@theMarket: The 'Apprentice' Manages the Markets
Where to begin? The China trade deal, the UK elections, the impeachment of the president? Let's not forget the agreement on a new North American trade deal as well. It was a heck of a week and Donald Trump flawlessly controlled the news flow.
Boris Johnson, the Conservative Party leader and prime minister of England, won the greatest majority since Margaret Thatcher on Thursday evening. That is good news for the United Kingdom. His victory also supercharges hopes that a Brexit deal can finally be accomplished in 2020. The British pound skyrocketed over 3 percent on the news, and the London stock market was up 2 percent as well. Good news.
The replacement for NAFTA, called the United States-Mexico-Canada Agreement, or USMCA, is also moving forward after over a year of negotiations between the Democrats and the White House. Environmental issues and U.S. safeguards concerning our labor force that worried the Democrats seemed to have been ironed out. Another good news development.
The next step will be for the Trump administration to submit ratifying legislation to Congress, so the new trade deal can finally be passed into law. After all the claims that NAFTA was the worst deal of the century by the president, the new deal is substantially the same as the old one. It may mean 50,000-75,000 additional jobs for the American auto sector over time, and some of our dairy producers will have a little more access to Canada. Overall, the deal, while positive, is simply another example of smoke and mirrors but should play well for both sides in the 2020 election campaign.
But the real news occurred simultaneously — the impeachment vote of the president and the on-again, off-again China trade deal. Announcements of both events occurred on Friday morning, almost at identical times. The Democratic-controlled House Judiciary Committee voted to proceed with the impeachment of President Donald Trump. He is only the third president in the history of our nation to be impeached. It was no accident that the House Judiciary Panel's vote was delayed until Friday morning when prime time television viewers were at their highest.
But the Apprentice was working behind the scenes. On Thursday afternoon, when the impeachment hearings at the House Judiciary Committee had reached a crescendo, Trump and his men met to ostensibly decide on whether to implement a new round of tariffs in the China trade war this weekend. Shortly thereafter, Trump once again announced (he did the same thing nine weeks ago) that a deal had been agreed to by both China and the U.S. The stock market exploded on the news and finished the day a percent higher. The event was pure theater.
Trump's strategy on Thursday, in my opinion, was to pre-empt the Judiciary Committee's televised vote on impeachment and switch the news focus back to him and to a trade deal, no matter how meaningless. But the Dems outsmarted him. They postponed the vote until Friday morning.
Wall Street (and the nation) has been snookered too many times by Trump and his tweets of misinformation and "fake" announcements on the trade deal to take anything at face value. At this point, Trump's words carry no weight, other than as a reason to move stocks up or down for a few hours. On Friday, investors were going to wait and see. There is no deal, they reasoned, until the Chinese agree, and the papers are signed.
Friday morning, the Chinese Ministry of Commerce in a press conference in Beijing, announced that there was a deal from their side. Trump confirmed the agreement a few minutes later in a tweet. Both sides said the U.S. would be rolling back the tariffs already in place over a period of time. The tariffs scheduled for Dec. 15 would also be canceled.
Investors were so busy following the trade news that hardly anyone noticed the House vote. Mission accomplished as far as the president was concerned. While the announcement is good news from a business sentiment point of view, the actual details will likely have little impact on the economy or earnings. The U.S. will still keep 25 percent tariffs on some imports and 7.5 percent on others. It does, however, give Trump another "victory" to run on in his 2020 campaign.
As for the markets, the final announcement proved to be less than bullish for the markets. Most investors saw right through the Phase One deal. As a result, markets reacted with a typical "sell on the news" event. By mid-day Friday, the markets were all down modestly. And so goes another day in this market. I still believe that we will continue to move higher into the New Year. Next year, however, may be another story.
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The Independent Investor: False Promises Hit Farmers, Manufacturers
The very people who were supposed to benefit from making America great again have become victims of the man who promised them so much but has delivered so little.
