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Tariffs Can Work — When They’re Part Of A Plan

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Republicans are in revolt. Economists on the left and right are deeply skeptical. President Trump’s top economic adviser resigned rather than be party to it. The culprit: tariffs, and specifically the president’s decision to slap duties on imported steel (25 percent) and aluminum (10 percent).

Though they are widely vilified, tariffs actually can work, providing protection for a few vulnerable companies, safeguarding entire industries, maybe even encouraging a wholesale reassessment of what counts as fair trade. Tariffs also come with considerable costs and risks, however, and making the gambit work requires a well-defined goal and a winning strategy. And it’s not clear that Trump has the detailed plan needed to make this gamble pay off.

One early estimate of Trump’s plans, for example, uses a variant of a well-respected model to project that the tariffs would eliminate five jobs for every one they save, because the help they offer steel producers is more than offset by the elevated prices that users of manufactured steel, like car manufacturers, wind up having to pay. This is often a risk with tariffs: By raising the price of imported goods, tariffs strain the budgets of companies — and consumers — who buy those goods. In addition, tariffs can provoke an escalating trade war in which foreign countries who resent the new border tax fight back by implementing protectionist measures of their own.

But these risks don’t mean tariffs are doomed to fail; they just require a long-term goal that justifies the short-term cost in jobs and dollars — and a way to reach it.

This kind of targeted tariff helped save Harley Davidson, for example. In the early 1980s, the company was losing market share to smaller, more affordable imports from Japan. Bankruptcy seemed a real possibility until President Ronald Reagan agreed to introduce a severe protective tariff.

Deliberately designed to be fast-acting and short-lived, the tariff started at a steep 49.4 percent before gradually falling back to the normal 4.4 percent rate over the course five years. In the end, it didn’t take that long for Harley Davidson to reorganize its operations, fix manufacturing problems and return to profitability. By year four, they felt secure enough that they actually asked for the tariffs to be lifted early (presumably because the tax had already fallen dramatically and because a show of strength was good PR).

To some observers, that turnaround might still count as a failure because the company recovered not on its own but with the help of regulations that, by their very nature, interfere with the free market, limiting consumer choices and putting upward pressure on prices.37 But clearly the tariffs accomplished their basic goal, blunting competition from Japan in order to give an iconic U.S. company breathing room to catch up.

Now consider a broader example of tariffs in action, namely the heavily protectionist world of European agriculture. The EU operates under an integrated set of policies designed to ensure a decent standard of living for Europe’s farmers while also guaranteeing a reliable supply of food for European citizens. Among those policies are direct payments to farmers, funding for rural development — and also tariffs, including some tariffs that bite deeply into the pockets of U.S. farmers. When sending goods to Europe, American farmers face an average tariff of 13.7 percent, or nearly three times what E.U. farmers face when exporting their products to the U.S.

All this special treatment for native agriculture comes at a serious cost, of course: Over a third of the E.U. budget goes to support the roughly 5 percent of citizens involved in farming, which is money that can’t be used for other urban or industrial priorities. But what really matters is whether Europeans think these costs are outweighed by the benefits that come with tariffs and other agricultural supports. And in a recent Eurobarometer poll, 52 percent of respondents said they “totally agree” or “tend to agree” that the EU should have trade barriers for agricultural products, compared to 34 percent who disagreed.

Which brings us back to Trump’s decision to impose a 25 percent tariff on steel imports from outside North America and a 10 percent levy on aluminum. Here, too, the defining question shouldn’t be, “What will it cost?” but rather, “What’s the underlying goal, and can it be achieved at a reasonable cost?”

The chosen goal might be quite narrow, along the lines Trump himself outlined when he signed the tariff proclamations last Thursday: “A strong steel and aluminum industry are vital to our national security.” Ensuring that the U.S. can produce enough steel to keep building planes and ships in the event of a military emergency seems like a tailored and well-defined objective, not unlike the aim of the tightly targeted Harley Davidson tariff.

