDonald’s are installing new self-serve kiosks. Now you can even order your Starbucks coffee using your phone. Where will young people get work experience?

Everywhere I look, jobs are slowing disappearing, the new AI technology seems to have very few limits.

“For example, Australian company Fastbrick Robotics has developed a robot, the Hadrian X, that can lay 1,000 standard bricks in one hour – a task that would take two human bricklayers the better part of a day or longer to complete.”

Japan has the highest percentage of people over the age of 60 and their population is shrinking. As a nation, there is a shortage of workers and they have embraced the use of robots in the work place. This trend could be coming to North America sooner than you think.

As a baby boomer, I worry about the future cost of health care. The world population is aging and health care costs are raising. I hope that science fiction turns into reality and my caregiver looks something like this.

   or this 

Why universal basic income may be necessary

A 2013 study by Oxford University’s Carl Frey and Michael Osborne estimates that 47 percent of U.S. jobs will potentially be replaced by robots and automated technology in the next 10 to 20 years. Those individuals working in transportation, logistics, office management and production are likely to be the first to lose their jobs to robots, according to the report.

For many, basic income sounds like a free ride or welfare. Economist believe that masses of people will not just sit at home but will make a contribution by continuing to work. The basic income would allow recipients to explore other options not available to them if they are struggling just to survive,  such as retraining or to find new job opportunities.

In theory, new opportunities would spring up to replace jobs done by machines. However, there are some practical problems, like where will government get the money if less people are working to pay for a basic income program? The North American education system would require a major overhaul to put more job training skills into the curriculum.

Some additional information to consider

The government of Ontario just announced a three year basic income pilot project to help low income earners in three cities. A single person can apply to receive $16,889 a year and couples will receive $24,027. Recipients who are employed will keep what they made from their jobs but their basic income would be reduced by half their earnings. For example, a single person earning $10,000 per year from a part-time job would receive $11,989 in basic income ($16,989 less 50 per cent of their earned income), for a total income of $21,989.

Is basic income just a pipe dream or a future reality?

 

 

 

 

 

Will Trump disappoint Wall Street & America?

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There is no doubt that the Republican Party was totally surprised and unprepared by the November election results. Trump’s management style is going to drive his management team, the media, most of the American people and the world nuts. A new reality show has come to Washington, “The Billionaire Apprentice”, who will be the first to get fired?

I think that there is going to be more than the usual amount of personnel turnover in the first six months. The media will be writing about how Trump can’t keep people and about all the chaos in the White House. The world has never seen an American president with this type of management style. It is going to make most of us uncomfortable.

The stock market has high expectations regarding less regulations, infrastructure spending, a new tax policy and the replacement of Affordable Care Act. Failure to deliver something that at least comes close to meeting those expectations is going to have a significant negative impact on the markets and the economy. Some market watchers believe that a correction will show up in the next 60 days if there are cracks in Trump’s agenda.

Being Canadian, I am not an expert on American politics. In my humble opinion, a civil war maybe brewing between Trump and the Republican Party on the implementation of a new tax policy and infrastructure spending. Repealing and replacing the ACA isn’t going to be easy without some bipartisan cooperation. Some republicans maybe hesitant to support some of Trump’s agenda in fear of losing their seat in upcoming congressional elections in Nov. 2018! Trump’s team could be stuck in the Washington swamp!

If you have any doubts that protectionism is at the top of Trump’s agenda, you clearly need to watch Trump’s inauguration speech. President Trump’s first few days in office was to pull out of the Trans-Pacific Partnership and signed an executive order to renegotiate NAFTA.

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My buy American and hire American playbook

Avoiding:

  • Auto industry (including part suppliers)
  • Canadian lumber producers
  • Health care and biotech
  • Oil & gas (watching U.S. fracking companies)
  • Retail & Restaurants
  • U.S. industrials that depend on infrastructure spending

Investments that could be Trump Free

  • U.S. banks (including some regional banks)
  • Tech stocks (including semi-conductors, cloud plays)
  • Some U.S. domestic stocks
  • Gold & silver stocks
  • Cash (in case of a correction)

What do you think? Has President Trump over promised and will he under deliver?