Tag: Trade War

Separating Fact and Fiction in Investing

Is America’s economy failing? Has Trump undone the American economic empire? Do ports sit empty? Are people being laid off? Have world leaders conspired to control America’s debt?

These are just some of the headlines and subjects floating around the internet. Depending on who you are and where your political allegiances lay, the answers will be self-evident. Trump is either a an economic genius and unparalleled negotiator, or he is a clumsy and indifferent conman masquerading as successful businessman and politician.

For investors this presents a real challenge. These questions aren’t just thought experiments. Depending on the answers they may significantly impact where one chooses to invest, and the more polemical the question the farther we may get from a useful answer, regardless of politics. If our goal is to ask questions to reveal truth, we may find ourselves confused as to why markets have surged back from their lows (as of May 12th the major US indices have almost recovered from their tumble at the beginning of April) even while business reporting warns of a potential for a worsening economy.

One way to make better sense of what’s happening is to put ourselves in the shoes of Donald Trump’s administrative allies. Imagine what someone who believes in what Donald Trump is doing would say about his economic plans. Its not as though they haven’t heard economists and businesses express doubt and worry about the actions of his administration. So how would they defend them?

In my imagining I believe they would argue something like the following:

                The United States is enormously rich but wastes money on cheap goods from China, and while some of these goods don’t need to be made here, America has lost enough manufacturing jobs that its worthwhile experimenting with tariffs to bring jobs back. Over the past 45 years we’ve seen countless evidence that playing by the rules of globalization reduces the ability of governments to help their most vulnerable citizens, and money has become too fluid and too willing to cross borders at the expense of their domestic homes. Regardless of what people fear, America remains the richest country in the world, with the largest consumer base, and that combined with the existing strength of the US economy will be enough to bring industry back to the US in some capacity while tariffs on junk from other countries will help pay for renewed and permanent tax cuts. Market volatility will be temporary while the economy realigns itself, but the combination of lower taxes and existing economic strength will ultimately help lift the markets even higher.

You don’t have to believe in such a claim, or even pretend this was what Donald Trump campaigned on. What I’m putting forth is a set of ideas (picked up through numerous interviews and speeches) that I believe his administration finds largely defensible and recognizable, and would be a better frame of reference for understanding their actions. Let’s start with the recent indication that GDP is contracting. In traditional economic terms, two quarters of back-to-back GDP contractions constitute a recession. We’ve had more than a few of those over the past decade, but few people would say that we’ve had recessions. The reason for this might be best expressed by Jason Furman; an American economist, professor at Harvard, and former deputy director of the US National Economic Council, in a recent editorial in the Financial Times. Outlining the importance of “Core GDP” vs “GDP”, he points out that Core GDP (actually known as Real Final Sales to Private Domestic Purchasers) better reflects consumer spending and private investment while the traditional GDP includes net exports, inventories, and government spending, all things in flux because of Trump’s new administration. So, while the GDP contracted in Q1 of this year, the Core GDP was up in the first three months.

What about rumours of empty ports and empty shelves? Reportedly Trump was shaken following meetings with the heads of three major retailers about shelves being empty if the tariff’s remain at 145% on China. Trump seems to have vacillated a number of times about the size and implementation of the tariffs, but as of today they remain intact. Asked about higher prices and fewer options Trump seemed dismissive of concerns over the Chinese trade war declaring “maybe the children will have two dolls instead of thirty dolls, and maybe those dolls will cost a couple of bucks more.”

Is Trump being dismissive? Yes, but he’s also not worried that shelves will be empty. Though shipping and imports are down as we head into May for cargo coming from China, far from alarmist rumours that docks are sitting empty there is still plenty of ocean-going traffic coming from China.

 Does this mean that there won’t be furloughed dock workers or empty shelves? According to the Port of Los Angeles there has been a 35% drop week over week of expected cargo, and a 14% decline from the previous year. That very well may lead to reduced working hours and fewer options in stores, but the discrepancy between what’s being shared online and what is likely to actually happen is probably enough to gird the loins for Trump’s team to continue their policies.