But narrow efforts aren’t always the most successful. The last time the U.S. imposed steel tariffs in an attempt to bolster the industry, under President George W. Bush, the real-world effects proved rather meager. Imports did decline, but seven U.S. steel companies still went bankrupt and the number of workers in the industry seems to have dropped. Partly, this may be because the tariffs didn’t last long enough to allow for the kind of restructuring that U.S. steel mills really needed; they were lifted within two years, after the World Trade Organization ruled them illegal. But it’s also possible the industry needed more help than tariffs alone could provide as a result of high pension costs and a history of inadequate investment.

With the virtue of hindsight, it seems like the time was ripe during Bush’s presidency to pursue a bigger goal: not just helping America’s struggling steel industry but helping many U.S. industries fight off the full force of what’s sometimes called the “China shock” — the sudden rise in Chinese imports of all kinds after the country joined the WTO and gained broader access to U.S. markets. Between 2000 and 2007, America lost about a million manufacturing jobs, affecting industries well beyond steel. A more ambitious plan — one that included steel tariffs alongside other protections and supports — might have helped defend U.S. industries across the board.

Trump may indeed have something bolder in mind, in which case steel and aluminum tariffs may merely be the opening move. At times, he seems ready to embrace a widening trade war, saying that if Europe retaliates against the steel imports, the U.S. could impose a new tax on EU cars. And during his campaign, he floated the far more disruptive possibility of a 45 percent tariff on Chinese imports.

But if the goal is indeed grander — a realignment in global trade that opens space for more U.S. exports and U.S. manufacturing jobs — then tariffs alone probably won’t suffice. Remember that to build a unified agricultural support system, the EU created a complex package of tariffs, subsidies, regulations and rural development aid that all operate in concert.

To ignite a renaissance of U.S. manufacturing, a lot of other things would have to change: The dollar would probably need to fall further, which would help spur exports; countries like China and Germany would have to start saving less and spending more, thus creating more demand for foreign goods, including those made in America; and the U.S. would likely have to pare back its own appetite for imports, including getting Americans to save more money.

Whatever the objective, it needs to be paired with the appropriate tactics. For some goals, tariffs make sense, even if they do come with costs. Ultimately, the only way to assess Trump’s tariff plans is not with a ledger comparing the boon for steel producers against the cost for steel users, but by identifying the broader goal — and seeing whether it gets met.



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What is Driving Markets?

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I have been mulling over a somewhat contrarian theory as to why the US markets seem to have decoupled from the U.S. economy. I have a commentary with lots of data on this coming Monday, but I wanted to discuss the evolution of my thinking about it today.

I began by asking the Fintwit community what they thought was driving markets, culled from some of the more popular tweets on the topic:

I was genuinely surprised about the response to that tweet; here is the FinTwit community reaction:

About 60% credited “The Fed” for the market rally off of the lows, while 30% believe it is a bubble; in the comments, more than a few people suggested it was both: a Fed induced bubble.

One option I considered was “Investors are looking past 2020 to 2021/22” (but I swapped it out as too nuanced and replaced it with “Bubble!”).

I half-jokingly noted that no one had suggested “Buybacks,” which if you can remember all the way back to 2019 was a popular explanation for what was driving markets over the prior 5-10 years. Suggestions to add “All of the Above” was thwarted by Twitter’s 4 choice limit for polls, but I think that is as valid an answer as any.

The biggest shock to me: No one whatsoever brought up anything related to “international” in any capacity. No one mentioned overseas regions are the biggest source of revenue for America’s biggest technology companies (and 42% of the S&P500).

I pulled this data form the most recent 10ks for the 6 FAANMG stocks — and it is pretty compelling.

 

The other item no one thought to mention:  How much better the rest of the world is doing than the US in managing its pandemic — in terms of handling the lockdown, communicating the importance of masks and social distancing, in re-opening. Germany and South Korea and Japan, and yes, even China, have all managed this crisis much, much better than we have.

I pointed this out in a tweet Monday, and (again) I was surprised by the responses. A handful of trolls on the other side of the argument, but generally, widespread support.

The difference between the two tweets is the poll at top was read by a financial audience, while this tweet was pushed into a political audience, thanks to retweets by George Conway, Rick Wilson, and the Mooch.

