Donald Trump constantly bills himself as a business genius and an incomparable negotiator. However, since he was elected president, he has proved himself to be sub-par negotiator who been regularly been taken to the cleaners by other world leaders including Vladimir Putin and even the youthful and totally inexperienced Kim Jong Un. Apparently Trump can only negotiate successfully when he has all of the available leverage on his side of the table. His poor performance in the business of government and in the realm of macroeconomics leads us to believe that he must have paid much smarter students to take all of his civic, history and economic tests when he was back in college. Trump’s ignorance and narcistic tendencies have extracted huge tolls from the country’s stock market and its economy in general.
Since the beginning of October through the end of 2018, the S&P 500, an index of the stocks of 500 of this country’s largest and most respected companies, lost approximately $4 Trillion dollars in value or about 14.3% of the value of their stocks. That loss in stock value can be attributed to just those 500 companies. The entire American stock market fell 14.9% in that same time period while the NASDEQ index of tech stocks fell 17%.
Why does that matter to regular Americans? First of all, 54% of the adults in our country own stocks, with working class citizens participating in the stock market mostly through their 401K and other retirement plans. I am not worried about top 10% of that number because they are wealthy enough be able to absorb such the stock market loss without too many problems. However the other 44% had an average of $132,000 at stake in the stock market, at least until the beginning of the 4th quarter, and that isn’t pocket change.
Given the extent of the downturn in stock prices, that means that on average those mostly middle class Americans each lost approximately $19,000 last quarter, mostly in their retirement. For those people, that’s a major hit. Perhaps just as important is what the stock market plunge means for our economy going forward.
There are many reasons why the market took a dive in the last quarter of 2018. The positive economic upswing which began early in President Obama’s first term after the most severe recession in our recent history is now getting old in the tooth. It has been over ten years since our economy hit rock bottom and began to claw its way up out of what was a near depression. That is already a record for the length of an economic expansion. Savvy investors know that what goes up must eventually come down.
The bottom line is that investors have reason enough to be cautious at this stage of the economic cycle. When an economic expansion begins to mature (the situation in which we find ourselves now), what is needed is a steady and encouraging hand from our government in Washington. The term, “the market hates uncertainty” is never more true than when an economic expansion is starting to top out. Instead of providing such reinsurance, Trump and his Repulican allies in Congress have done their level best to cause already nervous investors more anxiety by adding disruption to our economy.
The Republican Tax Cut:
If Trump and his Republican allies in Congress believed that a huge corporate tax cut would provide long term stimulus to the American economy, they were sadly mistaken. Predictably, instead of using their tax savings to invest in expanding their operations, many corporations chose instead to transfer their newly found cash directly to their share owners by increasing their dividends and/or by buying back their stock in an attempt to increase their stock prices, which of course also benefits their stock holders.
Obviously, that didn’t work for very long. Instead, again predictably, the corporate tax cuts increased our national debt by $2 trillion dollars to record levels without producing much additional economic stimulus. In order to borrow more money to cover the increasing national debt, the US Treasury has to increase government bond interest rates to attract more lenders which in turn will lead to increased interest rate yields for the overall bond market. This, of course, will make safer government bonds more competitive with stocks causing stock prices to decline.
We should regard the health of the stock market of an early indicator of things to come for our economy. A steep stock price decline from which the market does not recover rather promptly is very often s predictor that a recession is in our foreseeable future. We don’t yet know whether the current stock price decline is simply a correction from which the market will recover or a harbinger of worse things to come.
Trump’s Trade Wars:
As Trump’s ongoing trade war with China escalates and Trump increases tariffs on imported Chinese goods while China raises its tariffs on the American goods in response, the economies of both nations are being negatively impacted. Much of the negative reaction we are seeing in the stock market is an illustration of investors’ concerns that those tariffs could eventually cause our economy to spiral downward out of control.
Apple’s announcement after close of business a couple of days ago that it expects its iPhone sales to decrease substantially in the coming year as a result of Trump’s trade war is a reminder that investors’ concerns are not unwarranted. Apple stock fell 10% in a single day after the announcement while the NASDAQ index fell 3.3% and the S&P 500 fell 2.6% – all enormous one day losses.
The prices of stocks other than Apple also fell because investors believe many other companies will be similarly adversely affected by Trump’s blundering as well. And again they are right to be concerned. Tariffs are a tax on the ultimate consumers of products even if those imported goods are not bought directly by those consumers.
To understand the negative effects of tariffs, let’s take imported steel as an example. Large quantities of imported steel are used in the manufacture of finished goods such as refrigerators, automobiles, etc. In 2017 the US imported 34.6 million metric tons of steel though very little of that from China. During that same year US manufacturers produced 81.6 million metric tons steel of which 7.6 million metric tons were exported to other countries. (We import certain types of steel while exporting other types.) So about 32% of the steel used in the US in manufacturing in 2017 was imported. In March of 2018 Trump imposed 25% tariffs on imported steel, supposedly to create more American jobs.
However, it is likely that as a result of that tariff more Americans in other industries will lose their jobs than will be gained in the American steel industry and the overall effect of the tariff on the American economy as a whole will be decisively negative. In the American car industry for example, not only did the price of imported steel used to manufacture automobiles increase due to the tariff, but the price of US produced steel that the automobile companies use increased as well. With the prices for steel made by their foreign competitors being artificially being increased by the tariff, instead of maintaining their existing prices and seeking to increase their production (and create additional American jobs), the greedy US steel companies felt free to increase their prices for their steel products to match the new prices of imported steel.
The cost increases due to the Steel tariff in car manufacturing operations were already evident in the first quarter of after the tariffs were imposed. In the second quarter of 2018 GM reported a $300 million increase in cost of raw materials – equivalent to a $1.2 billion increase for a full year of production. Ford reported that the tariff resulted in $145 million in higher costs for the quarter which could rise to as much as $800 million for a full year of manufacturing. Chrysler, as well the German and Japanese car companies that manufacture vehicles in the US, reported similar cost increases.
Such large impacts to company profits cannot be absorbed and must be passed on to the ultimate consumer which means that the price of the average car produced in the US is destined to increase by several thousand dollars. Of course those price increases are expected to adversely affect automobile sales. In addition, vehicles made in the US which are being exported to other countries are being subjected to a competitive disadvantage, further reducing the number of vehicles sold. All of this must obviously result in sizable layoffs in the automobile industry.
General Motors has already reported that it will shut down several of its US plants and layoff thousands of its American workers as the company restructures its operations because it is losing money on the sedans it manufactures. One can only conclude that the new steel tariff played a substantial role in those decisions. Ford’s also announced a restructuring could result in even more plant closures and more layoffs than GM’s. Other companies which manufacture automobiles in this country will also be affected. Japanese and German automobile companies which manufacture the vehicles they sell in the US in states such as Tennessee and Alabama may find it more profitable to manufacture those vehicles other countries.
That is just the automobile industry. Consider all of the other manufactures who use a lot of steel in their manufacturing processes. Then expand that to all of the other companies who use other imported raw materials or sell imported finished goods which already are or will be affected other tariffs Trump has already imposed or might impose in the future. Trump has already imposed a 10% increase in tariffs on $200 billion in Chinese goods. While engaged with new talks with China Trump has put off for now his plans to bump up those tariffs to 25% at the start of the new year. He has also delayed for now his plans impose tariffs on an addition $250 billion of Chinese imports. I assume that Trump will eventually impose those additional tariffs because it is highly unlikely that he will get major concessions from Beijing. And I don’t believe he will stop there.
China is our largest trading partner. Consider all of the products which are made in China that you buy from Walmart. Then consider that all of those products might soon be at least 25% more expensive. Trump’s existing and proposed tariffs on Chines products will substantially increase inflation. Increasing inflation is often a precursor to recession because it forces American consumers to feel less optimistic about the American economy and decreases consumer spending. That leads to job layoffs which in turn lead to a further decrease consumer confidence and even less consumer spending. From there the economy could easily be drawn into a downward economic spiral which leads inevitably to recession. That situation is even more perilous now because we are already nearing the end the current economic expansion.
I don’t hold out much hope for the current US-China trade discussions. Trump is correct in saying that his tariffs on Chinese products have the potential to harm the Chinese economy more than their retaliatory tariffs will hurt us. However, China still has a very good “trump” card to play in this very serious economic game. With its tight control of the Chinese population and its power to control the media messaging available to their people, the ruling Chinese Communist Party believes that China can withstand a significant downturn in the Chinese economy for a substantial period of time. It has long been preparing for just such a situation.
Chinese leaders believe they can hold out long after Trump will be forced to call off his tariff dogs under pressure from the American people who, as always, will supported by a free press. Of course, the Chinese know just how to play that card. I think the best that we can hope for is for the Chinese to provide Trump with some minor concessions which he can wear as a fig leaf while he retreats from his tariff policy. Let’s hope that the Chinese will allow Trump to falsely declare victory in his trade war before our country is prematurely forced into a deep recession.
The Government Shutdown
One would think that Trump’s tariffs have cause enough damage to the American economy to satisfy him, but apparently he is talented enough to wage his trade wars and shut down the government at the same time. As I edit this article this we have just completed the 14th day of latest the government shutdown with no end in sight after Trump bowed to the talking heads on Fox News and out of fear for his rabid base of supporters. According to economic experts, the 2013 government shutdown cost the country $24 billion in lost American economic output or 0.6 percent of projected annualized GDP growth. That shutdown lasted 16 days and this one is expected to be much longer. Trump has been quoted as saying that this shutdown might last months, or even years.
This time around over 800,000 government employees are being furloughed or being forced to work without pay and that is again having substantial negative effect on the nation’s economy. A portion of that workforce is made up by government contractors who will never be reimbursed for the paychecks they are missing. Then consider all of the people and local companies that depend on serving those personally affected by this stupidity. The initial negative economic effects of the shutdown are thus being multiplied four to five times in the economy at large.
Compare that blow to that rendered by major American company laying off the better part of a million workers for a substantial period of time. However, the damage doesn’t stop there. The shutdown is contributing to the economic anxieties of American investors and the country’s population in general. Confidence in country’s economic condition is key to extending an economic expansion, especially one that may be on its last legs. Obviously the longer the shutdown lasts, the greater the damage to the nation’s economy and the country’s ability to delay a recession.
Republican Deregulation
In addition, Trump’s deregulation drive has the real potential to make future recessions more unpredictable and more extensive than they would be otherwise. For example, Trump and his Treasury Secretary, Steven Mnuchin, worked with the Republican Congress to dismantle the safeguards installed by the Obama administration and the Democratic in Congress after the last disastrous recession. Those regulation were designed to keep big banks from getting us in a similar situation yet again. As you will recall the vast majority of economic experts did not see that near depression coming and therefore little was done mitigate the coming disaster in advance. With the Obama era protective regulations now gone, we are now in that same bad place again. I have almost no faith that the big banks can overcome their greed in order to act in their own best interests and those of the rest of country.
Of course, we and the rest of the world may ultimately pay the greatest price for Trump’s stupidity in reversing Obama era regulations designed to protect our environment and hopefully avoid the worse human and financial costs of global warming. Past Republican administrations could never be accused of being the environment’s best friends, but the Trump administration has taken a meat cleaver to every sensible environmental regulation they could get their hands on. After President Obama lead the countries of the world in effort to hopefully mitigate the worse effects of climate change, Trump has not only vacated that leadership role, he has totally removed the greatest, most influential nation in the world from that effort. Meanwhile the vast majority of the other countries on earth, including even China, are tryingto continue on without us.
Fighting the Federal Reserve
The news that Trump has been looking for ways to fire the new Federal Reserve Chairman has also caused yet another disruption in our economic system while spooking already nervous investors.
The Federal Reserve was established in 1914 to be a “a decentralized central bank that balances the competing interests of private banks and populist sentiment.” Its stated mission is “to foster the stability, integrity and efficiency of the nation’s monetary, financial and payment systems in order to promote optimal macroeconomic performance.” In plane words the primary job of the Fed is to promote the nation’s economic wellbeing by promoting maximum employment of our population while keeping down inflation.
