Tariffs Will Be A Main Driver Of Volatility
Things are about to get rocky. The market still continues to try and price in tariffs and sanctions.
This is high-stakes poker.
Trump opened with a big raise.
China hesitantly called. They slowed purchases of U.S. goods and agricultural products.
Soy and other farm prices dropped. Trump then raised again. The call was offering farmers billions to offset their losses. His raise was to schedule higher tariffs.
Then came the flop (in poker terms, a round of cards that get dealt prior to more betting).
Bad news for China: African Swine Flu has struck and it is decimating Chinese hogs.
That means demand for U.S. hogs is rising, and undermines China. Pork is the #1 source of protein in China.
U.S. hog prices are down ~10% from last year, but so is the yuan. That’s before the impact of ASF takes hold. In other words, Chinese consumers are more likely to see food inflation than not.
In the China/US poker game, China did not pull a card it needed. But the US did.
The next move is Trump’s and he is well-positioned.
Both the selection of goods and the timing work are in his favor.
The first round of tariffs hit products where China is exposed. But the U.S. private sector is not.
Specifically, (1) no U.S. consumer products were targeted and (2) only products where buyers had sufficient alternatives (where Chinese suppliers have less than 20% market share.)
The next round is where consumer pain will be felt. Smartphones, air conditioners, and so on. Apple will have to decide whether or not to absorb the cost (put differently, Apple needs to decide if they make $50B in profit next year or $48B.)
Here is where timing is Trump’s friend. The next round of tariffs really won’t affect this holiday season, so smartphones are relatively safe. And the US consumers won’t notice much of an impact on air conditioners until April or May.
Trump has managed away consumer pressure for now. Corporate pressure is also not a threat for now.
So far, the tariffs have benefited the U.S. Not everywhere, but overall. That’s true both anecdotally (steel makers loooooove Trump.) And also economically: GDP is surging and payrolls are strong.
You can also look at this in terms of pure politics. With manufacturing on-shoring, the Rust Belt is booming: these States voted for Trump. High-tech hardware companies (Cisco, Apple, HP, etc) are about to get hit but they are based in California, which did not vote for Trump.
Silicon Valley companies tended to lead the anti-Trump charge (yes, Meg Whitman and John Chambers are Republicans and were leaders at HP and Cisco, respectively, but the companies themselves tend to adopt pro-Dem positions.)
To summarize, public opinion is not against the tariff moves and companies that will suffer don’t matter to trump. Even better for Trump, he has them in a lose-lose position.
In fact, when Apple mentions that tariffs will hit their profits, Trump’s response was: then build in the U.S. And that’s the ultimate goal here: more on-shoring.
My experts say Apple’s $1000 phone’s bill of materials would rise ~$10 per phone if Apple used U.S labor and production. Sure, that adds up. Apple loses ~$1B in profits and the U.S. gains 10s of thousands of jobs.
This puts Apple in a tough spot. The public will see Apple forced to make a choice: either support the American worker OR continue to build offshore to earn billions of dollars of profits that they keep offshore and not pay taxes while giving executives billions in payout (Tim Cook just got $120M in compensation).
Apple is screwed one way or the other. And they have no leverage.
To keep it simple: Trump has time and politics on his side. And he has crafted his approach to maximize his leverage.
So what is China’s move? Likely they want to wait until the mid-term elections pass and the political winds are clearer. But I suspect that Trump will be in a good place insofar as domestic politics are concerned as they impact trade.
China could try and weaponize their stock market holdings.
Everyone is afraid China could dump their massive dollar holdings. But that hits all of China. I think a better move would be for China to force their conglomerates to sell U.S. holdings of real estate and stocks. You get the middle class attention when you unleash a bear in the 401ks and property markets. This leaves the most of China unaffected.
This would result in about 8 weeks of turmoil in the stock market as the game continues to unfold.
But underneath it all: a stronger U.S. economy.
Stocks that have international exposure are problematic. They face a rising dollar and less Chinese consumption. Avoid these stocks.
Editor of Moneyball Economics
September 6, 2018: Financial Survival Network – It’s All About Trump