Sunday, November 27, 2016

Trump's Thesis on Jobs and Trade Restrictions


Trump says he will cancel trade agreements on his first day in office as his anti-trade approach to bring back jobs rhetoric is supported by his voters.

We live in interesting times as the Republican party has been pro trade and anti trade restriction since Ronald Reagan was President. We will see how this issue plays out as the interests of the business wing of the Republican party are at odds with Trump and his voters who believe he will bring back jobs through trade restrictions. His voters are likely to be disappointed.

In reading the research, I find no credible evidence that significant job growth will be created by trade restrictions and barriers. The research I am referring to leans Republican. I also looked at the evidence on this topic from multiple points of view. Trump's argument on this topic appears to be the least credible I can find.

For folks who lean right that are interested in learning more about free trade and jobs, I would recommend the most well known Republican leaning think tanks, The CATO Institute (CATO) and The Heritage Foundation (Heritage). These organizations extensively cover this topic and have published Republican leaning pro trade arguments and research for years.

It will be interesting to see how the battle plays out within the Republican party.

For folks who would like to go beyond CATO and Heritage on this topic, feel free to reach out to me.  

Sunday, November 20, 2016

Trump's Economic Rhetoric

It is one thing to run a campaign based on misleading economic rhetoric about cancelling trade agreements, bringing back coal and manufacturing jobs, stopping companies from leaving the U.S., losing to foreign countries via U.S. trade deficits and restricting trade along with immigration to appeal to voters. It is another thing to govern. Campaigns are easy in comparison. Governance is hard even if you are prepared and knowledgeable. Trump is not. The Trump campaign can be likened to a dog that to its amazement catches the car - now what?
Trump, an opportunist allowed for the will of his voters to be voiced, ill-informed or not. This is dangerous. As Churchill once said, "The best argument against democracy is a five-minute conversation with the average voter." Trump, the opportunist stuck with simplistic ideas during the campaign and his voters took the bait.
The country and world are currently waiting for answers to what Trump's actual political and economic approaches will be. Given his lack of experience and policy specifics, there are questions everywhere about the effect of his Presidency on the future of the markets and economy both in the U.S. and the world. In the meantime, forward looking markets have already reacted and adjusted to what the currently perceived forward economic and financial future may hold for the U.S. based on Trump's campaign rhetoric and acceptance speech. The current forward looking economic and financial market assumption set will be impacted by his ongoing rhetorical comments, stated positions and will continue to adjust.
The markets are currently discounting (i.e. expecting) large amounts of U.S. government deficit/debt financed infrastructure spend, military spend and tax cuts that will benefit the owners of capital (banks, Wall Street and the 1 percenters). This is seen as a potential short-term economic positive for the economy and select sectors of the U.S. stock market but a big negative for the credit market. The markets are also discounting deportation and reduction in immigration, trade restrictions and deglobalization, which is seen as a negative for the economy. Institutional investors to some degree, rotated their bets post election day out of bonds (triggering and reacting to an increase in interest rates) and into select stocks of companies that are perceived to benefit from Trump's policies (e.g. commercial banks, finance companies, investment banks, construction equipment and supply companies and select healthcare providers, among others) while trading out of company equity that may be hurt by Trump's policies (e.g. multinational companies, and software companies among others). Key Trump appointments and comments that are interpreted as policy will continue to move markets in assets classes (stocks and bonds) that are already fully valued.
Should Trump supporters looking for change who bought into putting America first rhetoric and the past be happy? The answer is, probably not, given forward looking reality. In response to Trump's perceived policies and election results, interest rates have already increased and are expected to continue to do so thereby wiping out a significant amount of value out of the bond market. The combination of ongoing multi-year improving U.S. economic conditions (despite the contrary argument of the right) and massive debt financed Trump spending programs, have and will continue to drive interest rates higher resulting in borrowers potentially being poorer and asset classes (e.g. stocks, bonds and real estate) potentially facing downward risks/adjustments due to current full valuations and higher discount rates. If you are a borrower, worker, industry or region (e.g. household mortgage borrowers, the home building industry or U.S. government) this is a negative which is set to get bigger. In the week that followed the election for example, U.S. mortgage rates increased about 50 basis points due to Trump's perceived economic policies which triggered an approximate 9% decline in U.S. mortgage applications.
