WASHINGTON. Disregarding the economic head-waggers in the US and the Eurozone, President Trump today effectively said his patience is exhausted with this country’s key trading partners. Accordingly, his administration slapped the EU, Canada and Mexico with new US tariffs on imported steel and aluminum. They go into effect as of midnight Thursday, May 31, 2018.
Predictably, the U.S. stock market instantly reversed most of Wednesday’s gains, with the Dow dropping over 210 points Thursday morning. As we write this article, around 1:45 p.m. Thursday afternoon, the Dow has sunk somewhat further, standing at 24436.03, off approximately 232 points. That’s nearly a 1 percent loss on the day. It will get worse when (not if) our international trading “friends” retaliate.
The more broadly based S&P 500 is off about half a percent, while the NASDAQ is fighting hard to stay in the flatline zone. That tech-heavy average is only down 0.1 percent at the moment.
This increasingly fingernail-biting market took a big hit Tuesday in reaction to the political (and potential economic) chaos in Italy. It recovered over half of Tuesday’s damage on Wednesday, when traders and machines suddenly decided that things weren’t so bad.
However, Thursday’s declaration of US tariffs on imported steel and aluminum has frightened traders and machines. Fears of an Italexit – Italy’s version of the Brexit – are also hammering the averages.
A further drop in the price of WTI (U.S.) crude – off $1.40 per barrel at $66.81 – isn’t helping sentiment either. Yet Brent crude, is actually up slightly (0.35 percent) to stand at $77.77 per barrel.
It’s clear that as long as the administration keeps rolling out new US tariffs, markets will remain in turmoil. It is not the intention of the administration to impose its announced tariffs forever. That said, however, the new steel and aluminum tariffs are meant to focus our regular trading partners – who’ve been slapping tariffs on U.S. goods forever – on establishing a more equitable global trading environment.
The US, effectively, subsidizes many nations – particularly China and Germany at the moment – by quietly suffering tariff and export restrictions. These restrictions imposed by our regular trading partners are clearly intended to protect their own workers and industries at the expense of ours.
Trump is imposing new US tariffs on steel and aluminum not to initiate an uncalled-for trade war. He is trying to get our trading partners’ serious attention after many years of indifference toward their own trade predations.
Unfortunately, Trumps gambit to counteract that situation is inflicting a roller coaster of pain on stock and bond investors. This is likely to continue. But in all honesty, how else can the American government focus the attention of our trading partners on their own highly discriminatory and protectionist trading policies? Such policies consistently limit American exports either by export controls, tariffs, or inspection regimes that delay American product shipments from consumer and retail outlets.
It’s almost certain that the EU, Canadian and Mexican governments will fluff up their collective plumage displays, slapping retaliatory tariffs on U.S. goods that already suffer from tariff disadvantages. That’s not the desired result, but perhaps the impasse will lead to common sense negotiations on the trade front.
(UPDATE: The EU, Canada and Mexico are already threatening retaliation against the U.S., primarily aiming at U.S. agricultural products. Many of which, ironically, they already discriminate against. Stocks are currently taking a deeper cliff dive as a result.)
Yet something else is afoot here. The current trade situation is quietly, almost surreptitiously linked Brexit and the potential for a populist-driven Italexit. The Eurozone, at least – plus Canada’s foolish, socialist-driven Trudeau government and a similar tilt in Mexico – unite this triumvirate with the anti-Trump Deep States in the U.S.
The aim of this essentially socialist mega-Deep State is to impose their own retaliatory tariffs in areas – like farm products – that are designed to damage the Trump constituency leading up to America’s fall elections.
In other words, this is a long and dangerous game. In our opinion, Trump is trying to break out of the passivity of previous administrations. Recent presidents have preferred to look the other way at our trading partners’ blatant discrimination against U.S. products, particularly in the steel and aluminum industries. Over the years, such discrimination has been killing thousands of working-class jobs in this country. (But who cares, right?)
For their part, our trading partners prefer to continue their discriminatory policies as it helps their Deep State politicians to win reelection. Something’s got to give, and that’s the message Trump is sending. It remains to be seen what it will take to force those freeloading trading partners to bargain in earnest. For if they do, their own reelection efforts could run into trouble, as it will likely mean a reduction in the subsidies that have kept working class Europeans passive for generations.
Like the despicable Obama-phone giveaways in this country, European tariff and subsidy regimes – and to a lesser extent those in Mexico and Canada (not to mention China) – effectively give “free” or reduced price stuff to lower class constituencies by forcing American workers to subsidize them. Often at a cost of their jobs.
What are traders to do in light of the new US tariffs on imported steel and aluminum?
We will read, see and witness an awful lot of anti-Trump media blather on the currently boiling topic of international trade. But if there were ever a time and place to punch that RESET button, now is that time.
Meanwhile, there’ll be hell to pay for traders and investors in U.S. and international stocks. To paraphrase our old pal, Yogi Berra, this won’t be over ‘til it’s over. And no one knows when that will be.
As a result, we continue to shift our investment strategy over to large-sector ETFs, which remain far less volatile to the emotional trading in individual stocks. It’s just safer that way.
History tells us that remaining mostly invested most of the time is the way to go. But it’s during times like this that we wonder about that. As a consequence, our cash position remains higher than usual, and we continue to hold preferred stocks as a hedge, along with other high-yielding (but not sub-par quality) investments. And we picked up a small position in steel-oriented Suncoke (symbol: SXC). As its name suggests, the company prepares “coking coal,” a key ingredient in the manufacture of steel.