What about layoffs? Fears about unemployment remain high, but as the most recent jobs report shows hiring remains robust and the unemployment rate, already very low, remains unchanged.

This discrepancy between a popular public impression and the on-the-ground economic reality gives room to Trump’s administration to continue ahead with ideas that remain controversial, as well as opening up investors to making mistakes in their allocations. For the time being, Trump does have a reservoir of economic and political strength to call on. He may be using that reserve up, but may also have guessed with some accuracy that the global economy will keep doing business with America regardless of whatever feathers he ruffles.

But markets may also not be calculating the longer-term direction correctly, mispricing assets and remaining too optimistic. Since Trump’s re-election markets have been shown to be placated by the promise of deferred tariffs, as though deferring them is really the prelude of getting rid of them. Trump doesn’t help this by going back and forth on their implementation, but listening to his words, and following his actions, I feel that it would be a mistake to assume that the tariffs will ultimately be rescinded.

This past week changes to the auto-tariffs were announced, reducing some of the duplication of tariffs on steel and aluminum, but also laid out reimbursements and tariff relief for parts manufacturers need to import. These changes also make clear the groundwork for a longer and more durable tariff regime. Trump himself has been quick to correct any reporting that suggests that he’s backtracking or creating exemptions for specific products, and that some products may end up with different tariff treatment, but will still be subject to tariffs.

This seems best exemplified by the announcement of the US-UK trade deal. Called “a starting point” by the British ambassador, the Trump administration has said the deal is “maxed out”, leaving in place a 10% tariff on British imports, with a reduced tariff on British cars, steel, and aluminum (the deal effectively lowers car and steel duties to the flat 10% rates, down from 27.5%).

Whether deals such as these are anything for the market to get excited about is a question that will be answered with time, like all the unanswered questions that have been introduced this year. What investors must work on is remaining clear eyed about what is happening, and resist submitting to their own partisan preferences. Trump may yet undermine the US economy, and trade deals may turn out to simply be acknowledgements of existing tariff rates, or perhaps the opposite may happen. But recognizing that reality is more mixed and that we do not yet have a clear picture about the future will promote more time tested strategies for sensible investing.

Aligned Capital Partners Inc. (“ACPI”) is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and the Canadian Investment Regulatory Organization (“CIRO”).  Investment services are provided through Walker Wealth Management, an approved trade name of ACPI.  Only investment-related products and services are offered through ACPI/Walker Wealth Management and covered by the CIPF. Financial planning services are provided through Walker Wealth Management. Walker Wealth Management is an independent company separate and distinct from ACPI/Walker Wealth Management.

by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

The End of Globalization?

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I’m not one to indulge in predicting radical transformations to the world order. As a rule, change remains slow and while its end can’t always be guessed, its direction is often telegraphed. So, while I’m reluctant to make any grand pronouncements about the future after the lockdowns and life resumes a more normal trajectory (like people no longer working in offices!), I think there is enough evidence today to say that the globalized world is under heavy threat.

The COVID-19 global pandemic has highlighted some strategic weaknesses that must be addressed, and that governments will be unlikely to tolerate into the future. Chief among them is the large dependence on China as a source of medical supplies, including 80% of global face mask supplies and (at least in the US) 30% of personal protective equipment.

We might assume that this is a problem with China, but it isn’t. This is actually a problem with globalization and how dependent it is on a global leadership structure. As supply chains have become global their operation depends on a strong global framework that keeps trade open and coordinates needs across borders. That means that there must also be leadership that can fight (more metaphorically than literally) to keep those chains open in a crisis. That role has been traditionally occupied by the United States, but under Trump’s management the country has taken a big step back from such a global leadership role with other nations making a similar retreat.