In response to interest rate increases due to parity relationships, the U.S. dollar has also increased in value and is expected to remain strong, thereby hurting revenues and earnings of U.S. exporters (e.g. manufacturers, tourism related businesses, U.S. multinationals, software and education industries, among others) and the workers employed in these industries. This is a significant headwind that is expected to persist.
Trump argued on the campaign trail and his supporters believe that trade deficits hurt the U.S. and its workers. Trump's stated position of deficit/debt financed government spending which has already increased interest rates (and will continue to do so) in turn increases the value of the U.S. dollar due to parity relationships. Increases in the U.S. dollar increase trade deficits as foreigners spend less in the U.S. (because American goods and services are more expensive for them due to dollar strength) and Americans spend less at home and more abroad (because foreign goods and services are cheaper for them in U.S. dollars). This in turn hurts U.S. companies and workers and helps foreign companies, economies and workers. Trump's simplistic arguments and beliefs lose credibility when matched up against actual economic and market fundamentals. His supporters will not necessarily be better off and may very well be further damaged. Change is in this case is complex and arguably negative for his voters.
Can tariffs and trade barriers work for U.S. workers? The answer is complex but likely no. A credible argument can be made that job losses will occur in U.S. businesses and industries negatively impacted by imposition of trade barriers put in place by foreign countries in response to Trump's actions. China has already indicated they will do this. U.S. Jobs losses triggered by international reaction to U.S. trade barriers offset U.S. jobs protected by trade barriers. Costs are also increased for consumers. The U.S. learned this hard lesson due to similar actions by president Herbert Hoover that significantly contributed to the U.S. depression. Let's hope Trump is able to recruit sane economic policy advisors and does not take extreme measures here. The jury is still out. His simplistic rhetoric and action, if it occurs, does not match up with reality setting up disappointment for his supporters who are negatively affected here and also poses risks for the economy.
Can Trump stop companies from leaving the U.S.? The answer is probably not due to a range of political and economic factors as well as knock-off effects. At the most basic level, business enterprises tied to the global supply chain have the ability and flexibility to adapt to available alternative global business opportunities where they weigh risks and returns based on long term investment decisions (measured in years or decades) that go beyond the next four year U.S. Presidential election cycle. Businesses affected by such restrictions, operate to produce returns for owners of capital as opposed to workers and operate on a global scale. Priority of owner interests, long-term investment strategies, flexibility and global supply chain reality will drive their decisions and override this restriction.
Finally, the economic forecasting community has updated its forecast of the U.S. economy post Trump's election and the new consensus for U.S. GDP growth remains unchanged at approximately 2%. In other words, economic forecasts of 4% to 6% GDP growth put forth by Trump supporters are not credible. High profile institutional investors have now weighed in on Trump's presidency and resulting forward looking economic/market conditions. Ray Dalio of Bridgewater (a large hedge fund manager) made comments about Trump's perceived economic approach that skewed probabilistically positive on a short term basis. Bill Gross (the world most famous bond manager) who made negative comments about Trump's economic approach, said that workers will not benefit by his policies and that Trump will be a one term President. Similar to Gross, Jeremy Grantham's GMO ( a large global fund manager) indicted that given today's low yields and high valuations across almost all asset classes, there are particularly no good outcomes available for investors.
It remains to be seen who Trump appoints as key economic advisors and if he is up to the task of governing in an economic world that is far more complex than he and his supporters demonstrated thought process. His supporters are ill informed. He is inexperienced and will have to prove himself. Given the misleading and simplistic economic rhetoric he has put forth, there is a large gap between his rhetoric and reality. His voters face a future where the expectations tied to economic promises made to them will not be met. Over the longer term, it will become clear that change for change sake is disappointing as change has consequences beyond the rhetorical arguments. Trump's populist rhetoric is anti trade-globalization which is the antithesis to the traditional Republican global pro trade approach. The markets are looking ahead to see how this issue is resolved. For now, Bill Gross's thesis appears to be the most credible and Trump's honeymoon with his voters appears to be to short lived.
A Brief Note on Local Conditions

