The Risk of 'War' Is Rising...
The Trump tariffs are here (again)... America's biggest trading partners prepare to retaliate... The risk of 'war' is rising... New troubles in Europe... Great news for GM?...
It's become a familiar story...
This morning, U.S. stocks opened lower on renewed fears of a "trade war."
Only this time, the news had nothing to do with China. As the Wall Street Journal reported...
The U.S. will impose tariffs on steel and aluminum imports from Canada, Mexico, and the European Union starting on Friday, the Trump administration said, raising the specter of trade war with some of Washington's closest allies...
Since Mr. Trump announced unilateral, global steel and aluminum tariffs in March, Canada, Mexico, and the European Union, which includes the U.K., had been offered temporary exemptions to the duties...
But on Thursday [Commerce Secretary Wilbur] Ross told reporters the exemptions won't be renewed, subjecting their steel and aluminum exports to tariffs starting Friday.
The plan will place a 25% tariff on steel and a 10% tariff on aluminum imported from these economies. And unlike the recent tariffs on Chinese metals, these could have a significant effect on U.S. consumer prices.
You see, China accounts for less than 8% and 13% of U.S. steel and aluminum imports, respectively. But Canada, Mexico, and the European Union ("EU") together supply roughly 50% and 60% of all the steel and aluminum the U.S. imports each year, according to market and consumer data firm Statista.
All three economies have already promised to retaliate in response...
The Canadian government said it will impose "in kind" tariffs on U.S. steel and aluminum and will also challenge the decision under both the World Trade Organization and the North American Free Trade Agreement ("NAFTA").
Mexico said it would target several U.S. exports – including some steel and pipe products, berries, grapes, cold cuts, pork chops, and cheese – "up to an amount comparable to the level of damage" from U.S. tariffs.
But the strongest response came from the EU. More from the Journal...
The EU has said it is also planning to hit back with its own levies after preparing a list of U.S. exports worth €6.4 billion ($7.5 billion) that could be slapped with levies, up to €2.8 billion of which could go into effect staring June 20.
The EU said it would also launch a case against U.S. measures at the World Trade Organization on Friday.
Several European officials also spoke out against the move...
European Commission President Jean-Claude Juncker said it was "protectionism, pure and simple" and said his group "will defend the Union's interests, in full compliance with international trade law."
Cecilia Malmström, the EU trade commissioner, likened the move to "blackmail," and said Europe "will not negotiate with a gun to our heads."
And a spokesman for German Chancellor Angela Merkel said the decision was "unlawful," "fundamentally wrong and extremely dangerous," and risks creating "a spiraling escalation that will harm everyone."
Here in the U.S., the reception wasn't much better...
Even Republicans who have been supportive of many of the administration's other policy goals criticized the decision.
Nebraska Republican Senator Ben Sasse called the move "dumb," according to the Journal. "Europe, Canada, and Mexico are not China," he said. "You don't treat allies the same way you treat opponents."
Meanwhile, Utah Republican Senator Orrin Hatch, chair of the Senate Finance Committee, warned that "tariffs on steel and aluminum imports are a tax hike on Americans and will have damaging consequences for consumers, manufacturers, and workers." Hatch said he would "continue to push the administration to change course."
We generally aren't fans of politicians of any stripe, but we have to agree...
Even if these moves are a negotiation tactic – as some pundits suggest – they are incredibly risky.
First, as we've discussed, tariffs are generally ineffective as a means of boosting an economy. Instead, they're almost always a net negative... They benefit a select few, while making everyone else worse off.
Second, any miscalculation on the part of the White House risks setting of a true trade war... And despite the rhetoric you may have heard, history shows no one wins a trade war. As our colleague Steve Sjuggerud noted when talk of these tariffs first emerged just over a year ago...
The Smoot-Hawley Tariff Act of 1930 was enacted to protect American jobs from foreign competition. The tariff rate was roughly 60% on 3,200 goods imported in the U.S. At first, it seemed like a success... Then other countries either raised tariffs on us or started trading with other world powers instead of with us. The result was disastrous.
Overall world trade decreased 66% between 1929 and 1934. Unemployment was 8% in 1930 but jumped to 25% in 1932-1933. Not all of that can be attributed to Smoot-Hawley, but it did exacerbate the Great Depression.
We continue to hope cooler heads prevail.
In the meantime, Europe continues to make headlines for another reason as well...
On Tuesday, we noted that populist "anti-euro" politicians appear close to gaining control of Italy's government. This has sparked fears that the country could decide to leave the eurozone and has raised doubts about the future of the single currency for the first time since the 2011-2012 European debt crisis.
But Italy isn't the only concern today. As financial-news network CNBC reported this morning...
Spain is the next country set to test the resilience of southern Europe, after recent political convulsions in Italy battered global financial markets.
Unlike Rome's power struggle, where markets were fearful a fresh election could be framed as a de facto referendum on Italy's role in Europe, Spain's political drama hinges on a no-confidence vote for Prime Minister Mariano Rajoy.
Last week, a long-running corruption trial — known as the Gurtel case — found dozens of people linked to Rajoy's governing People's Party (PP) guilty of benefitting from illegal kickbacks. That prompted socialist leader Pedro Sanchez to push for a vote of no-confidence against the incumbent.
