Why Investors Should Fear Trump’s “Really Dumb Idea”

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
Steel_Machine_Factory

After eight years of subpar performance during the Obama administration, the U.S. economy has posted its best nine-month stretch of growth in more than a decade - even in the face of two devastating hurricanes.

Some of the credit goes to Donald Trump.

His pro-business policies - including deregulation and tax reform - have increased consumer and business confidence, as well as wages.

With interest rates low, energy cheap and corporate earnings up, many stock market investors have lately been asking, "What could go wrong?"

Then last week, Trump spoke - and tweeted - his intention to put a 25% tariff on steel imports and a 10% tariff on aluminum imports.

The Dow slid 600 points within hours - and finished the week down 3%.

For months, analysts have speculated about whether Trump is a real protectionist or - like many politicians - just a rhetorical one.

Now we know. He's the real McCoy. And that's not a good thing.

To those who are ignorant of both economics and history, protectionism sounds like a fine idea.

After all, every citizen would prefer that domestic sales accrue to local businesses ahead of foreign ones.

So wouldn't throwing up barriers to foreign competition mean stronger U.S. economic growth, more jobs and bigger corporate profits?

Fortunately, we don't have to speculate on these matters. History provides us with plenty of evidence. And the answers, respectively, are "No"... "No"... and "Yes, but..."

Let's start with jobs and economic growth. Last week, Trump said, "Trade wars are good, and easy to win."

He didn't cite an example. That's because there are none. Yet there is plenty of evidence to the contrary.

On June 17, 1930, for example, the U.S. government enacted the infamous Smoot-Hawley Tariff Act. It raised U.S. tariffs to record levels on more than 20,000 imported goods.

This populist legislation sounded appealing at the time, but it also helped create and worsen the Great Depression.

Foreign governments retaliated by shutting out U.S. exports. International trade ground to a halt. The world economy contracted 25%. And a quarter of Americans were thrown out of work - and onto bread lines.

This is something we want to emulate?

Trump claims that foreign tariffs on U.S. exports aren't fair. I don't disagree. But is anyone so naive as to believe that completely free trade exists anywhere in the world?

Yes, Europe imposes a 10% tariff on U.S. car imports. Trump promises "retaliatory tariffs."

Does that mean we're ready for Europe to slap the same 25% tariff on American trucks and commercial vans that we currently impose on theirs?

Also, let's not forget who pays U.S. tariffs: American consumers. Are you excited about the prospect of paying more for your Toyota sedan, Samsung TV, Corona beer or foreign-made generic drugs?

Remember also that tariffs favor U.S. companies that are unable to succeed against foreign competitors. That's why struggling companies always support them.

For example, many U.S. steel companies have failed to modernize and cannot compete against low-cost blast furnaces overseas.

Why should we reward these laggards by passing protectionist legislation that causes foreign governments to hit popular U.S. exports - like Cummins engines, John Deere tractors, Caterpillar bulldozers or Harley-Davidson motorcycles - with punitive countermeasures?

Foreign trade benefits us far more than it costs us.

The United States is the world's third-largest exporter. We are also the world's single biggest importer. Americans love Japanese electronics, European cars, French wines, Italian shoes, Swiss watches, Dutch chocolates and designer clothes made in Vietnam.

It sounds alarming when you hear that we buy more from the rest of the world than the rest of the world buys from us. But - unlike a household deficit - a trade deficit isn't a debt that must be repaid.

And it isn't necessarily bad. Here's a real-world example.

I do research for The Agora Companies, a privately owned, Baltimore-based publishing company that is one of the largest publishers of investment letters.

Most of our letters are printed by MPM Communications in Waldorf, Maryland.

We run an enormous trade deficit with MPM. We buy millions more in printing services from them than they buy in investment publications from us.

Yet it's a mutually beneficial relationship. We both profit from it.

Can what is true for companies also be true for nations? Absolutely.

Remember that nations don't trade with each other... individuals, businesses and other entities do.

What all countries want are economic growth, low inflation, a sound currency and rising incomes. And that's what international trade delivers: prosperity.

One final thought about what economist John Ryding calls Trump's "really dumb idea."

Trump didn't propose just arbitrarily slapping tariffs on foreign imports. He justified them in the name of "national security."

If the U.S. alters existing trade agreements for transparently false reasons, other nations will do the same.

So... back to our original question. What should investors worry about in this era of low inflation, cheap energy, strong job creation and record corporate profits?

How about a senseless trade war - started for base political motives, paid for by American consumers, to protect undeserving U.S. companies - that threatens to dampen economic growth and possibly tip us into the next recession.

Dumb indeed.

Good investing,

Alex

Thoughts on this article? Leave a comment below.

Verizon: No Trade, No Problem

Wall Street was apoplectic last week about Trump's proposed tariffs on steel and aluminum. So much so that an 8-month-old note to clients from Goldman Sachs' chief global equity strategist resurfaced. In it, he warned that, should a trade war commence, clients should invest in companies with large U.S.-based sales exposure - Verizon (NYSE: VZ) being one of them.

Last December, our very own Alexander Green just so happened to recommend Verizon to his True Value Alert readers. Here's why Alex thinks it makes a great bet...

Verizon, of course, is the nation's second-largest telecom provider and a world leader in broadband and wireless services, serving more than 115 million customers around the globe.

Last fall, the company announced flat quarterly earnings on a 3% increase in revenue. I know, that doesn't sound terribly impressive.

However, Verizon reported its first sequential improvement in services revenue in three years. And there are good reasons to believe we'll see better-than-expected growth in 2018.

Let's start by acknowledging that cell service has now become a staple good. With people fixated on their smartphones - and the list of things you can do with speedy wireless growing - demand is steady in good years and bad.

Moreover, while archrival AT&T is locked in a battle with the Justice Department over its planned acquisition of Time Warner, Verizon has been making some very savvy moves. It picked up valuable assets from AOL and Yahoo on the cheap.

It is also laying down more fiber in cities, improving its current 4G data services and setting the stage for an eventual 5G rollout.

Plus, management intends to cut $10 billion in costs over the next four years. That will help push the dividend - already ample at 4.7% - even higher.

A high yield, of course, can be a warning that the dividend is about to be cut. But Verizon has the cash flow and growth prospects to easily cover its payout.

I expect earnings to rise from $3.78 in 2017 to more than $4.50 in 2018. Yet the stock is inexpensive at just 13 times trailing earnings and only 11 times prospective ones.

In short, this is a profitable, growing and high-yielding blue chip with excellent short-term trading potential.

- Donna DiVenuto-Ball with Alexander Green

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