In finance, all of us tend to bring our confirmation bias to the table, typically reflecting our portfolios. But the political audience are hard core believers, and exist in a bubble within which it is very difficult to change any minds.

My job is to bridge the gap between these two disparate belief systems — politics and financial — to see if I can adhere to Ray Dalio’s prime directive to investors: “There is nothing more important than understanding how reality works and how to deal with it.

Say what you will about confirmation biases in finance, but all of us have the ability to cover a short and go long. We each change our portfolio allocations, we sell long held beloved companies. Buying and selling often reflect a change of perspective. The feedback loop in investing is very short — buy or sell something, and you usually know if you are right or wrong in a matter of days or weeks, if not hours.

That feedback loop in politics is decades, and it does not tend to encourage circumspection and thought when we are in error.

Mr. Market is cruel but fair, and intolerant of losing positions.

This is the real genesis of the upcoming analysis. See it here on Monday.

 

Lots of charts after the jump…

 


FAANMG Stocks (group) vs S&P500 March 23 lows to present

Source: YCharts
FAANMG Stocks (group) vs S&P500 2015 to present

Source: YCharts

 

FAANMG Stocks (individual) vs S&P500 2015 to present

Source: YCharts

 

FAANMG Stocks (individual) vs S&P500 March 23 lows to present

Source: YCharts

 

The post What is Driving Markets? appeared first on The Big Picture.



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Market Talk – July 10, 2020

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ASIA:

The United States has imposed sanctions on three senior officials of the Chinese Communist Party, including a member of the ruling politburo, for alleged human rights abuses targeting ethnic and religious minorities in the western part of the country. The decision to bar the three senior officials from entering the US is the latest in a series of actions the Trump administration has taken against China as relations deteriorate over the coronavirus pandemic, human rights, Hong Kong, and trade.

The United States is in talks with India on market access for its goods in exchange for reinstating New Delhi’s trade concessions under the Generalized System of Preferences (GSP), U.S. ambassador to India Kenneth Juster said on Thursday. Last year, the US scrapped India’s trade concessions under the GSP program that allowed duty-free entry to the US market for up to $5.6 billion of Indian exports in retaliation for India’s high tariffs and rules on e-commerce.

Indian state-owned lender, Punjab National Bank, said on Thursday it had reported loans made to Dewan Housing Finance Corporation Ltd worth 36.89 billion rupees ($491 million) to India’s central bank as “fraud.” Indian state-owned lender PNB, which was hit by a $2 billion fraud involving billionaire Nirav Modi in 2018, had already set aside 12.5 billion rupees in provisions for the loans to DHFL, which is in bankruptcy proceedings. Other banks including State Bank of India and Union Bank have also reported DHFL’s accounts as fraudulent.

The major Asian stock markets had a negative day today:

  • NIKKEI 225 decreased 238.48 points or -1.06% to 22,290.81
  • Shanghai decreased 67.27 points or -1.95% to 3,383.32
  • Hang Seng decreased 482.75 points or -1.84% to 25,727.41
  • ASX 200 decreased 36.30 points or -0.61% to 5,919.20
  • Kospi decreased 17.65 points or -0.81% to 2,150.25
  • SENSEX decreased 143.36 points or -0.39% to 36,594.33
  • Nifty50 decreased 45.4 points or -0.42% to 10,768.05

The major Asian currency markets had a mixed day today:

  • AUDUSD decreased 0.00141 or -0.20% to 0.69463
  • NZDUSD increased 0.0001 or 0.01% to 0.65707
  • USDJPY decreased 0.29 or -0.27% to 106.92
  • USDCNY increased 0.01336 or 0.19% to 7.01052

Precious Metals:

  • Gold decreased 7.10 USD/t oz. or -0.39% to 1,796.95
  • Silver decreased 0.02 USD/t. oz or -0.12% to 18.6465

Some economic news from last night:

China:

China Thomson Reuters IPSOS PCSI (Jul) increase from 67.89 to 72.52

Japan:

M2 Money Stock (YoY) increased from 5.1% to 7.2%

PPI (MoM) (Jun) increased from -0.5% to 0.6%

PPI (YoY) (Jun) increased from -2.8% to -1.6%

Thomson Reuters IPSOS PCSI (Jul) increased from 33.63 to 33.82

New Zealand:

Electronic Card Retail Sales (YoY) (Jun) increased from -6.0% to 8.0%

Electronic Card Retail Sales (MoM) (Jun) decreased from 78.9% to 16.3%

Some economic news from today:

China:

M2 Money Stock (YoY) (Jun) remain the same at 11.1%

New Loans (Jun) increased from 1,480.0B to 1,810.0B

Outstanding Loan Growth (YoY) (Jun) remain the same at 13.2%

India:

FX Reserves, USD increased from 506.84B to 513.25B

Cumulative Industrial Production (May) decreased from -0.70% to -45.80%

Industrial Production (YoY) (May) increased from -57.6% to -34.7%

EUROPE/EMEA:

The UK government has relaxed quarantine rules for travelers from a number of destinations, including France, Italy, Belgium, Germany, and Spain. From July 10, visitors arriving in England from 58 selected countries will no longer be required to self-isolate for 14 days. The US, China, and Portugal are among the destinations that have been left off the list, which is to be kept “under constant review.”

A British-Palestinian MP and staunch opponent of Donald Trump’s Middle East peace plan is running for the leadership of one of Britain’s main political parties after its dismal showing in the 2019 general election. Layla Moran – born to a British diplomat father and Palestinian mother from Jerusalem – is in a two-horse race to head the Liberal Democrats, the fourth largest party in the UK Parliament.

German lawmakers have finalized the country’s long-awaited phase out of coal as an energy source, backing a plan that environmental groups say is not ambitious enough and free marketers criticize as a waste of taxpayers’ money. Bills approved by both houses of the German parliament on Friday envision shutting down the last coal-fired power plant by 2038 and spending about 40 billion euros ($45 billion) to help affected regions cope with the transition.

France, the second-biggest economy in the European Union, returned to growth this month even as activity in the rest of the region continued to decline. The $3 trillion French economy grew this month for the first time since February, as coronavirus restrictions were eased and domestic consumption ticked up, according to a closely-watched survey. An initial reading of the country’s Purchasing Managers’ Index, which tracks activity in the manufacturing and services sectors, jumped to 51.3 in June from 32.1 in May. Readings above 50 indicate an expansion.

The major Europe stock markets had a green day:

  • CAC 40 increased 49.47 points or 1.01% to 4,970.48
  • FTSE 100 increased 45.79 points or 0.76% to 6,095.41
  • DAX 30 increased 144.25 points or 1.15% to 12,633.71

The major Europe currency markets had a green day today:

  • EURUSD increased 0.00102 or 0.09% to 1.13004
  • GBPUSD increased 0.00216 or 0.17% to 1.26303
  • USDCHF increased 0.0008 or 0.08% to 0.94101

Some economic news from Europe today:

Norway:

Core CPI YTD (Jun) increased from 3.0% to 3.1%

Core Inflation (MoM) (Jun) increased from 0.1% to 0.4%

CPI (YoY) (Jun) increased from 1.3% to 1.4%

CPI (MoM) (Jun) remain the same at 0.2%

PPI (YoY) (Jun) increased from -17.5% to -14.4%

Italy:

Italian Industrial Production (YoY) (May) increased from -43.4% to -20.3%

Italian Industrial Production (MoM) (May) increased from -20.5% to 42.1%

France:

French Industrial Production (MoM) (May) increased from -20.6% to 19.6%

US/AMERICAS:

In a landmark ruling, the US Supreme Court has declared nearly half of the state of Oklahoma to be an Native American Indian reservation. The 5-4 ruling was based on a promise to the Muscogee Creek Nation prior to Oklahoma becoming an official state. “Today we are asked whether the land these treaties promised remains an Indian reservation for purposes of fed­eral criminal law. Because Congress has not said otherwise, we hold the government to its word,” Justice Neil Gorsuch stated. Dissenting Justice John Roberts warned that the ruling would impact the government’s ability to prosecute crimes and “may destabilize the governance of vast swathes of Oklahoma.”