The vote, scheduled to be held Friday afternoon, could see the collapse of Spain's center-right PP administration after more than six years in government.
Three of Spain's four most popular political parties remain "pro-euro" today, so new elections don't carry the same "existential risk" to the euro as those in Italy would. But they're likely to add to the uncertainty in Europe – and the volatility in the markets – in the coming months.
Finally, we'll note that one of our favorite whipping boys – beleaguered automaker GM (GM) – had a good day...
Shares surged more than 12% on news that investment firm Softbank is making a $2.25 billion investment in GM's self-driving car unit. As Bloomberg reported...
GM announced that the SoftBank fund would take a stake in its Cruise autonomous-car unit just hours before Alphabet's Waymo expanded its partnership with Fiat Chrysler Automobiles. The major powers are squaring off into alliances to ensure they claim a stake in the future of the transportation industry, where machines will rule the road and old business models could vanish.
"This gives GM Cruise the capital necessary to commercialize at scale," GM Chief Executive Officer Mary Barra told reporters. SoftBank's backing sent GM's shares surging by the most since the November 2010 initial public offering.
Expect to hear more from us on this soon, but make no mistake: Despite the sexy headlines, this investment does nothing to solve the critical problems Porter discussed last Friday.
We believe this rally is an extreme overreaction... and folks buying shares today are likely to regret it sooner rather than later.
New 52-week highs (as of 5/30/18): Amazon (AMZN), Intel (INTC), Lindsay (LNN), Monsanto (MON), Microsoft (MSFT), Okta (OKTA), ALPS Medical Breakthroughs Fund (SBIO), Sysco (SYY), Cambria Value and Momentum Fund (VAMO), and Verisign (VRSN).
The "teaching versus learning" debate continues. What's on your mind? Let us know at feedback@stansberryresearch.com.
"'No Such Thing as Teaching'??? What cracks me up is that you keep repeating this moronic and offensive phrase as if it was a fact, and then almost invariably proceed to use words like 'teach' and 'teacher' in the rest of your commentary – as you do in your response to Marty.
"So – obviously – there is such a thing as teaching. You say so yourself! Either change your pet phrase to accurately express what you are trying to say – or stop using it. (I'm sure your 'teacher' parents could help you with this, whether you want them to or not!)
"Why you are so determined to insult subscribers who are or have been teachers is beyond me. This pig-headed insistence on repeating an obviously false statement does nothing but diminish your credibility as a financial analyst – your legitimate area of expertise!" – Paid-up subscriber Bill M.
Porter comment: Bill, like I said, it cracks me up that this bothers anyone.
I'd wager that the vast majority of teachers who read my letter understand exactly what I mean. They know they must motivate their students to learn. And until that desire exists, there's no such thing as teaching.
That hurdle is even more prevalent and challenging when you're dealing in a subject like investing, where so many of your normal instincts will lead you astray and where there are so many emotions in play.
Open your mind, just a fraction, and I think you'll understand.
"I was a university accounting professor for nearly four decades and agree with your catch-phrase regarding 'there is only learning.' On the first day of class every semester, I routinely told my bright-eyed future accountants that I really couldn't teach them anything about accounting. (Cue questions on faces, frowns and furtive glances around the room.) BUT, I told them, I'm really good at 'helping you learn.' (Cue a mixture of responses... many recognizing the point... others with no clue.) The prospective professionals got the message, successfully completed the course and prospered. The others changed majors.
"While growing up, my high-school teacher Dad often told me that 'If the student hasn't learned, the teacher hasn't taught.' While I used that perspective as personal motivation, I soon realized that it was not my job to 'teach.' It was to 'help my students learn.' It is no insult to hear you say there is no teaching, just learning. Frankly, if there is no learning, there has been no teaching... and my Dad's bromide remains valid." – Paid-up Stansberry Alliance member Bruce B.
Porter comment: That's exactly right, Bruce. I'm glad you got the message.
"Porter, you and Buck are awesome on the weekly Podcasts. We listen while driving up to Anchorage. Tell Buck to finish his series about 'Shields Held High.' You guys always give my wife and I cause for many belly laughs. Your sense of humor is full of honesty, sarcasm, and irony. And we always learn from your guests, and the questions from you and Buck.
"[Regarding Stansberry's] Credit Opportunities: I have 'learned' a lot about bonds. Why buy stocks when bondholders are first in line right? I skipped some of your recommendations, kept some like Sears that seems to be coming back and have done well with the others. slowly building a strong ladder of bonds along with the World Dominators, and Steve's highly recommended China trade. Keep up the good work.
"There is only learning and listening, you can teach all day long, but if the students mind has not slowed down enough to focus on what you are trying to place in his cerebral cortex, you are peeing in the wind." – Paid-up subscriber Robert W.
Porter comment: Hi, Robert! Thank you. That's high praise. And it means a lot to me that folks are able to use our work successfully. Thanks for letting me know.
"Dear Porter, after 'teaching' for 14 years, I've learned that teachers are simply facilitators of education. Granted some are better than others, I just try my best. Nice quote!" – Paid-up subscriber Ed E.
Porter comment: Ed, Thank you! I'm very glad that you got the spirit and meaning of that catch phrase. It seems obvious to me... but some folks clearly don't get it.
Regards,
Justin Brill
Baltimore, Maryland
May 31, 2018