Wednesday, March 29, 2017

The Trump Recession

Donald Trump may find himself presiding over a recession.  And if his trade policies are enacted, a depression.


A recession is coming.   I can say that with confidence as a recession is always coming, the trick of course is saying exactly when it will come.    No one ever knows for sure, but sometimes the signs are all there.

After the election, the stock market went nuts, increasing in value by a phantom 10% within two months.   People were ecstatic that Republicans would be in charge, slashing regulations and taxes and letting businesses run "unfettered" by government regulation.   Of course, no one remembered that lack of regulation and oversight is what caused the collapse of 2009.   Economic memory in humans spans 18 months, by my estimation.

Banks making bad loans and brokers making risky investments.   Consumers over-extending themselves with credit and sketchy mortgages.  Builders overbuilding houses and condos in saturated markets.   We all just had a jolly good time and just hoped the hangover wouldn't be so bad.

Well, it took eight years of strong coffee, but Obama slowly resuscitated the economy - one of the longest bull markets in history.  People complained that growth wasn't fast enough and that wages were stagnant and "income inequality" was on the rise.  But compared to the day he took office, things improved dramatically over his term.   When he left Office, the Dow was at all-time highs, unemployment at record lows, inflation nearly non-existent, and interest rates so low the banks were complaining they weren't making any money.

What direction could Trump go, but down?   As it turns out, his slashing of regulations hasn't really changed anything too much.   The loosening of CAFE and emissions requirements may be moot, as States like California might keep its own rules, which other States also follow.   So the idea of 8-liter cars being commonplace might be a little overblown.   Carmakers are using smaller engines with turbocharging to get more power - and consumers are liking it.   My neighbors traded in their old Expedition (a monster of an SUV) that had a 4.9 liter V-8 for a new Expedition (the same truck!) with a turbocharged V-6 that has more horsepower and gets better mileage - from 15 in the old truck to over 20 in the new one.    Ford could go back to the older, cheaper engine design, but it is not clear consumers will buy it, if gas remains pricey.

The "Coal Renaissance" isn't likely to happen either, at least so long as we are awash in a sea of cheap natural gas.   You can go dig all the "clean coal" you want, the utilities aren't going to switch their power plants back to coal and pay more money for the privilege.

Speaking of power, four nuclear plants under construction in the USA are in trouble, as Westinghouse, the prime contractor for the AP1000 reactors is declaring bankruptcy.   How this will play out with power bills for consumers as well as profits for the utility companies remains to be seen.

Speaking of bankruptcies, expect a few major ones this year.   No, it isn't just the Elio wet dream, but storied companies with lots of exposure in the market, including Sears, J.C. Penny and maybe even Macy's - as "brick and mortar" continues its decline.   A disruption in the marketplace could also mean the premature bankruptcies of many money-losing "dot.com" and tech companies that have never turned a profit and likely never will.    Investors in a skittish market will be less likely to plow more money into things like Twitter if they don't look like they will be profitable, ever.   A series of "dot com" collapses could start to topple these companies like dominoes.

And let's not talk about Tesla and other Musk endeavors which have not made a profit yet - a recession could cause them to sell out to larger competitors, or just collapse.  Or Uber, which everyone thinks is "too big to fail" but is systematically being shut out of one market after another.  It is one thing to be shut out of Demnark, but Austin Texas?  If you can't make it in the capital of hip, forgetaboutit!  And how long before taxi companies push through regulations in other cities?   And let's not forget, Uber has never made a profit, and in fact is hemorrhaging cash.  The pundits wonder what we will do without Uber?  How will we live?  Probably the same way we did before.   Although before Uber goes bankrupt, they probably will be bought out by someone with deeper pockets and more influence.

Speaking of cars, again, have you really read what Ford is saying about the car business?   Cheap leases has meant that a flood of lightly used cars is hitting the market - and car companies are losing money.  Long-term car loans mean many buyers are "upside-down" on their cars, and cannot afford to trade-in.  With interest rates rising, car costs will rise.  If Trump imposes an "import tax" on car parts, car prices could skyrocket.   Ford is projecting a 14% decrease in profits this year.  Read that again.   How far do you think their share price will drop as a result?  I'm guessing 14%.   Good time to buy an off-lease used car as the dealers cannot give them away (as opposed to SUVs).   GM is faring no better.   Trump's "de-regulation" of these industries will not offset the build-up of used car inventories, the losses in leases that over-valued residuals, and the saturation of the market over the last seven years.

