Blame Yellen and Trump for rapid raising U.S. interest rates

  

I believe that the former head of the Federal Reserve, Janet Yellen, is partly responsible for rapid raising U.S. interest rates. Although, GDP growth wasn’t overheating during her term, she could have started to unwind the Fed’s balance sheet which had 4 trillion dollars’ worth of treasuries. Instead she bought more treasuries after they matured and expanded the balance sheet by buying more treasuries with the interest earned.

This kept long term interest rate extremely low and allowed corporations to borrow money at low rates to buy back their shares. The Fed’s lack of action has help fuel the longest bull market in history.

Sorry Trump supporters but your man is also to blame. His policies are inflationary!

  1. The trump’s administration decision to pull out of the Iran deal has cause oil prices to rise. One million barrels of oil a day is being taken off the market.
  2. Trump’s tariff war with China and other trading partners will force corporations to increase prices because their costs are going up. Costs could go up even higher if Trump increases tariffs on imports from China from 10% to 25% in January 2019
  3. The corporate tax cuts and government spending has juiced the economy causing unemployment to fall to the lowest level in nearly fifty years sparking fears of raising wage growth.

The Trump’s administration spin that the tax cuts will pay for themselves is simply not true. Both the Reagan and Bush tax cuts added to the fiscal deficit.

The new Fed chairman, Jerome Powell has a difficult job of unwinding the Fed’s balance sheet by buying less treasuries just as the federal government is issuing more debt to cover the Trump’s tax cuts. Trump will add another trillion dollars to the deficit. More supply of treasuries plus less buyers equals raising interest rates.

Trump blaming Powell for the massive drop in the stock market last week is ridiculous. No one knows for sure what caused investors to hit the sell button. Was it fear of raising interest rates, a forecast of slower global growth by the IMF, fear of an escalating trade war with China or fear of runaway inflation.

My guess is all or none of the above. Maybe the stock market was just due for a correction.

 

 

 

 

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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!

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

 

Sorry America, Canada is imposing retaliatory tariffs on U.S. goods

We have been good neighbours for 151 years and we share the longest unsecured international border in the whole world.  We have fought and died together in too many wars to even count. However, Canada’s foreign minister announced Friday that Ottawa plans to impose about $12.6 billion worth of retaliatory tariffs on U.S. goods on July 1, joining other major U.S. allies striking back in the escalating trade dispute.

Canada’s plan taking effect next week will include imports of U.S. products such as yogurt, caffeinated roasted coffee, toilet paper and sleeping bags. Canada’s announcement is part of larger fallout from U.S. President Trump’s tariffs on steel and aluminum imposed on Canada, the EU and other nations. As a result, some of the U.S.’ biggest trading partners have retaliated with counter-tariffs.

 “We will not escalate, and we will not back down,” Freeland said.

Mexico’s tariffs took effect June 5 on U.S. products such as pork, cheese, cranberries, whiskey and apples. The EU enacted tariffs Friday on more than $3 billion worth of U.S. goods including bourbon, yachts and motorcycles.

The White House’s stated goal in implementing tariffs is protecting U.S. jobs, but the initial business response suggests that U.S. companies are taking a hit. Companies are coping with the tit-for-tat tariffs by increasing prices or making business changes to cope with higher costs.

Harley-Davidson, an American Icon, is an example why Trumps’s protectionist agenda may not work.

In May 2017, Harley said it planned to build a plant in Thailand. Harley’s CEO, Matt Levatich, said the decision was made as part of a “Plan B” when Trump dropped out of the Trans-Pacific Partnership. The plant would allow Harley to avoid Thailand’s tariffs on imported motorcycles and help the company obtain tax breaks when exporting to neighbouring countries.

In January Harley announced plans to close its Kansas City plant, leaving 800 workers without jobs. It will shift operations to another plant in York, Pennsylvania, and hire some workers there, but ultimately there will be a net loss of 350 jobs. Days later it said it would spend nearly $700 million on stock buybacks that would benefit shareholders.

The company also announced on Monday it will shift the production of its Europe-bound motorcycles overseas as a result of the EU’s retaliatory tariffs. It’s not exactly clear which factories will take on the excess production for Harley. However, Harley’s Street-model bikes are made in India for Italy, Spain, and Portugal. More American jobs could be effected.

Harley-Davidson took its tax cut, closed a plant, and bought back stock.