As the coronavirus was starting to make inroads in Europe and North America it became impossible to get masks from China, regardless of which factories made them (Medicom, a Canadian manufacturer has three factories in China but none of those masks ever made it back to our borders) as the Chinese government simply requisitioned all masks for their population. Other countries have also taken similar steps, restricting the transportation of some drugs and medical supplies. Finally, in a moment of clarity for Canadians regarding their relationship with the US, Trump invoked a Korean War era law to halt the sale of N95 masks to Canada. That was eventually rescinded, but the message was received loud and clear. Nations have no friends, only interests.

This is true with large international organizations as well. The World Health Organization is facing a lot of scrutiny over its early handling of the pandemic and for its perceived subservience towards China. The WHO, which can only operate in China with the government’s permission, had limited access to people on the ground in Wuhan, accepted the Chinese explanation of no “human to human” transmission, and in respecting the Chinese position on Taiwan can not engage or work with the Taiwanese government to understand how they have very successfully curbed the outbreak. All this has raised eyebrows about how useful this group is. In the past this might prompt more engagement from its largest backers, the United States, and fought for reforms to improve its responses. That’s not the case today, as instead Trump has opted to cease funding to the WHO as both a retaliatory act and a way to shift focus from his own administration.

For sometime globalization has been coming under increasing pressure as a result of the erosion of industrial domestic manufacturing, inequality, and populism. But the pandemic seems to be hastening that process as opposed to repairing it. At a time when a global coordinated effort is desperately needed, no nation is inclined to fill that role. This effect has been described by political scientist Ian Bremmer in his book Every Nation For Itself as a “G-Zero World”, a world with no global leader.

That role has traditionally fallen to the United States, which has seen its own prosperity connected to considerable soft power. But as domestic issues and populism have risen voters of wealthy Western nations have become increasingly inward turning. Some might think that China would fill that role, but China is too nakedly self-interested in its own ambitions, making it difficult for nations to embrace the country’s “help”. Meanwhile, as other nations continue to develop economically they are growing less willing to accept the terms of IMF and World Bank help, and more committed to their own national wants.

Whenever the world begins its return to normal we should expect countries to decouple some of their supply chains from China purely for the public good when it comes to health and medical supplies. But other businesses are taking note that during this crisis they have also been held hostage by China. Apple intends to have its new budget phone assembled in Brazil, and the ongoing trade war with China (now rapidly turning into a cold war) is unlikely to be eased when this is put behind us. Instead we should expect it to accelerate.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

When Only One Thing Matters

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In my head is the vague memory of some political talking head who predicted economic ruin under Obama. He had once worked for the US Government in the 80s and had predicted a recession using only three economic indicators. His call that a recession was imminent led to much derision and he was ultimately let go from his job, left presumably to wander the earth seeking out a second life as political commentator making outlandish claims. I forget his name and, so far, Google hasn’t been much help.

I bring this half-formed memory up because we live in a world that seems focused on ONE BIG THING. The ONE BIG THING is so big that it clouds out the wider picture, limiting conversation and making it hard to plan for the future. That ONE BIG THING is Trump’s trade war.

I get all kinds of financial reports sent to me, some better than others, and lately they’ve all started to share a common thread. In short, while they highlight the relative strength of the US markets, the softening of some global markets, and changes in monetary policy from various central banks they all conclude with the same caveat. That the trade war seems to matter more and things could get better or worse based on what actions Trump and Xi Jinping take in the immediate future.

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Now, I have a history of criticizing economists for making predictions that are rosier than they should be, that predictions tend towards being little more than guesses and that smart investors should be mindful of risks that they can’t afford. I think this situation is no different, and it is concerning how much one issue has become the “x-factor” in reading the markets, at the expense of literally everything else.

What this should mean for investors is two-fold. That analysts are increasingly making more useless predictions since “the x-factor” leaves analysts shrugging their shoulders, admitting that they can’t properly predict what’s coming because a tweet from the president could derail their models. The second is that as ONE BIG THING dominates the discussion investors increasingly feel threatened by it and myopic about it.

