Hi Everyone,
I have been quiet lately but now it is time to discuss the news and blues. Good news for India-Modi was reelected, so the economy has a good chance to grow strongly for several more years and to grab production from Chinese factories moving out of China. Removing steel tariffs on Canada and Mexico clears the way for USMCA to be passed if the Dems will pass anything. There are tight restrictions to prevent China from dumping and transporting to the US. Germany has been in economic decline for over four straight months and likely that might continue for a while. Japan is being propped up by government spending and the central bank for now. Brexit will fail again and then there will be a new election for prime minister. The pro-Brexit party of Nigel Farage won the recent Europe Parliament vote in the UK by a wide margin which may bring him or Boris Johnson to the PM post and stability to the Brexit discussions, but nobody yet knows where this goes. It will be a very messy summer in UK politics. China is gearing for a real trade war, likely betting on Trump not being reelected. We are in for a long fight now, but most people realize this fight should have been waged a decade ago. Obama completely failed to deal with the China problem, just as he did with N Korea and Iran. China will try to withhold rare earths and do other things, but in the end they will lose, especially when the rare earth mine in Cali becomes environmentally approved. The Dems will push very hard for Biden to win as they paid a $1 billion bribe to his son Hunter in 2017 while Biden was there in Beijing. It was called a investment in Hunter’s private equity fund which he had zero experience in running one. They have done added investments with Hunter and Kerry’s son who is Hunter’s partner. This will all come forward soon, and could destroy Biden for the election. That is on top of the threat of withholding $1 billion Biden made to stop a Ukraine investigation of a company his son was a director for. (it is on video) All in, the next year is not going to be nice for much of the world. The EU remains a mess and the banks are still using negative interest rates to try to get companies to borrow, but it is not working. It is a big message that when you can’t stimulate an economy with negative rates, things are in deep trouble. The EU and China will likely be in further decline for the next several months or longer. Oil prices has sunk to $53.25 and will go lower as these economies slow further. The political pressure to revolt against Brussels control is growing across the EU. I predict, the chance that the EU will exist in its current form in five years is low. In short, the world economy is a mess right now. The US remains the island of growth and economic stability, but that could change now with the Dems going all out to destroy Trump nothing good will get done, and the China tariffs will add to the downward pressures. It is going to be a long unpredictable summer.
So what does this mean for the US. Not helpful, but not terrible. Global growth is now less reliant on Global trade. From 1992 to 2006 Trade growth was 7% while GDP growth was only 3.7%. But from 2011 to 2018 Global trade only increased by 2.8% but US GDP grew by 3.8%. Even if all $500 billion in Chinese exports to the US are subject to tariffs it’s a paltry 2.4% of the US economy that is tied to exports exports from China that are at risk for tariffs. Keep in mind that our economy is 21.1 Trillion dollars vs. the Chinese economy which is 13.4 Trillion and 3.7% of the Chinese economy is tied to exports to the US which will be at the risk of tariffs. We totally hold the upper hand and China will have to negotiate or see their economy and banks collapse. As of now this giant US economy seems to be feeding itself with low inflation, nicely rising wages, minimal unemployment, and very high consumer confidence. Tariffs will be an issue, but not nearly as bad as retailers and some others predict. Farmers are getting partially bailed out, and will continue to be until the election if needed. Walmart and Target, and others are already planning alternate sources. The retailers will eat some of the cost, they will minimally raise prices across the board to eat some more, the Yuan will decline further eating some of the cost, Chinese producers will eat some, and in the end the impact will not be so bad as many fear. $500 billion is the base amount, but tariffs are only 25% of that or $125 billion. Let’s assume a 7% currency differential-that is a $35 billion reduction in impact, and let’s assume producers in China eat 5% or $25 billion. Now $125 is $65 billion impact. Now let’s assume retailers like Walmart eat 2% or another $10 billion. Now we are down to a $55 billion impact spread over hundreds of products, some of which are components with the US assembler will maybe eat part. In the end, there will be an impact, but over time with producers going elsewhere and Walmart and Target and others finding non-Chinese sources, the real impact spread over a full year will not be terribly damaging- maybe .2% or .3% of GDP at most. Companies that depend on Chinese imports will scream, and being election time, they will scream loudly, but Trump has to hold strong. We must win this war -especially the theft of Intellectual Property and forced expropriation of technology. History depends on this. We stop Chinese theft and their military growth, and Silk Road now, or really bad things will happen 5-10 years from now. The long term threat cannot be over stated. The more the Dems attack Trump and call for impeachment, the more dangerous the Chinese become as they misunderstand what is happening, and refuse to deal.
Who pays for tariffs? While the importer pays the tariff, the Chinese bear some of the cost in a lower Yuan which raises their cost for what they import. Their producers are leaving to produce elsewhere, or are eating some of the tariff cost in their margins, so indirectly the Chinese are paying some of the tariff. You need to look at who is bearing the true costs, not who pays the tariff. So if I pay the tariff, but my cost is reduced because of currency and the seller in China reducing his price, then in real cost, the Chinese are eating some of the tariff, and my true net cost is not the full tariff.
