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Will the Tariff Tantrum Kill the Rally... or Even the Economy?

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Revised 3/6/18: This article was updated and edited for attribution of sources, grammar, and style.

Stocks were already in a two-day slide when the White House surprise of steel and aluminum tariffs hit the wires Thursday morning.

And all that the S&P 500 dropped afterwards was another 2% before bouncing strongly on Friday.

Trading veterans will know that the investor reaction since Thursday is confirming a very strong market.

But what about the President's strong words Friday and over the weekend?

"Trade wars are good, and easy to win" and that "IF YOU DON’T HAVE STEEL, YOU DON’T HAVE A COUNTRY!" (presented in all caps as was his Twitter post) were pretty clear signs that the President had no intention of backing down despite the cacophony of critical economists and the stock market's mini tantrum.

The Economist-Curmudgeon from AQR

Quant fund manager and Republican Clifford Asness, of the giant $225 billion investment management firm AQR, had this to say in response to those March 2 tweets from the President...

"The lack of grasp of anything to do with how trade works, when you benefit or not, etc, is simply utterly breathtaking. Breathtakingly dumb."

"He’s now descending from idiocy to utter gibberish. What about if you don’t have a sane functional president with a moral compass?"

But after a TV roadshow Friday through Sunday by Commerce Secretary Wilbur Ross and White House economic advisor Peter Navarro, Trump did put one bargaining chip on the table Monday morning...

"We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A. Massive relocation of companies & jobs. Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed."

While the administration may have a poor understanding of the economics of trade deficits and of free trade in a global, high-tech, information economy, it was good to see them willing to negotiate on something that will slow down the possibility of fast executive action.

Maybe this was his clever negotiating ploy all along as NAFTA meetings begin this week.

Ross and Navarro: Fighting the Last Battle of an Old War

As I listened to the TV interviews with Ross and Navarro, it struck me that these two are trying to get something done that might have made sense in the 1970s through 1990s.

But in our sophisticated, global, high-tech, information economy, they are fighting the last battle of an old war. Trade wars have become as anachronistic as the gold standard.

And their understanding of the fallout effects seemed irrationally narrow, even myopic, as Wilbur Ross explained things on CNBC and Bloomberg TV like why the price impact on cars & soup cans for American consumers are "no big deal."

In his defense of the tariffs, Ross framed the debate as one of "national security" by using an old Department of Commerce rule called Section 232 Investigations: The Effect of Imports on the National Security.

Meanwhile, Peter Navarro, a staunch protectionist for many years, wrote a book not long ago that put him in the President's spotlight. According to The Hill.com...

Jared Kushner found a White House economic advisor by browsing Amazon, Vanity Fair reported Saturday. Kushner, President Trump's son-in-law and senior adviser, was asked by Trump to do research on China, and turned to Amazon, the report said. There, he found a book co-written by Peter Navarro and was struck by its title, Death by China."

Navarro had this to say to Chris Wallace on FOX News Sunday: “This whole idea that there’s a big downstream effect — it’s just part of the fake news that’s going to be put out to oppose these tariffs.

140,000 Jobs vs 6.5 Million

But if Ross and Navarro keep the frame of the debate this narrow, then they are missing the complexities of the most dynamic system on the planet -- the global economy -- one that is anything but a science, or dismal.

And they are ignoring that this massively complex economic cauldron is now driven by technology and information sciences, not heavy metals and other commodities.

First, let's look at who the tariffs hurt the most. It's not China, but Canada and Europe.

Canada, as the most glaring example, exported $7.2 billion of aluminum and $4.3 billion of steel to the US last year. Yet in goods and services, the US runs a trade surplus with Canada, which buys $48 billion worth of US automobiles and $40 billion of machinery, in addition to agricultural products.

Second, consider how big the steel and aluminum industries are versus their domestic customers. The former is about a $36 billion group (by market cap), while their widespread industrial customers, from Boeing, Ford, GE and major construction firms to hundreds of smaller manufacturing companies and their customers, have market capitalizations totaling in the hundreds of billions.

It's possible that you are talking approximately 140,000 jobs in steel and aluminum vs. 6.5 million jobs nationwide.

Here's what I told my TAZR Trader group on Thursday evening...

Even Without a Trade War, Steel Tariff Could Hurt Economy
3/1/18

TAZR Traders
 
Well, I think it's safe to say the Administration may have just made its first serious executive blunder.
 
Steel and aluminum tariffs seem as anachronistic as the gold standard in a high-tech, global economy.
 
And the problem now isn't so much what happens in those small materials industries but how the geopolitical economic fall-out ripples outward to other nations and industries and thousands more US companies.
 
Clearly large market players didn't like the news one bit.
 
Besides the ripple effects, there is now a new level of uncertainty about "What will they think of next?"
 
Now, all is not immediately lost. I can't predict the exact outcomes for this move and there is still time to stop it next week, especially if GOP Senators Orrin Hatch (Utah) and Ben Sasse (Nebraska) can convince the President this is a bad idea. I have no idea right now where Trump's closest economic advisors, Gary Cohn and Steven Mnuchin, stand on the specifics.
 
