Protecting Free Markets

Jun 29, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It is hard to believe the second quarter is now behind us.  We were just celebrating the new year the other day.  How quickly the snow melts into spring flowers, and the spring flowers melt into the summer.  The big news this week had to do with tariffs and Supreme Court decisions.  There was a small uptick in volatility with the end of the quarter, but that is to be expected.

The news this week was tariffs.  What started as idle threats seem to have turned into the beginning of a trade war.  Both China and Canada have levied tariffs on U.S. products in retaliation for U.S. tariffs on steel and aluminum last month.  Our Canadian friends will impose tariffs on almost $15 billion worth of U.S. imports beginning Sunday, ranging from steel and aluminum to whiskies, mustard, toilet paper, washing machines, motorboats, and oddly enough maple syrup.  China reported it has an additional $450 billion worth of tariffs earmarked if the Trump administration chooses to escalate things further.  In economics we learned that every decision, from public policy to corporate projects, needed a cost-benefits analysis.  It’s what got Ford in trouble with the Ford Pinto and its exploding gas tank.  So where is the cost-benefit analysis in these tariffs?  I’ve yet to see who exactly benefits and who pays.  There will be winners and perhaps even more losers.

Not surprisingly U.S. auto manufacturers are crying foul.  To be taken with a grain of salt, an automotive trade group representing GM, Toyota, and Volkswagen says a 25% U.S. tariff on imported passenger vehicles, if imposed on national security grounds, would cost American consumers $45 billion annually, or $5,800 per vehicle.  They further argue, this hit alone would largely cancel out the benefits of the tax cuts.  Ironically, a couple weeks ago it was the rising price of gasoline that was going to wipe out the benefit of the tax cuts.  It seems the benefit of the tax cuts is doomed at this point.  No doubt, the proponents would argue that this gives good cause for manufacturers to build more plants in the U.S. to serve our market.  Along those lines, Harley Davidson announced this week it will shift production of motorcycles for European Union (EU) destinations from the U.S. for exactly the reason to get around EU tariffs.  So, there is a case to be made.

In other news, the Supreme Court ruled on several important cases they heard last Fall.  I won’t get into the politics of it since I’m sure there are those on both ends of the political spectrum who read this weekly email.  I will however provide links to the opinions of those cases.

And finally, you’ll be happy to know that all banks, except for one, have passed the Federal Reserve’s stress test this year.  The banks intend on increasing dividend payouts and buying back substantial shares in some cases.  Investors were pleased by the news.  The other sector that did well this week was Energy due to oil prices moving higher.  Increased demand due to the Fourth of July holiday could be part of it, however, some attribute at least some of the recent rise to the upcoming ban on all Iranian oil imports both domestically and abroad.  The White House expects not only our allies to abide by the ban, but also intends for China, Turkey, and India to follow suit.

I’m sorry I don’t have anything funny to close on, but I do want you to pay attention to one thing this weekend.  The Mexican presidential election is Sunday and it could be the beginning of a new era for Mexico.  The frontrunner, a politician named Andres Manuel Lopez Obrador (AKA Amlo), is strongly left-leaning and could present a challenge to President Trump’s agenda, i.e. immigration, the border wall, and NAFTA negations.  The populist movement that started here two years ago is burning bright across the globe, from Italy to Germany, and Mexico to Brazil.  Keep an eye on this election.  I have a feeling it will be consequential.

June 29, 2018

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