The chart below is Harley-Davidson’s stock price from Trump being elected President to Friday’s closing prices. Is it safe to assume that both shareholders and workers are not benefiting from Trump’s protectionist agenda?

The automotive industry is Trump’s next target for imposing tariffs. Trump’s Commerce Secretary Wilbur Ross plans two days of public hearings on July 19-20 aimed to wrap up the probe into whether imported vehicles represent a national security threat by late July or August.

Two major auto trade groups warned imposing 25 percent tariffs on imported vehicles would cost hundreds of thousands of auto jobs, dramatically hike prices on vehicles and threaten industry spending on self-driving cars.

Lets hope that this trade war with our American neighbours will not accelerate! Wishing them a Happy 4th of July!

 

 

 

 

 

 

Why China will outlast the U.S. in trade war

In the political terms, President Xi Jinping runs a communist country that has just granted him the ability to rule for life. He enjoys advantages that may allow him to cope with the economic fallout far better than President Trump. His authoritarian grip on the news media and the party means there is little room for criticism of his policies, while Trump must contend with complaints from American companies and consumers before important midterm elections in November.

The Chinese government also has much greater control over their economy, allowing it to shield the public from job cuts or factory closings by ordering banks to support industries suffering from American tariffs. It can spread the pain of a trade war while tolerating years of losses from state-run companies that dominate major sectors of the economy. In addition, China is also sitting on top of about $3 trillion in surplus cash.

At best, the American actions could shave one-tenth of a percentage point off China’s economic growth. Not enough to force a drastic reversal of policies, given the enormous benefits that Chinese leaders see in the state-heavy economic model they have relied on in recent decades.

Chinese tariffs on the American agricultural sector is very influential in the Congress. Many states that have voted republican in the past will be hardest hit by these tariffs.

Hopefully the president is just blowing off steam again but, if he’s even half-serious, this is nuts,” said Senator Ben Sasse, a Republican from Nebraska, “China is guilty of many things, but the president has no actual plan to win right now. He’s threatening to light American agriculture on fire.”

In addition to agriculture, China threatened to retaliate with tariffs on American cars, chemicals and other products. The 106 goods, many produced in parts of the country that have supported Mr. Trump, were selected to deliver a warning that American workers and consumers would suffer in a protracted standoff.

The mere talk of a possible trade war has sent investors on a rolling coaster ride of uncertainty. The six month chart of the S&P 500 below clearly illustrates increased volatility.

China also has the upper hand because it holds $1.2 trillion dollars of American debt. Trump’s tax cuts and infrastructure spending will require issuing more debt. The U.S. government has relied on foreigners to purchase treasuries to finance their spending because American saving rates are so low and they can’t participate fully. Add the fact that the biggest buyer of treasuries was the Federal Reserve which has started to sell it’s holdings.

What would happen to the bond yields if China doesn’t buy additional American debt?

The economic law of supply and demand dictates that more supply will cause prices to fall. If bond prices fall then yields will go up, causing interest rates to raise. Wage and price pressures are already rising, higher tariffs would only intensify these pressures forcing the Fed to raise interest rates even more.

A worst case scenario, the talking war turns into a trade war that could slow U.S. growth, tank the stock market and cause a U.S. recession.

 

President Trump is approaching this like does everything else, by talking tough and expecting his opponent to give in. Unfortunately for Trump, it’s not the 80s anymore. China was dramatically underdeveloped then and it wanted access to Western technology and manufacturing techniques. China is relatively mature today and it can easily obtain what it needs from other vendors outside the United States. While the U.S. market looked enticing a few decades ago, Beijing is more interested in newer emerging market countries.

Trump is not only gambling his political future but the financial well-being of Americans if he starts a trade war.

Trudeau is whistling by the Canadian graveyard

According to Wiktionary:  “whistle-past-the-graveyard” is to attempt to stay cheerful in a dire situation; to proceed with a task, ignoring an upcoming hazard, hoping for a good outcome.

In my humble opinion, this idiom describes our Prime Minister perfectly. The Canadian government missed a golden opportunity to respond to the Trump tax cuts in the February 2018 federal budget.  The United States, our largest trading partner, has made investing in the U.S. more attractive than Canada. Corporate tax rates in the U.S. are 5% lower than Canada and more important is the 100% deduction for new capital spending.