Today, China rejected the proposal for a nuclear arms discussion with the US, with Foreign Ministry spokesperson Zhao Lijian claiming the US was “neither serious nor sincere.” China currently possesses the third-largest nuclear arsenal behind the US and Russia. The Chinese government faulted the US for allowing Russia to propose an extension of the New START treaty that limits the number of nuclear weapons but is set to expire in February. Although the Trump administration would like China to participate in discussions, spokesperson Lijian confirmed, “China’s objection to the so-called trilateral arms control negotiation is very clear, and the US knows it very well.”

The coronavirus outbreak that originated in Wuhan, China, has “severely damaged” US-China relations, President Trump stated this Friday. The US president declared that phase two of the prolonged trade deal is no longer a top priority, as the world is still recovering from the economic damage caused by the outbreak. Furthermore, the president allegedly stated that China had the ability to stop the spread of the virus but chose not to do so.

Police chiefs in Canada are asking the federal government to decriminalize recreational drug use. The Canadian Association of Chiefs of Police believes the matter should be considered a health crisis rather than a criminal offense, and reframing the act could lead to a decrease in overall drug usage, deaths, and drug-induced crimes.

According to Statistics Canada, 953,000 jobs were added to the Canadian economy in June. The total accounts for 488,000 full-time and 465,000 part-time jobs. The current unemployment rate sits at 12.3%, down from 13.7% in May. However, Statistics Canada noted that the real unemployment rate is closer to 16.3% as they did not include those who were not actively seeking employment.

US Market Closings:

  • Dow advanced 369.21 points or 1.44% to 26,075.30
  • S&P 500 advanced 32.99 points or 1.05% to 3,185.04
  • Nasdaq advanced 69.69 points or 0.66% to 10,617.44
  • Russell 2000 advanced 23.76 points or 1.70% to 1,422.68

Canada Market Closings:

  • TSX Composite advanced 145.18 points or 0.93% to 15,713.82
  • TSX 60 advanced 9.67 points or 1.03% to 945.35

Brazil Market Closing:

  • Bovespa advanced 871.50 points or 0.88% to 100,031.83

ENERGY:

The oil markets had a green day today:

  • Crude Oil increased 0.91 USD/BBL or 2.30% to 40.5300
  • Brent increased 0.84 USD/BBL or 1.98% to 43.1900
  • Natural gas increased 0.025 USD/MMBtu or 1.40% to 1.8080
  • Gasoline increased 0.0288 USD/GAL or 2.30% to 1.2795
  • Heating oil increased 0.0171 USD/GAL or 1.40% to 1.2400

The above data was collected around 15:00 EST on Friday.

  • Top commodity gainers: Lumber (7.41%), Cotton (2.43%), Copper (2.55%), and Canola (3.80%)
  • Top commodity losers: Bitumen (-2.63%), Corn (-3.14%), Ethanol (-6.45%), and Coffee (-2.87%)

The above data was collected around 15:05 EST on Friday.

BONDS:

Japan 0.02%(-0bp), US 2’s 0.15% (-0bps), US 10’s 0.62%(+2bps); US 30’s 1.31%(-0bps), Bunds -0.46% (+3bp), France -0.13% (+1bp), Italy 1.31% (+2bp), Turkey 12.39% (+2bp), Greece 1.27% (+16bp), Portugal 0.45% (+2bp); Spain 0.44% (+10bp) and UK Gilts 0.16% (+0bp).

 

  • Italian 12-Month BOT Auction decreased from 0.014% to -0.124%

 



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Extending the $600 weekly unemployment boost would support millions of workers: See updated state unemployment data

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The U.S. Department of Labor (DOL) released the most recent unemployment insurance (UI) claims data yesterday, showing that another 1.4 million people filed for regular UI benefits last week (not seasonally adjusted) and 1.0 million for Pandemic Unemployment Assistance (PUA), the new program for workers who aren’t eligible for regular UI, such as gig workers. As of last week, more than 35 million people in the workforce are either receiving or have recently applied for unemployment benefits—regular or PUA.

Figure A and Table 1 show the total number of workers who either made it through at least the first round of regular state UI processing as of June 27 (these are known as “continued” claims) or filed initial regular UI claims during the week ending July 4. Three states had more than one million workers either receiving regular UI benefits or waiting for their claim to be approved: California (3.1 million), New York (1.7 million), and Texas (1.4 million). Seven additional states had more than half a million workers receiving or awaiting benefits.