I am writing from Las Vegas, NV. The Las Vegas economy is primarily based on two industries, gaming and real estate. In terms of thinking about interest rates, trade and dollar strength, Las Vegas Strip gaming would be hurt by strength in the dollar due to its impact on significant international visitation and spend along with domestic tourism spending being redirected to non domestic markets. Trade restrictions could also hurt the industry. The gaming industry could also be hurt by interest rate increases due to balance sheet debt. Time will tell but it is worth noting that MGM's (the largest casino operator on the LV Strip) CEO, Jim Murren endorsed Clinton based on economic rational along with other factors. Rate increases may also be negative for the real estate industry in general. We will have to see how this plays out, but gaming and real estate stocks were negatively volatile immediately post election.

Wednesday, August 24, 2016

Support for Hillary Clinton


It would be easier to stay quiet and privately cast my vote in November given that many of my business  and other relationships are Republican. Due to my level of conviction and importance of the presidential election I am writing for the first time in my life about who I will vote for president. I will cast my vote for Hillary Clinton. I believe Clinton has the experience and the national-global relationships to be an effective president. Clinton has done a significant amount of positive work on behalf of the people of the United States and the world, while serving in public office as well as people in need through the Clinton Foundation.

She has impressed me as a strong leader during her long career. More recently she has demonstrated significant leadership and relationship building skills during the current campaign as evidenced by the depth and breadth of her campaign organization and the team of high quality individuals she has assembled. She has also been endorsed by leaders that I deeply respect. As an aside, I also appreciate the fact that she has not turned over her campaign manager three times in recent months. I was very impressed with the professional organizational level of the Democratic convention as well as the overall positive-hopeful tone and message. The convention audience and platform was diverse and reflects the long-term demographic trend of the country. The campaign message of "We"  as opposed to "I" speaks to the spirit of cooperation and community and the fact that significant accomplishments come from groups of people who work together. I believe she possesses and has demonstrated the necessary attributes to serve as President of the United States.

Clinton has published detailed policy information and has stayed the course of sticking to her agenda during the campaign. I agree with the majority of her policy agenda and understand that implementation will be influenced by control of the U.S. Congress. I believe her Vice President is an experienced high quality man of character.

Her opponent who is not qualified to be president has run a disastrous campaign that appeals to the worst instincts in people. In the current fractured, hostile and tribal political environment she is winning the race by a significant margin as the voters get a good long look at her, her opponent and Republican party. Despite kid like taunts and the daily ignorant display from her opponent, she has maintained composure. My effort now is to do all I can do to get the vote out in an effort to elect the first women as President of the United States.

Sunday, August 14, 2016

Trump Makes Race More Competitive in Select States


The race tightens in traditionally red states like Arizona and Utah among others with Trump's poll deficits widening across the country. Battleground state deficits also increase for Trump. The GOP convention bounce is long gone as Trump displays daily ignorance and negative traits on the campaign trail that turn off the center and others. In response Trumps blames the media. Voters have a hard time imagining Trump as president except for his most ardent supporters who appear to be displaying cogitative dissonance.
No surprise here as Fox cable TV casts doubt about the polls in their mantra to their rightwing audience along with the other serious issues the entertainment network faces. The reality here is that Fox has zero credibility on this issue owing to the consistency in poll results among a wide variety of independent pollsters and the fact that the network's talking head/pundits batted zero percent in their 2012 prediction of a Romney victory. On the opposite end of the forecasting credibility spectrum is a statistician from the University of Chicago by the name of Nate Silver. In 2012, Silver correctly predicted the winner of all 50 states in the Presidential election after going 48 for 50 in 2008. Believe it or not, Silver actually based his forecasts on empirical-analytical techniques and no doubt humble non hedgehog like hard work. Silver is not perfect but he has gone two for two in his presidential general election predictions. Based on my recollection, Silver was consistently criticized by Fox during the 2012 presidential campaign cycle. Silver's recent prediction models  indicate that Trump has an 80%+ to 90%+ probability of losing the race. There is a way to go to election day and things can change but as of now the situation now looks grim for Trump and his followers who are in denial. Elite members of the GOP who have not defected from the party or Trump are thinking about their options, and to say the least, the future looks dicey.