This may seem obvious, but being a smart investor is about distance and strategy. The more focused we become about a problem the more we can’t see anything but that problem. In the case of the trade war the conversation is increasingly one that dominates all conversation. And while the trade war represents a serious issue on the global stage, so too does Brexit, as does India’s occupation of Kashmir (more on that another day) , the imminent crackdown by the Chinese on Hong Kong (more on that another day), the declining number of liberal democracies and the fraying of the Liberal International order.

This may not feel like I’m painting a better picture here, but my point is that things are always going wrong. They are never not going wrong and that had we waited until there were only proverbial sunny days for our investing picnic, we’d never get out the door. What this means is not that you should ignore or be blasé about the various crises afflicting the world, but that they should be put into a better historical context: things are going wrong because things are always going wrong. If investing is a picnic, you shouldn’t ignore the rain, but bring an umbrella.

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The trade war represents an issue that people can easily grasp and is close to home. Trump’s own brand of semi-authoritarian populism controls news cycles and demands attention. Its hard to “look away”. It demands our attention, and demands we respond in a dynamic way. But its dominance makes people feel that we are on the cusp of another great crash. The potential for things to be wiped out, for savings to be obliterated, for Trump to be the worst possible version of what he is. And so I caution readers and investors that as much as we find Trump’s antics unsettling and worrying, we should not let his brash twitter feuds panic us nor guide us. He is but one of many issues swirling around and its incumbent on us to look at the big picture and act accordingly. That we live in a complex world, that things are frequently going wrong and the most successful strategy is one that resists letting ONE BIG THING decide our actions. Don’t be like my half-remembered man, myopic and predicting gloom.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Beware the Rally

*At the time that I wrote this markets had just finished several positive sessions, however by the time it was ready markets had once again changed directions!

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I’m going to potentially embarrass myself and go on the record as saying we shouldn’t place too much trust in the current market rally, though the upturn is welcomed.

Rallies present opportunities for potential short-term gain, and with markets having shed roughly 10% over the month of October, there is certainly money to be made if you’re feeling sufficiently opportunistic and have a plan. For the rest of us, the rally is a welcome break the punishment the market has been delivering, and an opportunity to see portfolios stabilize and regain some ground.

S&P 500 Rally

The long-term viability of a rally, its ability to transition from opportunistic buying to sustained growth, very much depends on the fundamentals of that rally. Are markets sound, but oversold? Or are fundamentals deteriorating and represents more hopefulness than anything else?

Readers of this blog will not be surprised to find out I have no set answer to this question. As always, “it depends”. But as I look over the news that has supposedly rekindled the fire in the markets much of it seems at best temporary, perhaps even fanciful. Up against the wall of risk that investors are currently starring down, the best news currently available is that Trump had a phone call with Xi Jinping and has asked for a draft to be prepared to settle the trade disputes between the two countries.

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I’m of the opinion that a recession isn’t imminent, but it should be obvious that recessions happen and the longer we go without one, the more likely one becomes. That seems especially true in a world that is undergoing a seminal shift when it comes to international trade and multilateral deals. To take one example, in the last year U.S. soybean exports to China have dropped by 97%, with no exports for the last quarter. This is a trade war still in its infancy. Other market data is mixed. Even as job growth exceeds expectations it will also keep the Fed raising rates. Housing starts have dropped significantly below expectations, driven in part by rising costs.

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All this is to say that market rallies like the one we’ve just seen should be treated with trepidation. Investors should be cautious that a bottom has been reached and that this is a good time to rush into the market looking for deals, and we should keep an eye on the fundamentals. Rallies falter precisely because they can be based more on hope than on reality.

So what should investors do if they want to invest but are unsure about when to get into the markets? Come talk to us! Give us a call and help get a plan together that makes sense for your needs! Check out our new website: www.walkerwealthmgmt.com or give us a call at 416-960-5995!

by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc