DIASTOLE ECONOMIC AND MARKET COMMENT
March 5, 2018
Tariffs, tariffs, tariffs.
The President has proposed a 25% tariff on imported steel and 10% on imported aluminum. This will make the imports more expensive, and will encourage domestic producers to increase output. Or so the thinking goes. In fact, since the tariffs can be achieved (and repealed) by Executive Order, it is unlikely that foundries will bet on their continuing enough to build new plants. And even if they do, they are likely to be fully mechanized and will not create jobs. The jobs that will be affected are those in industries that USE steel and aluminum, like auto manufacturing. For every steel-making job that is “saved”, there are 30-40 steel-using jobs that are put in jeopardy.
The U.S. imports steel, NOT from China and Russia, but from close allies Canada, South Korea, and Mexico. And our trade deficit with Canada is minimal, since we export and import roughly the same amount of goods. But Canada, Europe, and other countries have already announced that if we put a surtax on steel and aluminum, they will put a surtax on goods that we export, like liquor, wine, motorcycles, cars, and Levi’s.
As with the coal industry, there is really no bringing steel back. We hope that this tariff idea will be abandoned, or at least greatly modified, before it is enacted. There are only Pyrrhic victories in trade wars.
The current administration has already put a 20% tariff on Canadian lumber imports, which is directly affecting the U.S. home-building industry. Canada supplies one third of lumber used in America, and has appealed the tariff to the World Trade Organization. Home-builders are reluctant to stock up on lumber at inflated prices and say that the increased cost, which is being passed along to home buyers, amounts to $3,000 - $9,000 per mid-sized home. Builders say that the cost of raw materials, along with labor shortages, are their current main concerns.
Facebook and Mark Zuckerberg reached a $35 million-dollar settlement with shareholders last week. The shareholders claimed that Facebook hid concerns about future growth right before it went public in 2012. Facebook shares stayed below the initial offering price of $38 for a year after its IPO, but now trade around $180. The strongest evidence brought by the shareholders were the panicked texts that CEO Zuckerberg sent to his wife Priscilla Chan right before the IPO, in which he states that he might cancel the offering.
The International Energy Agency has announced that the U.S. will soon be the world’s largest oil producer. The U.S. passed Saudi Arabia (the top oil exporter) last year, and will surpass Russia, which produces just under 11 million barrels per day, this year or next. U.S. oil producers are benefitting from a production cut engineered by OPEC and Russia that is stabilizing oil prices. And U.S. imports of oil have fallen below four million barrels per day - versus a record-high 12.5 million bpd reached in 2005.
New Federal Reserve Chairman Jerome Powell testified before Congress last week, saying, “My personal outlook for the economy has strengthened since December.” Powell’s rosy outlook worried investors who began to imagine that the Fed would increase rates four times this year instead of the predicted three times. With interest rates rising, and the cost of everyday goods (and cars) expected to rise with tariffs (see above), it seems clear that we can expect inflation to pick up. But will worker salaries keep pace?
Note to investors: the thought of inflation makes markets uncomfortable, but the fact of inflation is usually good for stock prices.
Amazon is acquiring Ring, which makes smart doorbells with video cameras. Business rumors value the deal at more than one billion dollars, which makes it one of Amazon’s priciest moves. The purchase of Whole Foods cost $13.7 billion in 2017, and the purchase of Zappo’s online shoe business was worth $1.2 billion in 2009. No doubt Amazon will attach the Ring products to its Echo line of smart-speakers and try again to get consumers to let Amazon delivery people into their homes when no one is there.
India’s economy has overtaken China’s as the world’s fastest growing. China’s GDP grew by an annualized 6.8% in the fourth quarter, while India’s GDP rose by 7.2%. India is the largest democracy in the world, although beset with corruption, while China is the world’s leading authoritarian state (whose economic numbers thereby can neither be confirmed nor quite trusted).
The Securities and Exchange Commission is looking into regulating initial coin offerings (ICOs) in which new coins are brought to market and sold to suckers, I mean investors. If the SEC gets involved in regulating ICOs, it will bring some consumer protection to those markets. In recent months we have seen Venezuela issue its own cryptocurrency, the Petro, while Disney has released the Dragonchain. Other countries and companies will no doubt follow suit. All cryptocurrencies use blockchain technology, which is anonymous and open-source. But currency exchanges seem easy to hack, and once stolen, your cryptocurrency is probably gone for good.
Bitcoin was invented by Satoshi Nakamoto, the pseudonym of the genius behind blockchain. No one has every figured out who it is, UNTIL NOW! Australian Craig Wright is claiming to be Nakamoto, at the same time as he is being sued for stealing his mining-partner’s bitcoin. (Bitcoin is “mined” by people who solve mathematical problems on server farms. It uses a lot of electricity!) He has offered no proof of his identity OR his genius. He is also being investigated for tax fraud in Australia.
For the week ending March 2nd, the Standard & Poor’s 500 closed at 2,691, the Dow Jones Industrials at 24,538, and the Nasdaq Composite Index at 7,257. The yield on the ten-year Treasury Note finished at 2.87%. Crude oil cost $61.25 per barrel, gold cost $1,321.10 per ounce, and one Euro was worth $1.2329.
Elizabeth E. Cook
News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The New York Times, The Wall Street Journal, Barron’s, Bloomberg, The Economist, and businessinsider.com. If you have any questions, please call us at 203.458.5220 or reply to this email. Thank you for your attention.