All politics aside, let's just try to focus on the micro and macro-economics impacts. This WSJ editorial tonight is a good start (even if you sense a political bias) as they compare the relative size of the steel industry (140K jobs) vs the industries who need affordable steel (6.5 million jobs)...

Trump’s Tariff Folly: His tax on aluminum and steel will hurt the economy and his voters

(end of Thursday TAZR subscriber commentary)

A Cocktail of Uncertainty

Then on Friday, Bloomberg reported that Canada's $230 billion pension fund, number two in the country, said U.S. tariffs on steel and aluminum would add to a “cocktail of uncertainty” that threatens to slow business investment, stoke inflation and derail global growth.

“Since the crisis, business investment has really been one of the weak links” behind global economic expansion,  Michael Sabia, Caisse de Depot et Placement du Quebec’s chief executive officer said Friday in a telephone interview. With C$298 billion ($230 billion) in assets, the Montreal-based Caisse manages the pension plan of retirees in the province of Quebec, as well as other insurance plans.

"Companies globally “have been very cautious -- sitting on lots of cash, worrying about the kind of return they will earn if they invest,” Sabia said. “Over the last eight to 12 months, that has looked better, and businesses are beginning to invest. So the last thing we need is a circumstance where they start putting their foot on the brake again.”

Here's how veteran political commentator Hugh Hewitt, who was on a debate panel in March of 2016 when Trump spoke of his trade policies, described the recent move...

"And still waiting for any evidence -- really, any link -- where he called for this tariff on everyone. It is significantly different in kind and breadth from what he campaigned on, and should be rejected by GOP on the policy, not its proponent. The latter temptation is twisting debate."

Death By Protectionism: A Tax on the Poor?

Economists, CEOs and legislators will be intensely debating the merits of trade protectionism for many days and weeks to come. I for one am looking forward to those discussions and about whether any trade action tips the scales closer, sooner to the possibility of a 2019 recession.

While it's easy to get worked up about our persistent trade deficits with the world, especially China, the economics are much more complicated than a tariff, much less an old-school trade war, could or should solve.

One element you have to deal with first is addressing what are the current benefits of existing trade deficits. Many economists would argue that you are getting more, cheaper, and better goods that effectively lower the costs of living for US consumers, particularly the poorest among us.

Beyond this tax on the poor, we have to come back to the bigger question of how many jobs could we lose economy-wide versus what is saved in steel industries? 6.5 million vs. 140K is a ratio of over 46 times. What if it's only 14 thousand jobs you save and 140K you lose? Is that worth it?

Here's what economist and Zacks Chief Equity Strategist John Blank wrote this morning...

Memories of the Bush steel tariffs of 2002 linger. One study estimated 200K Americans lost their jobs due to those steel tariffs. A quarter of those lost jobs were in the metal manufacturing, machinery and transportation sectors like pipelines that heavily use one of these two metals.

More Americans lost jobs that year — due to the Bush tariffs — than the total number of employees in the U.S. steel industry. 2015 census data showed roughly 140K Americans were employed in steel mills, contributing $36 billion to the economy.

Our top military allies (Canada, South Korea, Japan, and Europe) are among the biggest hit by this, despite this matter being taken up as a “U.S. national security issue.” This could lead to a new source of internal and external divisiveness.

These steel export sovereigns likely react with a set of rising tariffs themselves, and not necessarily tariffs on steel or aluminum. Think Wisconsin Harleys (Paul Ryan) and Kentucky Bourbon (Mitch McConnell) and California Blue Jeans (Kevin McCarthy). That was what the Europeans already announced.

Then, there are the frictions this applies to ongoing NAFTA talks, underway in Mexico this week.

There are already 160 U.S. protections on Chinese steel. So the Chinese are not likely to be the leaders of the counter-response movement.

This means stocks must broadly reckon with retaliatory tariffs, coming from any number of countries simultaneously, but not China.

The deep simple answer, if you are looking for it, is to close the yawning U.S. Federal budget deficit. That WOULD shrink the huge U.S. trade deficit.

(end of John Blank commentary)

Forget Steel and Focus on Semiconductors

In all of this manufacturing debate, it's good to step back and look at what's really driving economic growth in the second decade of the 21st century.

As I've noted, it's not steel industries, but the steel-dependent industries -- that will see a rise in their costs -- who are US driving economic growth.

More importantly, it is technology and semiconductor industries fueling the exponential expansion of entirely new industries that are transforming the world—from the cloud, mobile, automation, and AI to biotechnology and new energy and materials innovations.

That's why the Philadelphia Semiconductor Index (SOX) is pushing within spitting distance of its all-time highs this morning.

And that's why I continue to own and accumulate technology and semi stocks like Apple (AAPL - Free Report) , Square (SQ - Free Report) , Lam Research (LRCX - Free Report) , NVIDIA (NVDA - Free Report) , and SMART Global Holdings (SGH - Free Report) .

You can learn more about SMART Global, the "lil Micron," in this piece I wrote last week...

Bull Train Has Left the Station

And you can learn more about my thesis that we are in the middle innings of a global Technology Super Cycle by reading my special report for Zacks Confidential.

Disclosure: I own shares of AAPL, SQ, LRCX, NVDA, and SGH for the Zacks TAZR Trader portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click Follow Author above to receive his latest stock research and macro analysis.



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