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.

 

 

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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. 

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?

 

Is Globalization or is Technology destroying more jobs?

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Could last Friday’s weak U.S. job numbers help make this man president of the United States?

Many Americans believe that China and Mexico are responsible for their job losses. There is no doubt that some industries like apparel & electronics require cheap labor costs and companies have moved production overseas. I also believe that the majority of illegal immigrants (Mexicans) are working at low paying jobs that Americans don’t want. (Even Canadian farmers hire temporary workers from Mexico during planting & harvest season).

Economists around the world believe that globalization has more benefits than detriments. Long term, higher wages in poor countries should theoretically increase spending and help spur global economic growth. Wages in China are going up causing a slowdown in their manufacturing boom. In fact, some illegal immigrants are moving back to Mexico because of higher wages.

Advances in technology has created a large number of new jobs but many of those jobs are unfilled. The major problem is employers find it difficult to find workers with the appropriate skill levels. The education system is really behind the curve in preparing young people to enter the job market. No real surprise that the participation rate is falling as the unemployed are giving up looking for work.

The automotive industry has been well-known for its intensive use of robotic arms for assembly, welding and painting of cars. Many other industries have adopted robotic arms into their manufacturing process. Advances in automation has eliminated an estimated 30% of all manufacturing jobs. Developments in 3D printing could allow consumers to make a variety of products beyond just toys, jewelry and novelty items.

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Technology has destroyed a number jobs in many sectors. It is obvious that on-line shopping has really hurt brick & mortar retailers. Retailers have cut full-time staff and reduce costs by hiring more part-time seasonal personal. A large number of book, music and video stores have simply disappeared. Netflix and other low-cost streaming services has really hurt jobs in media, cable and the music industry. Facebook and Google have captured the majority of advertising  dollars which has reduced revenue and job opportunities in radio, television and print media.

Have you ever wondered why there are so many fake reality shows on cable? Production costs are so much cheaper than producing quality programing. Networks have less ad revenue to paid wages for real actors, writers and directors.  

Thanks to ATMs, internet banking, direct deposit and mobile banking apps, bank branches don’t have as many tellers or people waiting in line. The rise of Robo-Advisors will further reduce bank staff over time. I wouldn’t be shocked to find a decline in the number of bank branches in the near future.

Smartphones have reduced the need for buying cameras, voice recorders, camera film, photo albums, alarm clocks, GPS’s, video cameras, calculators, flashlights, landline phones, watches, calendars, note pads, newspapers, books and even credit cards. I wonder how many jobs have been lost because of the popularity of smartphones.

The oil and gas industry used to drill five wells in order to get one producing well. Today’s drilling technology enables 100% success rate in finding oil and gas. Plus fracking technology has allowed oil companies to maximize oil and gas extraction.

Will future improvements in artificial intelligence enable robots to replace human workers?

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What do you think, Globalization or Technology to blame for job losses.