While the Rust Belt states of Michigan, Wisconsin, Indiana, Illinois, Ohio and Pennsylvania teeter on the edge of recession, those in the agricultural sector (also Wisconsin, as well as Georgia, Nebraska and Kansas) are already facing an increasing number of bankruptcies. These are the swing states that carried Donald Trump to a win three years ago. They are now feeling the brunt of his trade, tariff, and wholesale rejection of climate change.
Farm bankruptcies through September 2019 are up 24 percent versus last year. Suicide rates are rising among small farmers, and many towns that are dependent on the farming community are fast becoming ghost towns. Even Trump's own Agricultural Secretary, Sonny Purdue, said he wasn't sure that the family dairy farm could survive in the future. At least he has the courage to tell the truth.
Americans, especially those who live in urban/suburban areas of the country, have this mythical myopia when it comes to the nation's agricultural sector. Most think that the small family farm is what feeds us, and what surplus exist are sold overseas as exports. I am here to tell you that all of that claptrap no longer exists and hasn't for decades.
Global competition, Federal government policy, and big business has changed the fabric of the farming sector. Back in the 1970s, Federal farm policy sent an unmistakable message to the nation's farmers to either get bigger or get out of agriculture. A decade later, we witnessed a quarter-million farm foreclosures. Overproduction, a grain embargo against the then-USSR, and high debt decimated the industry. Today, 80 percent of American farmland is owned by "Big Ag."
In the last two years things have gotten immeasurably worse. Trump's tariffs on China elicited a predictable response. Chinese tariffs were levied on U.S. agricultural imports like soybeans and corn. Since then, the Trump administration has given the industry $28 billion in financial assistance of which at least 80 percent of that is going to big conglomerates, not the small farmer.
At the same time, thanks to climate change, the last six years have produced increasingly unstable weather patterns resulting in floods, droughts and debilitating crop failures. The administration's continued denial of these huge risks to our food production have been ignored. In fact, recent policies, in my opinion, have actually made our climate far worse.
Given the facts of farm production in this country and throughout the world, the small farmer of old is heading into extinction. In its place have risen boutique farms that are producing crops and food stuffs for a large population of consumers who buy direct and live close by. There are no or limited exports from these establishments.
A similar trend is occurring in the nation's manufacturing sector. Countries such as Australia, China, South Korea, Argentina and Mexico produce steel, aluminum, cement and a host of other manufacturing products of the same quality (but at lower prices) than the U.S. can produce. This is not a new phenomenon, but Trump's trade wars have made it infinitely worse for our manufacturing workers. And no one is talking about government assistance to this sector.
Tariffs may have prevented the manufacturing sector from total extinction, but they haven't fixed what is wrong with the sector either, nor can they. It is the same story with farm subsidies. They won't and can't fix what is ailing the family farm. The tariff argument is an old one: we need these industries for our national defense in the event of war. While that argument does carry weight, it does little to help our manufacturing and farming sectors, which continues to face global overproduction of just about every product they make.
As in farming, some would like to think that Trump's policies will not only save but reverse the decline in manufacturing. That is as realistic as thinking of today's workers as burly-armed men and women (as in WW II posters), when the reality is that today's manufacturing workers are far more likely to be sitting behind a computer screen than toiling with sledge and hammer beside a belching furnace.
Sometimes, the cruelest thing one can do is give a person (or in this case, an industry) false hope. Trump, it appears, has done just that. Most people realize you can't turn back the clock, no matter how hard you try. It is at the root of what Donald Trump promised and failed to deliver. The America he wants is an America that no longer exists, if it ever did.
The America I live in is always changing, growing morphing into something new and different. Sure, it has its problems, and even the nature of these challenges' changes over time, but by and large, I wouldn't want to live anywhere else. Would you?
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The Independent Investor: Truth About NATO & Defense Spending
While it would appear that President Donald Trump left the London NATO Summit this week empty-handed, the truth is he has already achieved what several presidents before him could not. Unfortunately, it is a shallow victory at best.
Just a week ago, in preparation for President Trump's visit, the North Atlantic Treaty Organization announced a change in the funding of its budget. It agreed to reduce the United States' contribution to the alliance (now 22 percent) and redistribute the costs to other members. As a result, the U.S. and Germany will now pay the same amount. Each will contribute 16 percent of NATO's central budget.
The problem is that NATO's central budget, which only amounts to $2.5 billion annually, is just a drop in the bucket when thinking about the ongoing defense of Europe. The alliance was formed after World War II as a means to counter the Soviet Union's growing domination in Europe and the rest of the world.
The idea of a collective defense — "One for all and all for one" — was a good one at the time. The assumption was that each nation member would see to its own defense spending, while contributing to the direct budget of NATO, which was miniscule in comparison.
Over the decades since its founding, it became apparent that, with the exception of the United States, most of the 29 members of the alliance were not spending nearly enough on their own defense readiness. The issue came to a head by 2014 when the members agreed that they would increase their own defense spending to 2 percent of their Gross Domestic Product (GDP) no later than 2024.
Therein lies the beef, since only nine members have reached that goal so far. In the meantime, the U.S. spends 3.4 percent of GDP on defense, which amounts to roughly 69 percent of overall defense spending among the NATO alliance. This year alone, the U.S. will spend $693 billion. That makes the amount members spend on the NATO budget mere peanuts in the grand scheme of things.
The 2014 agreement, however, is really a "paper tiger," since there is no penalty if a member fails to reach the 2 percent target. To be fair, most NATO members did increase defense spending this year, which makes it five years in a row. However, that was not nearly enough in President Trump's opinion.
"ALL NATO NATIONS must meet their 2 percent commitment, and that must ultimately go to 4 percent," was the tweeted message dictated to NATO by our commander-in-chief. That might be easier said than done, in my opinion. This week, the president has threatened additional tariffs on European imports if NATO members do not comply.
To be fair, our European allies are democracies and cannot simply up their defense spending without the agreement of their voters. At the same time, most Europeans have far less appetite for defense spending in general than Americans.
In addition, given Trump's overwhelming lack of popularity within European nations, it would be practically impossible for EU leaders to convince their citizens to increase defense spending based simply on Trump's demands. In fact, it is likely the opposite would occur.
That leaves one obvious avenue left to force a solution — threatened U.S. departure from NATO. The ramifications of such a move on Trump's part would go far beyond economics. I am sure that possibility is the stuff of nightmares that may keep our military establishment up at night. Many politicians on both sides of the aisle might also have a problem with such a move. And yet, I would not put it past this president to venture down that road, if only as a negotiating ploy to get some of what he wants.
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The Independent Investor: Will Santa Satisfy Retailers?
Ready, get set, go! That's what the nation's retailers are hoping you will do, preferably before your Thanksgiving dinner has barely been digested. Black Friday has become Black Week, while holiday shopping now officially includes the entire months of November and December.
In 2019, retail sales nationwide are expected to increase by 3.8-4.2 percent from last year, according to the National Retail Federation (NRF). That would amount to a total of between $727 billion to $730 billion being rung up in the nation's cash registers. That's not a bad haul when you realize the average holiday sales increase over the last five years was 3.7 percent.
Those numbers are even more encouraging when you realize that this year, there are six less shopping days until Christmas and Hanukkah. Driving theses sales is a healthy consumer, which is important, since consumer spending is still the primary engine of America's economy.
Consumers are in good shape financially, thanks to low unemployment, higher wages, and a record high stock market. It is a heady brew that gives shoppers an extra jolt of good cheer and could translate into more generous gifts for friends and loved ones.
The NRF predicts that the average Americans plans to spend $1,047.83 this year, which is up 4 percent from last year's $1,007.24. Breaking those numbers down into three groups: the average Joe/Jane will spend $658.56 on gifts for family, friends and coworkers. Holiday purchases such as food, greeting cards and decorations will total $227.26 more and other non-gift purchases for themselves and their families will add an additional $162.02 to the total.