Good news as predicted- oil is now $53.25. Great for low wage consumers and the economy. The ten year is at 2.3% which will help lower mortgage rates and borrowing costs generally, which is good news for housing, and the corporate sector which is borrowing heavily. It is also good news for the government as it materially lowers rates the government has to pay on Treasuries-a major piece of the deficit.
If you are a climate change advocate -consider this. Not one of the big signatories to the Paris accord is complying. They just wanted to lock the US into a big wealth transfer. The US is far out performing all of them. The EU is building 28 new coal plants, (Germany gets 40% of its power from 84 coal plants), Turkey is building 93 new coal plants, India 446, S Korea 26, Japan 45, and China which already has 2363 coal plants, is building 1174 new ones. The US has 15 and is building ZERO, and will be closing some of the 15. These are the facts. You like windmills for wind power? They require power plants run on gas for backup. To build one windmill requires 1100 tons of concrete and rebar, 370 tons of steel , 1000 pounds of mined minerals like rare earths, iron and copper. Plus very long transmission lines (lots of copper and rubber covering for those, plus many transmission towers.) Rare earths come from Uighur areas of China with slave labor, cobalt comes from places where they use child labor, and they use lots of oil to run rock crushers. This is all to build one windmill. So you think wind is great to save the planet. You forget what it takes to make one windmill, and they have a backup, inefficient, partially running, gas powered generating plant to keep the grid functioning because both wind and solar drop off at night so they have to run diesel powered generators during the night. To generate enough power to really matter, you need millions of acres of land and water, filled with windmills which consume habitats, and which generate light distortions and certain noise, which can create health issues for humans and animals living near a windmill. Nobody wants to talk about the real cost. And this all leaves out thousands of dead eagles and other birds. There is no free lunch when it comes to power. Fossil fuel is not going away for decades.
My guess- the Dems are going nuts over their investigations and calling Trump unstable because they know Barr is about to reveal the worst political scandal in US history, and they want to change the subject, and deflect the scandal by new revelations about Trump, or impeaching him, releasing his personal financial records, and his taxes. They hope to create so much noise with the help of the press, about Trump, that it will drown out the real conspiracy to overthrow the duly elected president. This is insanity when they talk about arresting the AG and Secy of Treasury. How do they have any right to have private bank records of a private company from long before Trump was president? Unless they have a specific evidence or a charge, they have no right. It sets a terrible fishing expedition precedent. If they get the tax returns from NY State it will also set a terrible precedent. They are out of control now. If they do get those records they will be leaked and misinterpreted and misstated. They will be published in pieces to misstate things as the press did for 2 years with Mueller. It will be a horrid mess. They have lost their minds. Pelosi calling for an intervention is disgraceful and clearly driven by the far left members to get the press to hammer home the concept that Trump is mentally ill now that collusion is off the table. They are doing irreparable damage to the country with this sh-t show, and the country will be much worse for it. Other countries will have no idea what to make of this disgrace. The Chinese will never do a deal under these conditions since they will think Trump may be gone. In the end, I believe Barr will indict some top people from the Obama administration, and people will be horrified by what really happened with the dossier, and FISA, and the conspiracy to get Trump out of office. The Dems will lose in 2020 when this all unfolds, and they are shown to have hatched an attempted coup. Nadler is a disgusting little pig who is just a hack. Schiff is a proven liar who is more interested in running for governor of CA than helping the country. By late June this will begin to unfold and then cascade. Pelosi clearly intended to blow up the infrastructure meeting by coming out one hour before and claiming Trump essentially broke the law with new obstruction by declaring executive privilege, and claiming that is impeachable. His claim of privilege and immunity for McGahn and others is normal and perfectly legal. What did they think Trump was going to do after that- just sit there and act like nothing happened. It was a set up. Washington now has become a stinking swamp of snakes and slime worse than it has ever been as the Dems become even more desperate to stop what is coming from Barr.
If you want some sense of the impact of the deduction for State And Local Taxes (SALT), and the high end housing market, the Hamptons is a prime example. It is the place of the most number of very expensive second homes in the country. An average house is $1.5-$3 million for a weekend house, and many homes are valued at over $5 million, or even $10 million, or much more-for weekend houses. The market is down double digits. People who have no pressures to sell are taking their house off the market, or are just waiting for a good offer. Almost nobody in the Hamptons is under any financial pressure these days, so there are no discount buys. Even locals who are contractors are making such a good living that they are under no pressure. There is simply no major demand to buy at the over $1.5 million level, so little is selling. The property tax deduction issue, and the limits on mortgage interest deductions is having a major impact. When you consider a house is $3 million, or $5 million, the mortgage is big and property taxes are very high, so those loss of deducts is huge. New York’s high spending governor, Cuomo, is having a real problem finding a way to cover his excessive budget as a result of rich guys moving out for tax purposes.
Bye till July,
-Bill
