Print the page
Increase font size

Posted November 20, 2024

Byron King

By Byron King

Four More Years: Trump, Tariffs and Trade

We’ve been waiting, watching, and wondering. What was going to happen? And now, we know: Donald Trump won the presidency again, this time via both popular and electoral votes. Plus, Republicans have slim majorities in the Senate and House. And the Supreme Court leans towards an originalist (if not conservative) agenda under Constitutional law.

Fasten your seatbelts.

The morning after Election Day, Tesla went up, windmills went down, the dollar strengthened, and gold sold off, albeit more of a correction than a major monetary trend. (Hint: let the dust settle, but be sure to buy gold for the long haul.)

Two days after the election, the Federal Reserve lowered interest rates by a quarter point. We saw the Trump cabinet picks and other supporting personnel a week later. Wow… “God-level trolling,” according to Pennsylvania Senator John Fetterman. 

Okay, hang on; it’s easy to fall down a political rabbit hole, but let’s not. Instead, let me first tell you about a recent post-election trip through the industrial landscape of Western Pennsylvania and Eastern Ohio. Then, we’ll discuss how to navigate new investment fairways opening up.

Keystone and Buckeye Perspectives

Full disclosure: Part of my weekend journey was to catch the last of beautiful autumn leaves, but mostly, I hit the highway to check in on a couple of industrial firms with whom I have contacts. 

“How’s business?” I asked a Pennsylvania steelmaker whose customers include the oil industry and numerous well-known names in manufacturing. “We’re solid,” he said, “but we could sure use some tariff protection from foreign imports.” Then he added, “Maybe Trump will help us out.”

Later, I posed the same question to a guy whose Ohio company uses an exotic, specialty steel alloy to make precision roller bearings, many of which go into hi-tech aerospace equipment like jet engines. “We have a good book,” he replied. “The customers are there. But we’re squeezed between rising prices for materials and tight margins on what we sell because of foreign competition.” And then he added, “Maybe Trump will help us out.”

Okay, did you get that? The basic steelmaker wants tariffs on imports to support his prices at home. Meanwhile, the high-end alloy user wants lower-cost metal to make his product, along with tariffs on foreign competition. In other words, both companies want President-elect Trump to “help us out” with tariffs on foreign competition. 

One guy wants to sell his steel at higher prices via tariffs. The other guy wants cheaper alloys but tariffs on foreign competition to goose domestic prices. Obviously, this reflects two very contradictory angles on a fundamental economic issue that just handed Trump the keys to the White House. 

Is “Free Trade” Really Free?

For many decades, U.S. trade policy has favored relatively open markets to foreign products—way too open, some argue. In fact, Trump campaigned on a platform of protective tariffs and so-called “America First” economics.

Lots of foreign-made stuff is for sale on American store shelves and dealer lots. Clearly, U.S. consumers and businesses have ample choice for all sorts of everything. That’s nice, right? 

However, over time, these same open markets have led to the demise of many domestic businesses and business sectors, which cannot compete against lower-cost foreign competition. The impact has been a long-term, broad, national-scale deindustrialization that left a continental landscape of closed mills and factories and towns, cities, and entire regions devastated by the loss of jobs and tax bases. Again, Trump campaigned on these issues and touched deep nerves out in voter-land.

Of course, nothing is simple. There are many reasons for foreign business success in grabbing U.S. markets and the flip side of U.S. business failure. Among these are lower foreign wages and taxes; costly regulatory burdens in the U.S.; American lawyers and litigiousness; cheaper foreign raw materials and energy; lack of skilled U.S. labor coming from a bureaucratic and ineffective education complex; foreign government subsidies to favored sectors and companies; and plenty more, to be sure. 

Plus, don’t neglect several generations of stodgy U.S. management culture, beginning with too many people learning too many bad ideas in business schools. One of the worst self-inflicted cultural-educational disasters has been the cult of financialization. That is, turning everything into a cash flow and asset strip analysis to justify the rentier class's high offtake. 

Along these last lines, General Electric under Jack Welch comes to mind. Welch dismantled a once great industrial powerhouse over a quarter of a century. He closed entire divisions and then churned other, often unrelated businesses, commonly on a whim. He bought and sold companies to record a loss or pencil-whip profits, enough to beat earnings estimates “by a penny per share” every quarter. 

Or consider Boeing, a formerly superlative engineering company that’s now emblematic of how to lose the core business focus. For two decades, Boeing management blew through tens of billions in solid cash dollars, only to emerge on the other side with its corporate reputation in tatters and now to face a years-long struggle to rebuild. 

As for that so-called “free trade” idea, how free was it? The fact is that, in the face of foreign competition, the primary U.S. economy hollowed out. The country lost capabilities in mines, mills, and factories. Losses included steel and other metals, as well as all manner of machinery, electrical equipment, electronics, autos, rail equipment, shipbuilding, clothing, pharmaceuticals, medical equipment, furniture, and much else. 

On the one hand, Americans enjoyed cheaper television sets, T-shirts, cars, and more because of open markets for foreign-made goods. But behind the curtains, businesses outsourced entire supply chains. Often, American companies abandoned product development and retained only a semblance of final assembly—that is, a token plant or two in which workers bolted foreign-designed, foreign-made components together and then slapped a pro forma “Made in U.S.A.” sticker on it. 

Another profound impact was that, over half a century and due to factory closures, the U.S. lost much of its working and middle class and the national capability to make real things in volume and at high quality. That loss includes the industrial capability to support a global-scale military footprint, which is clearly lacking anymore. 

As its 150-year industrial legacy hollowed out, the U.S. economy shifted increasingly into seemingly higher-end pursuits via the so-called “service” sector. That’s everything from lawyers to hairdressers, real estate agents, and financial consultants. Yes, it’s a very long list, and there is no need to go into detail.

Oddly, but also necessary and fair to say, along the way of America’s industrial decline, the country’s overall standard of living actually increased. Cheap foreign goods were a benefit in many ways. Now, in the U.S., more people have air conditioners, microwave ovens, large-screen televisions, and storage lockers full of gear than ever before. The origin of most of this loot is overseas factories, with those goods transported at relatively low cost across oceans on container ships. Isn’t that great?

Well, maybe it’s not so great because eventually, there’s this spot on every map called the “end of the road,” and we seem to be there just now. Hence, Trump and his political realignment of voting blocs.

For example, according to a recent report from Citibank, about two-thirds of U.S. households are all but tapped out. That is, many American households can buy this week’s groceries and perhaps pay next month’s rent, but that’s about it. Also, most Americans have almost no savings and live paycheck to paycheck, if not a government check to a government check. Buy a new car? Or a new house? Pay college tuition for the kids? No way, not in this economy.

So again, we ask: How free was free trade? Well, it left quite a trail of dead bodies, figuratively speaking, and maybe literally, too, if you tally up the deaths from drugs and despair across several decades of American time and space. 

New Economic Directions Ahead

Now, we return to newly reelected President Trump, who promised tariffs to support rebuilding basic and advanced American industry. Trump wants to bring back mines, mills, factories, jobs and paychecks. Will his ambitions work out? The short answer is that there’s something there with Trump’s tariffs. His ideas go back to the days of Alexander Hamilton in the 1790s, just as the U.S. was beginning its run of history.

But again, everything takes time, and big changes seldom happen quickly, absent war or other tumult. It’s important to realize how the country slid into its current state over many decades. There’s much history and economics to unwind, along with major cultural and physical resurrection processes on many fronts. 

Undoubtedly, we’ll see new Trump tariffs on many goods, with different rates attached to different items and plenty of politicking in the background. Just consider those two steel-oriented businesses I described above. One wants tariffs up front, and the other wants tariffs on the back end.

Here’s the rub, though. Nobody builds a factory, hires and trains workers, and opens up a new line of business based on a temporary sugar high of protective tariffs. Despite the election outcome, the entire concept behind the Trump tariff approach has shallow roots in U.S. academe and business culture. Also, other countries may retaliate against U.S. businesses. There’s much yet to unfold. The devil is in the details, and all that. 

Still, expect Trump to protect workers in the U.S. auto and primary metal fields, especially steel; these voting blocs were instrumental in the election victory. Plus, tariffs in these sectors have the added advantage of freezing out Chinese competition in autos, namely electric vehicles and blocking much Chinese steel that is “dumped” (an economic term) below cost into world markets just to keep China’s mills running. 

Another easy call relates to Trump’s promise to “drill, baby, drill” for energy. So, expect an easier time for the oil and gas sector to move ahead, both onshore and offshore. Along these lines, Zach recommended Chevron (CVX) earlier in this month’s issue. I also like EQT Corp. (EQT), one of the country’s largest natural gas producers, especially active in the Appalachian Basin, home to many Trump voters. 

Another underappreciated energy play is Transocean Ltd. (RIG), a major offshore and deepwater drilling rig operator. Since 2021, the Biden administration has all but shut down drilling in the Gulf of Mexico, and now, under Trump, we should see a marked uptick in activity. As next year unfolds, a long backlog of projects is about to pass through the regulatory hurdles. 

Finally, it’s worth noting that the U.S. faces a continuing defense buildup in a very unstable world. Right now, the defense budget is in the range of $840 billion just this year. But that’s before even larger sums must be spent to buy and build the next generation of nuclear systems, aka “strategic” weapons. 

It is sad to say that the Air Force program for a new land-based missile is far over budget, regardless of the upgraded design's technical merits. The program is led by Northrop Corp. (NOC) with many subcontractors. 

Meanwhile, that same Northrop company is in the early stages of testing and producing a new bomber called the B-21. And the price tags for everything, anymore, ring the cash register in numbers like multi-hundreds of millions per unit, with some systems totaling into the billions. So yes, big money is in play. 

Meanwhile, the Navy must build more submarines, and timetables are unforgiving for replacing old vessels and introducing new ones. General Dynamics Corp. (GD) is the main builder, with a large body of work from Huntington Ingalls Industries Inc. (HII) and many subcontractors.

There’s much more to say about the U.S. defense budget. For now, just understand that the flow of funds for military programs will be immense, up and down the vendor and supply chains. Plus, by its very nature, military procurement focuses on U.S. companies, materials, and workers, which fits right in with Trump's approach to rebuilding the domestic industry. 

Finally, as it all unfolds, some people will make huge money out of it. 

Thank you for subscribing and reading. 

The Equity Indexes

Posted December 13, 2024

By Sean Ring

The USG announced the largest deficit in its history. Get ready for a melt-up boom.

Deficits Matter.

Posted December 12, 2024

By Sean Ring

The USG announced the largest deficit in its history. Get ready for a melt-up boom.

Assassins, Tariffs, and Pardons

Posted December 11, 2024

By Sean Ring

A quick dip into the mailbag provides a fascinating look at what’s on your mind.

Gold Glitters on Assad’s Fall

Posted December 10, 2024

By Sean Ring

Gold finally had its first big up day after the election.

The Art of the Endgame

Posted December 09, 2024

By Sean Ring

A masterstroke? Yes. Beyond anyone’s wildest dreams. “Liberating Syria?” You must be joking…

The Carlson-Lavrov Interview

Posted December 06, 2024

By Sean Ring

Tucker Carlson does the job the diplomats are paid to do.