The Canadian dollar has fallen in value from $1.2586 at the end of February to $1.3079 today. A clear sign that foreigners are taking their money out of Canada.  The uncertainly regarding the successful re-negotiation of NAFTA is hurting our dollar and is also responsible for the lack of capital spending in Canada.

Our factors that make Canada less competitive than investing in the U.S.

  • Carbon taxes have increased energy costs.
  • February budget increased taxes for small businesses and individuals.
  • Canadian oil is being sold at a discount by $20 to $25 a barrel costing billions of dollars in lost revenue to Canadian oil companies and loss of tax revenue.
  • Kinder Morgan’s Trans Mountain pipeline expansion is being delayed by protesters.
  • Many LNG projects have been scrapped. Meanwhile, this sector is booming in the U.S.
  • The housing market is slowing down due to a 15% foreign buyer’s tax, tightening mortgage rules and higher mortgage rates.
  • Tariffs on softwood lumber, pulp & paper and solar panels. (Steel & aluminium tariffs could become permanent if Trump doesn’t like the NAFTA deal)

No surprise that the Toronto stock exchange is down 4% year to date while the S&P 500 is flat and NASDAQ is up 6%. The Trump tax cuts have already boosted employment and capital spending should kick in the second half of 2018. However, there are still are plenty of risks investing in the U.S. with the Trump circus in Washington. Possible trade wars leading to inflation and higher interest rates.

It is going to be very challenging to make money in 2018!

I am still a Canadian Bear

Market correction when Trump sends a NAFTA withdrawal letter

FILE PHOTO: Canada’s Foreign Minister Chrystia Freeland (centre) Mexico’s Economy Minister Ildefonso Guajardo (Left) and U.S. Trade Representative Robert Lighthizer (right) REUTERS/Chris Wattie/File Photo

I disagree with most media and political pundits that believe Trump is unpredictable. He campaigned on America first which includes being tough on illegal immigration and ripping up NAFTA. His voting base believes that these two issues are responsible for low wages and poor job opportunities in the United States.

It was obvious to me that the U.S. government shutdown was caused by Trump who set the March 5th deadline for DACA (Deferred Action for Childhood Arrivals). He is using Dreamers as a bargaining chip to get funding for more border security and for his idiotic wall. Eighty per cent of Americans don’t want Dreamers to be deported. If Trump really cared, he would have informed the House of Representatives to draft a by partisan bill to solely deal with DACA.

In my humble opinion, Trump is just looking for an excuse to rip up NAFTA. Donald Trump’s protectionist leanings have been obvious since before the U.S. presidential election. U.S. negotiators are showing few signs of backing down from unrealistic demands on automotive content rules, the chapter 19 dispute mechanism and a five-year sunset clause that have left NAFTA teetering on the brink.

Canada and Mexico have rejected most of the U.S. proposals for NAFTA reforms, leaving officials with a big job if they are to bridge the large differences in Montreal. Negotiations are due to wrap up at the end of March.

Protectionist moves as U.S. imposes tariffs on the following imports

  • Softwood lumber (Canada)
  • C-series planes (Canada)
  • Pulp & Paper (Canada)
  • Washing machines (South Korea)
  • Solar cells & modules (China)

Canada is firing back by bringing a trade complaint to the World Trade Organization (WTO) despite the fact that the president has been particularly critical of the WTO and its system for dispute settlement.

A former U.S. trade representative says he’s hoping that a recent wide-ranging trade complaint launched by the Canadian government against the United States won’t “end up blowing up in their face” at the NAFTA negotiating table.

Adding more fuel to the fire, Canada has agreed to a resurrected a version of the Trans-Pacific Partnership (TPP) and will sign on to the deal. The deal, renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, comes after talks in Japan this week with the 11 countries (including Mexico) that are still committed to the deal.

“We are happy to confirm the achievement of a significant outcome on culture as well as an improved arrangement on autos with Japan, along with the suspension of many intellectual property provisions of concern to Canadian stakeholders,” said International Trade Minister Francois-Philippe Champagne in a statement.

Will these moves strengthen Canada’s position at the negotiation table with the United States or will it force Trump to play his withdrawal card?

My bet is that picking a fight with Trump will result in him sending a NAFTA withdrawal letter to both Canada & Mexico which will cause a stock market correction.  In my humble opinion, it is only a question of when!