While gift splurging is up, the costs of Thanksgiving dinner will drop for the third year in a row. You can thank Thomas the Turkey for that. The cost of a 16-pound turkey is down 3 percent to $21.71, on average, nationwide. It is estimated by the American Farm Bureau Federation that the whole meal could average less than $5 per guest, if you stick to the basics like stuffing, sweet potatoes, rolls, peas, pumpkin pie, etc.
Thanksgiving Day will still register as the worst driving day of the year, but for the second year in a row, my wife and I have smartened up. We are taking the train roundtrip to New York City and spending just enough time with our loved ones to stuff our faces and maybe lose another chess game to my 7-year-old grandson.
We don't know yet what impact President Trump's tariffs will have on spending and prices, and we probably won't know until Dec. 15. That is the date when the next round of tariffs on Chinese imports is slated to take effect. Apparel, footwear, electronics and more will be subject to these new duties and it could dampen consumer enthusiasm just as holiday shopping swings into full gear.
So far, the message I keep getting is to "shop early." I'm not sure if this is just another gimmick to get me out and about spending money, or if retailers are warning me that if I procrastinate, the special gift I'm looking for will be either sold out or cost a heck of a lot more because of the tariffs. Either way, one thing is clear, Black Friday has now morphed into "Black Week" and it is in full swing right now.
In any case, no shopping for me on this Turkey Day. As you read this, I will be ensconced among family members and friends, passing the gravy boat, and wishing all of you, my readers, a Happy and Thankful Thanksgiving.
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@theMarket: Markets Broken Record
As the Dec. 15 deadline approaches, investors aren't sure whether the next tranche of tariffs on Chinese imports will be raised, lowered, or delayed. Given the importance of this event, markets are once again stuck betwixt and between.
If this sounds like a broken record on the China trade deal, you would be right. We have been here so many times before that just about everyone in the worldwide financial community is sick of it. Nonetheless, hope springs eternal, or so it would seem, because, many investors still have faith that there will be a breakthrough sometime in the next three weeks.
A senior executive of the U.S. Chamber of Commerce, Myron Brilliant, who is head of international affairs for the chamber, isn't holding out much hope. The Chinese, he believes, are adamant that all tariffs must be rolled back before a deal can be struck, while the U.S. is just as insistent that won't happen. At this point, President Trump is now threatening to increase tariffs again if the Chinese won't relent.
In addition, it's a bad time for making trade deal decisions. The president is not a happy camper at the moment and everyone in and out of the White House knows by now that emotions play a large part of his decision-making processes. The two-week long televised hearings on the impeachment inquiry, the almost-certainty that the House will vote for impeachment, and the likelihood that this circus will continue into the New Year (before it is defeated by the Republican-controlled Senate) is not, in my opinion, going to lighten his mood.
And yet the war of words continues. Friday, President Xi Jinping of China, while greeting some international visitors, including Henry Kissinger, in Beijing, said he wants to come to a phase one agreement as long as the deal is on the basis of mutual respect and equality. The markets immediately moved higher after three days of losses.
While that cheered markets for a short time, the facts are that Xi has been saying the same thing for weeks. Note the words "respect," which is short for "stop bashing us, our companies, and our handling of the Hong Kong riots, Mr. President." "Equality" to the Chinese means "the U.S. must rollback its tariffs in exchange for a phase one deal." To me, there is nothing new here, just the same old song with a slightly different beat than last week.
As I wrote last in my last column, I have been expecting some congestion in the markets. The China trade charade is simply the excuse. We are overbought and extended, so a little pullback would be a good thing. This week the profit-taking has been minuscule, with the S&P 500 Index down less than 1 percent from the highs. That doesn't mean it won't correct further, but if the majority of market participants are expecting stocks to go one way, the chances are they will go the other way.
Let's give things another week or two to shake out before we start looking for that traditional end-of-year rally. Some might say that Santa Claus has already come to Wall Street, filling our stockings with capital gains from all these double-digit returns this year. With the Fed on hold, the economy still growing (even though the rate of growth is slowing), and most analysts and economists optimistic about next year, you could see further gains in the weeks ahead, unless Trump becomes the Grinch that stole Christmas.
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