The Fed’s actions are designed to avoid frequent and deep recessions if at all possible and to soften the negative effects on the country’s population when recessions do occur. It does this by making the amount of funds available for lending more plentiful and at a lower interest rates and by taking on more debt when required to stabilize the economy. In the early 20th century and before recessions were much more frequent and long lasting than they are today. In recent years as the Fed has gained access to more plentiful and accurate economic data, it has been able to take steps to ensure that recessions are less frequent and shorter in duration, and hopefully less severe.
To do its job properly the Fed must be able to proceed without the interference of political considerations. For this reason while the president nominates the Chairman of the Federal Reserve for a 10 year term, once confirmed that person and the other members Federal Reserve’s board are free by law from interference by any and all politicians.
In an effort help the nation recover from the last disastrous great recession, the Fed reduced interest rates to almost zero for a very long period of time. As usual, as the economy neared full recovery the Fed began to gradually raise interest rates again to prevent runaway inflation and to provide itself the opportunity to lower those rates again if and when the economy slips into a recession. No American president likes Fed interest rate increases because they tend to slow economic growth. Every president likes to take credit, whether it is deserved or not, for the most robust economy possible.
Of course investors normally don’t like interest rate hikes either because they make stocks less desirable in relation to bonds. However, deep down they understand that the Federal Reserve usually does an excellent job of stabilizing the nation’s economy and that’s why Trump’s attack on the independent Federal Reserve and its chairman was so disruptive and worrying. Even though Trump’s tweet attacks were harmless in light of the fact that he has virtually no power over the Federal Reserve, the notion that a president of the United States might even attempt to fire the Chairman of the Federal Reserve rocked the financial markets.
Trump’s Unpredictability
If all of that economic damage isn’t enough, consider that the economic health of the nation could be negatively affected by Trump next random tweet. The country’s economists, financial experts, and everyday investors live in constant fear of next 144 character blast from Trump’s Twitter account. Trump’s unpredictability and his apparent lack of knowledge of macroeconomics keeps everyone from economic experts to investors to everyday Americans worried about the country’s economic future. That’s not a situation that forecasts economic stability and continued economic growth.
Last Words
I have been in involved in investing for my eventual retirement for much of my life. While I never made what I considered to be huge salaries, I have none the less been able to amass enough money from my investments to now live very comfortably in retirement, though my wife and I are not big spenders. I was fortunate to be able to acquire a fair amount of knowledge about how our economy works through required and elective economic courses I took while obtaining my MBA degree and I have read a great deal on the subject during the many years that followed. That knowledge contributed a great deal towards allowing me to become a successful investor.
However, during that entire period I have never seen a person with a greater natural ability to disrupt our nation’s economy than Donald J. Trump. A wise Chinese saying begins with the phrase, “He who knows not and know not that he knows not, he is a fool, shun him.” (You can google the rest of that saying.) Unfortunately, through his arrogance and the stupidity of a large segment of the American electorate, Trump has grown too powerful to be effectively shunned.
Though I have grown every more conservative in my investment strategies after I retired. Still the last quarter’s stock market downturn has me $175,000 and I hold Trump responsible for the major portion of that loss. Fortunately I can afford that setback far easier than other smaller investors who have lost much less. I worry most about those people and the country’s population in general as Trump in his ignorance and arrogance continues to severely damage our nation’s economic prospects.
Today’s good job report has given investors, me included, hope that there is a bit of life left in this economic expansion after all and that the basics of our economy remain somewhat strong despite Trump’s best efforts to the contrary. The news brings some assurance that the stock market will recover at least one last time before the economy eventually slips into a recession that I now consider inevitable. I sure hope so because I very much want to have one last chance to get my remaining money that is still invested stocks reestablished in safer investments or cash before that recession begins in earnest.
While it will never ever compensate for the damage to individual lives that a recession usually brings, in my mind the next severe downturn will have one silver lining in that very dark cloud. Trump probably regrets being encouraged by Chuck Schumer into claiming ownership the present government shutdown. However, because Trump has often falsely claimed he alone is responsible for the good economic environment he inherited from President Obama, he will be far less happy with being saddled with the ownership of the next recession which I feel sure will occur on his watch. That should damage his already slim chances of being reelected beyond repair.
Cajun 12/4/2018