While the largest U.S. states unsurprisingly have the highest numbers of UI claimants, some smaller states have larger shares of the workforce filing for unemployment. Figure A and Table 1 also show the numbers of workers in each state who are receiving or waiting for regular UI benefits as a share of the pre-pandemic labor force in February 2020. In four states and the District of Columbia, more than one in six workers are receiving regular UI benefits or waiting on their claim to be approved: Hawaii (19.7%), Nevada (19.3%), New York (17.8%), District of Columbia (17.6%), and Oregon (17.0%).

Figure A

Figure A and Table 2 show the total number of workers who either made it through at least the first round of PUA processing—the new federal program that extends unemployment compensation to workers who are not eligible for regular UI but are out of work due to the pandemic—by June 20 or filed initial PUA claims during the weeks of June 27 or July 4. We do not sum the PUA claims with regular UI claims because some states have misreported PUA claims in their initial claims data, leading to potential double counting.1

As of last week, DOL reported that over 15 million workers across 48 states and the District of Columbia are receiving or waiting on a decision for PUA benefits, which underscores the importance of extending benefits to those who would otherwise not have been eligible. Five states have at least a million workers in this category: Pennsylvania (3.0 million), Arizona (2.3 million), California (1.9 million), Michigan (1.1 million), and New York (1.1 million). New Hampshire and West Virginia still have not reported any PUA claims. Florida, Georgia, and Oklahoma have reported initial PUA claims, but have yet to report any continuing claims.

We should despair for the millions who have lost their jobs and for their families, and our top priority as a country should be protecting the health and safety of workers and our broader communities by paying workers to stay home when possible, whether that means working from home some or all of the time, using paid leave, or claiming UI benefits. When workers are providing absolutely essential services, they must have access to adequate personal protective equipment (PPE) and paid sick leave. The current spike in coronavirus cases across the country—and subsequent re-shuttering of certain businesses—show the devastating costs of reopening the economy prematurely.

As we look at the aggregate measures of economic harm, it is also important to remember that this recession is deepening racial inequalities. Black communities are suffering more from this pandemic—both physically and economically—as a result of, and in addition to, systemic racism and violence. Both Black and Hispanic workers are more likely than white workers to be worried about exposure to the coronavirus at work and bringing it home to their families. These communities, and Black women in particular, should be centered in policy solutions.

To mitigate the economic harm to workers, Congress should extend the across-the-board $600 increase in weekly unemployment benefits well past its expiration at the end of July. If Congress does not extend these benefits through next year, it could cost us more than 5 million jobs and $500 million in personal income. Figure B, at the end of this post, shows these expected job losses by state.

As part of the next federal relief and recovery package, Congress should also include worker protections, investments in our democracy, and resources for coronavirus testing and contact tracing (which is necessary to reopen the economy). At the same time, policymakers should prioritize long-overdue overhauls of federal labor law and continue to strengthen wage standards that protect workers and help boost consumer demand.

The package should also include substantial aid to state and local governments so that they can invest in the services that will allow the economy to recover, particularly public health and education. Without this aid, a prolonged depression is inevitable, especially if state and local governments make the same budget and employment cuts that slowed the recovery after the Great Recession. More than five million workers would likely lose their jobs by the end of 2021, harming women and Black workers in particular since they are disproportionately likely to work for state and local governments.

Figure B

Figure B

Table 1

Table 1

Table 2

Table 2

1. Unless otherwise noted, the numbers in this blog post are the ones reported by the U.S. Department of Labor (DOL), which they receive from the state agencies that administer UI. While DOL is asking states to report regular UI claims and PUA claims separately, many states are also including some or all PUA claimants in their reported regular UI claims. As state agencies work to get these new programs up and running, there will likely continue to be some misreporting. Since the number of UI claims is one of the most up-to-date measures of labor market weakness and access to benefits, we will still be analyzing it regularly as reported by DOL, but we ask that you keep these caveats in mind when interpreting the data.

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