Other Campaign Musings
Trump recently rolled out the long standing standard Republican economic message in a teleprompter speech that sounds like it was written by the Heritage Foundation (the conservative think tank) and Arthur Laffer, the former member of Reagan's economic advisory team and author of the Laffer curve. In case you missed it, the Laffer curve gained prominence during the Reagan administration as a justification for GOP economic dogma. The Laffer curve is a representation of the relationship between rates of taxation and the resulting levels of government revenue. Laffer curve theory says government taxable income changes in response to changes to the rate of taxation. The Laffer curve is used to justify the argument that tax cuts help the economy and increase tax revenues. (1) Part of the trickledown theory of economics. In general, economists have found little support for the claims here. The Laffer curve is controversial to say the least. Folks on the right argue for tax cuts per GOP economic theory. For folks that make right wing economic arguments to justify the core of their political/economic philosophy, it would not be a bad idea to learn the basic theory here (both pro and con) that is the basis for their argument, if they have not already done so. An easy place to start is by googling the topic. It is hard to say how many right wing folks who make or believe in the low tax increases income tax economic argument understand the basis for the argument (i.e. the Laffer curve)? I have an opinion here, but I will keep it to myself.  

Trump's heated rhetoric aimed at non-college graduate white victims of globalization is not credible as it avoids deeper and bigger issues that swamp his rational ( I use the term loosely here) and 4 year U.S. presidential cycles. The concepts include the long-term multi-year worldwide labor arbitrage and automation trends that will continue to wipe-out jobs for non-skilled workers in the U.S. and abroad. The U.S. continues to fall in worldwide rankings of the top countries for K - 12 educational achievement (a serious problem in a long-term high skilled job environment). The U.S. now ranks about 30th in the world. Countries at the top of the world include China, Finland and Korea, among others. The world and U.S. economy will continue to demand highly skilled labor that requires education. Occupations that do not will continue to wither or go out of existence killed off by automation and jobs that can be performed anywhere due to modern day logistics and communication systems, among other factors. The GOP and Trump  continue to pander to their audience by blaming teacher unions and trade/globalization. Not long ago the GOP supported globalization. But today the party is a mess that arguably may have seen its best days. Credible experts close to the issue know that bringing back low skilled jobs is not easy or likely. Trump's rhetoric avoids the key issues here and does no more than feed anger, without helping the people who truly need help here. Trump argued for less regulation in his recent economic address at the same time arguing for more regulation here that would stop or limit companies from moving overseas. Good luck squaring the logic here.
My guess is that Trump will not make his tax returns public. I obviously do not know the details and cannot say for sure, but given the fact that he is in the real estate business and by outward appearances not afraid of leverage and bankruptcy, I assume that he has paid little tax owing to real estate related tax deductions. I also assume he has followed the tax code. This is based on guesswork and personal opinion only so read with caution realize there is more to this issue than I am addressing here along with the fact that I could be wrong.

Trump's argument that the U.S. economy is dismal is not credible as are his recent stock market comments. Ditto for the arguments about government debt levels and cause & effect. Facts are not likely to change any minds here as wild *ss uninformed opinions have been set for a long time.
Trump's campaign hits new lows but my best guess is that we have not seen the bottom. In response his actions and rhetoric get crazier. At this point I have run out of words to describe the daily ridiculousness. It's scary!  Serious issues exist here.