The Fed has raised interest rates, which means the 0% financing and low mortgage rates are going to go away for good.  Already we are seeing higher interest rates in mortgages and higher housing prices - even shortages and bubbles in some markets.   People are already over-paying for crappy houses in shitty neighborhoods just so they can say they "bought before they were priced out of the market!" which as a very, very familiar ring to it.   In other words, the next few years could bring yet another housing bubble, because people deny the 1989 bubble even happened and blame the 2008 bubble on something called the "CRE" and Bill Clinton, instead of their own stupidity (where blame rightly belongs).

And of course, the Fed raising rates was designed to increase inflation to slow down the economy.   So here we have Trump trying to step on the gas, while the Fed applies the brakes.  But like a lady driving an Audi 5000 in high heels, Trump is subject to "pedal confusion" and is actually stepping on the brakes as well.

And a trade war could be the nail in the coffin.   Not only would it accelerate inflation dramatically by raising prices on imported goods a whopping 20% (and let's face, it, a lot of our goods are imported!) it would mean exports would face similar retaliatory tariffs which would cut sales and result in layoffs.  Much has been made of Trump's meddling with Carrier, but in addition to household HVAC systems, Carrier makes industrial and commercial systems which are exported all over the world.   How do you sell an industrial chiller in Europe when it has a 20% import duty?   Or an Otis elevator made in South Carolina?   Or a Pratt & Whitney jet engine made in Connecticut?   All are divisions of United Technologies, all export a substantial portion of their products.  (Disclaimer, I am a shareholder and former employee!).

Inflation would skyrocket.   Go to the grocery store and see many products with 20% higher price tags.  Your car costs 20% more.  Even things like lumber from Canada - now 20% more.   Once you start a trade war, it never ends, and tariffs, once on the books, are nearly impossible to get rid of.  The 20% "chicken tax" on light trucks from 1963 is still in effect, and as a result, car makers do odd things like ship trucks in pieces or install passenger seats in them and then remove and shred them once they reach the States.  This is not an example of more efficient government or more efficient manufacturing or business.

It also illustrates the lengths people to go, to avoid taxes.

But what about the rest of the Trump agenda?   Surly profits will rise once "Tax Reform" (read: tax cuts for higher brackets) are implemented.   A corporate tax cut may help by repatriating foreign profits that many US companies are holding overseas.   But it is unclear that cutting taxes on the very rich will stimulate the economy much, at least that is what we learned from the Bush era.

The other problem with tax cuts is who pays for them?  Since we are not seeing spending cuts, but rather spending increases, we will fall into the same trap as Bush did - cutting revenue and increasing spending, thus raising the deficit.   The biggest complaint about the Obama administration was the deficit spending and increasing government debt.   Trump appears poised to make Obama's deficit spending look like child's play.

And as with Bush, maybe this can go on for a year, two years, four years, or even eight.   But eventually the piper has to be paid, and these "house of cards" economies eventually come crashing down, profiting a very few people very handsomely, but impoverishing a whole lot of people at the same time.

The question is when.    The stock market peaked on March 1, 2017 and has been in decline every since.   Will it ever exceed March 1st levels, or was that the height of the bubble?   It is hard to say for sure.   One thing is clear, though, a lot of people are starting to wonder whether a recession is due.

What is disturbing to me is how quickly the market reacted to the failure of "health care reform-reform" by dropping nearly 10%.   Suddenly, the Libertarian Shangri-La promised by Trump turned out to be an actual Shangri-La - a mythical place that doesn't actually exist.   The myth of Republican solidarity was exposed, and no Republican worth his salt allows a President to cut spending on any government agency whose offices are located in his jurisdiction.   Too late, the "great dealmaker" fails to realize that what he needed was perhaps incremental changes that involved reaching across the aisle for a consensus of those "middle-of-the-road" Republicans and Democrats that represent a majority of Americans.   Too late.

And as I noted before, this is right out of the Carter, Reagan, Bush, Clinton, and Obama playbooks.  Whenever a President has control of both houses of Congress, they often are less effective in getting legislation through, as attempts to pass things using only one party only serves to highlight the differences among party members.   It also emboldens some party members to be holdouts for political pork, or for coalitions to hold out for their radical agendas.   We see this time and time again, sadly.

A reader writes asking how to time the market - to know when the bulls are running or the bears are coming.   When you do buy and when do you sell?   If I knew that, would I be writing this blog?  I'd be on my jet headed to some sunny tropical island.    And if I knew that, I certainly wouldn't tell you!

There isn't much you can do to position yourself for recession, as timing the market is nearly impossible to do.   The best thing to do is to diversify your portfolio and not panic.   Our paranoid-in-chief, Steve "Homeless Rasputin" Bannon, is a case in point, or at least his Father is.   According to Bannon, he became a political activist after his Father lost his life savings in the 2008 recession.   A lifelong employee of AT&T, he put all his money into AT&T stock and then sold it all in a panic in 2008, thus locking in his losses.   This is not a reason to be a political activist, so much as it is a reason for elder abuse.   Steve Bannon was an investment banker at Goldman Sachs (Hillary's favorite place to give a speech!).  Why he let his Dad do this, or why he thinks it is not his Dad's fault is an excellent question - a classic case of externalizing if I ever saw it.   And these are the idiots running the White House!

So, to survive the recession, don't do what Steve Bannon's Dad did.   Invest in a number of different things, and as you get older, take less risks and put more money into stupid safe things with lower rates of return, like government bonds.   Sure, we all love to see our portfolios go up, up, up with the rising stock market, but when you are 65 or 75, you can't afford to ride the market all the way down and wait for it to come back.

So my personal strategy is to do almost nothing, as I already am diversified into a number of stocks, bonds (corporate and government), mutual funds, bond funds, index funds, insurance, and real estate.   The key is, like with 2009, to be able to lose money - a lot of money - and just shrug your shoulders and say, with confidence, "It will come back".   Because if you invested in things that are not con-jobs, they will come back over time.

What are con-jobs?  Money-losing companies whose valuation is based on fantasy.   IPO stocks in high-tech firms with no profits and no plans to make profits.    Commodities that are hyped as going up in price because they are inherently valuable and everyone can see that, duh!   Yes, I am talking about gold.  Or bitcoin.   These are just placeholders for money that earn no profits and rarely do not go up in value, over time, more than the market - often not even beating inflation.   You need to understand the history of gold from 1980 to 2005 to see that.

The worst thing to try to do?   Try to time the market.   Because unless you are lucky, your timing will likely be off.   Unless the market really goes insane, like the housing market did in the 2000's, it is hard to see when you want to get off.    Housing was easy to spot - who could afford these overpriced houses?   Why buy a house for $3000 a month cost when you could rent it for $1500?   It made no sense at all.

On the other hand, an old-line company with a good product that doesn't appear to be going obsolete, that is also investing in new technologies, that makes a regular, if not fantastic, profit, and pays a regular dividend - and has a healthy balance sheet - that likely won't stay down for long, even as it is dragged down by the rest of the market.   Yes, good investments can be dragged down by a declining market as markets are driven by emotions, not by logic.   

The best place to be, in retrospect, was the guy with the cash in March of 2009.   I bought 1,000 shares of Avis stock with my last $750 cash back then, and it went up over 7000% in price.   I was lucky not brilliant.   And even if I had more cash to invest back then, I likely wouldn't have.   Because that was gambling and not investing.

And those are the folks who lose big, both at the casino and in the stock market - the gamblers.   Gamblers want the "big score" and the huge payback.   But it rarely happens.   And for every "superstar" investor out there who gets lucky, there are dozens, if not hundreds, if not thousands, who lose it all and go broke.   Sometimes they are the same person.   Never confuse getting lucky with being brilliant!   Today's golden boy is tomorrows has-been, if he thinks a few lucky trades give him special insight into the market.

So there you have it.   We are heading for a recession, but when and how severe is hard to tell at this time.   My guess is that we will see a recession in the next 18 months and it will turn the mid-term elections against the Republicans.   How deep the recession will be - and how long, and whether it turns into a depression - will depend on whether some of Trump's wackier policies are enacted.   Throughout history tariff wars have resulted in prolonged depressed economies.   I see no reason why Trump has any special magic to prevent this from happening again.

And, quite frankly, after two months in office, I think the market is realizing that Trump has no magic at all, and in fact, is quite incompetent to lead the country, or the economy.

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