I HATE Tariffs

I hate tariffs! I hate tariffs! I hate tariffs!

PHEW!

Now that I got that out of the way, I can get down to business. I really hate the idea of tariffs. The free market should be the ultimate arbiter, absolutely not the global governments trying to protect certain industries. And as I have said over and over and over, no one, not a one, wins a trade war. There are only losers.

You can only put so much lipstick on that pig. Tariffs are either borne by the consumer or the producer, but tariffs are just a fancy word for taxes. The consumer can pay more for a good which is inflationary or the producer can absorb that cost which impacts their bottom line. And anyone who thinks the U.S. is guilt free is just dead wrong. How do you think our light truck industry became so dominant for Ford and GM?

What also bothers me is the President’s tactics of the on again, off again tariffs which serves no one well. Literally, on any given second, a random tweet can hit Twitter and the global markets see instant outsized moves. And let’s not forget that the Chinese are masters at manipulating their currency. In this regard, they have weakened the Yuan to help offset some of the tariffs.

If I were China, I would continue to massage the Yuan and always be open to calls, meetings and negotiations, but there is no way I would make a deal with U.S. before the 2020 election. What’s the motivation? The Chinese economy is already in the toilet. President Xi is basically president for life or until he decides he’s done. The Chinese people won’t demand anything on this front. Xi is smartly playing the waiting game and hoping he gets to negotiate with another resident of the White House. And if Trump wins, Xi already knows who he is dealing with.

Many people have asked what the U.S. should do instead of imposing tariffs. How should we combat intellectual property theft? While an excellent question, there really is no good answer. I do not think China will ever agree to help the U.S. combat IP theft. We could fight it out at the World Trade Organization, but that’s a lot of time without much reward.

The long-term “hope” is that the free market would eventually move manufacturing from China to other nations and that would help level the playing field, but not solve all of the problems. Additionally, unless the Chinese allow their currency to free float, it will never, ever be considered a reserve currency that the world must use. Eventually, the Chinese know that having a reserve currency trumps everything else.

President Trump has come out with some really good economic policies, like cutting more than 400 regulations and overhauling the tax code like Presidents Reagan and Kennedy before him. I supported these because they had a direct positive impact on the economy for everyone. Trump’s policies toward China are misguided from my seat and will only end up damaging our economy. Some believe that Trump knows this, but is also counting on the Fed to continue to cut rates. That’s a dangerous game, especially once the economy rolls over.

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China Devalues – A Look at Currencies

After a good close last Friday and strong stock market showing on Monday, the bulls hard a tough day on Tuesday as China surprised the markets by devaluing their currency, the renminbi or RMB, overnight in an effort to spur on exports. Japan has been trying to do this for several years by massive amounts of money printing. For most of the world, the free market sets the various exchange rates, but a few countries set their own exchange rates, which can be viewed, rightly so, as manipulation.

The average person traveling to Europe or Japan typically views those areas as costly and probably doesn’t realize that exchange rates fluctuate 24/7. It seems like people always complain how expensive it is to travel to Europe and Japan, but there are varying degrees of expensiveness!

When I moved to London in January 1987, I remember it costing $1.38 for one British Pound, and that was expensive at the time, although it was $1.55 when I left six months later. In hindsight, the mid $1.30s has been the low for that currency for decades. On the flip side, in late 2007, the Pound was as high as $2.10. Today, it sits at $1.55, the same price as in June 1987.

Free market currencies typically oscillate over time; the longer your timeframe, the more you can see it. They are relative value vehicles. All currencies cannot be rising or falling together as they are paired against one another. I would also include gold as a currency today.

For the most part, economic activity, inflation and perceived future interest rates determine the value of one currency against another. Notice I did not include the money supply in that equation. Contrary to popular belief, more currency printed does not always lead to a devaluation of the currency by the free market. Sometimes it does, like Japan, while other times it doesn’t, like the U.S.

Disagree?

Look no further back than our own Fed’s money printing binges, QE I, QE II and QE Unlimited.

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In the example above, the dollar hit its ALL-TIME LOW in March and April 2008. That was before QE was launched or even announced. By the time QE began in November 2008, the dollar had already rallied more than 20%, a hugely dramatic move for a currency.

By the time the Fed was done printing $4 TRILLION, contrary to popular belief, our currency did not disintegrate into worthless ashes. Rather, as you can see below, the dollar was still in rally mode and about to go parabolic over the past year.

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It’s certainly no secret to readers that I have been long-term bullish the greenback since early 2008. I have mentioned in every Fearless Forecast for at least six years. I do not believe the run is over. Action in the dollar has been constructive and the next leg higher should carry it well above 101 on the index and possibly to 110. Eventually, that will cause massive capital inflows into the U.S. as we saw in the mid 1980s, which should be bullish for large cap stocks. The long-term problem is that we could see some serious global imbalances with a market crisis to accompany that, but that would be a few years down the road.

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