Have a nice rest of your summer, now back to Copacabana.


(1) Sourced from Wikipedia.

Sunday, July 24, 2016

Scary

I watched small segments of the Republican party convention and some of Trump's acceptance speech. As much as I have tried to tune it out I have followed the Trump campaign. Over the years I have voted for both Republican and Democratic candidates. Most of my career has been in business. I have also worked in local government. My employers and clients have been both Democrat and Republican. I lived in Asia for about 2 1/2 years and have traveled and worked in about 20 countries. My friends, associates, business and other relationships consist of people with a wide variety of business, ethnic, economic, educational, geographic, cultural  and religious backgrounds. I have worked for and on behalf of men and women, the public at large and a wide variety of people who have little if any power or resources to folks that have vast amounts. If you know me well you know I am a big reader in a variety of subjects. For several years I authored economic, industry and public company research for professional investors.

Over the past year I have listened to Trump denigrate women, single out Muslims, insult Mexicans/Mexico, handicapped people and the Pope among others along with anyone else who disagrees with him in the worst way possible. His remarks and behavior are very disturbing. At this point in the campaign his behavior is well documented and in my view reaches the lowest of lows. He is not fit to be President of the United States and I will not vote for him.

On the policy front, the odds of him implementing his political rhetoric as his stated approach is at best simplistic and at worst a lie. On this front he has demonstrated again and again a complete lack of knowledge of issues he raises. I do not know if he is a reader but based on his arguments he does not appear to be. The facts and reality are not the point for Trump and his supporters. The examples are many and I will touch on a few.

On trade, if you are going to address the issue you have to understand and think about the concept of comparative advantage. I learned about the concept in the first one or two economic classes I took in undergraduate school owing to the fact that this is a basic core economic concept. As far as I know, he has not thought about this as I have not heard him mention it. I may be wrong, but I do not get the impression he has any understanding of this.

On bringing back jobs in the coal industry, to understand the probability of this outcome you have to understand the concept of the energy complex and how pricing between energy commodities (i.e. natural gas, coal, oil and alternatives) influences supply and demand for each commodity. If you attempt to understand this and have some level of intellectual curiosity you begin to understand that the long-term pricing for natural gas (among other factors) influences the demand for coal which in turn influences the demand for coal workers. Trump's rhetoric does change this concept. This concept has a bigger long-term influence on demand for coal and therefore jobs in the coal mining industry than Trump can ever hope to have. If he does not recognize this basic fact he is completely lost. On the other hand, if you assume he in fact understands this, then you have to conclude he is completely misleading the coal miners and the voting public based on his rhetoric.

Trump's rant about the wall across the Mexican border is more about prejudice than reality as it makes little sense. So much has been said here I have little to add except to say if you truly care about this issue and  want to understand  it, at a minimum, I would recommend looking at cross border trade flows, immigration patterns and historic relative economic prosperity over the years on both sides of the border. This level of thought and complexity is not discussed by Trump and his supporters. Wise folks should consider facts that do not support their opinion or Trump's dogma. How much are you willing to bet Trump and his supporters will do this? I could go on and on but will not. Trump's campaign is not based on about facts, complexity, reality or substance and instead is based dogma that appeals to the worst instincts in our nation's history.

His acceptance speech was the darkest speech I heard in my lifetime. It confirmed my worst fears about Trump and brought back the memories of the worst authoritarian dictators in the century. If he is elected the U.S. and world will be a much darker and scarier place in my humble opinion.

Finally, look things look decent here in the U.S. contrary to Trump's questionable opinion.

Thursday, May 26, 2016

Costco - Mr. Market Miscalculates

The book title "Mr. Market Miscalculates," written by James Grant came to mind as I witnessed the strong positive market reaction to Costco's recent earnings release.(1) This came after the pros sold off Costco in earnest during recent weeks in front of the earnings release due to challenges reported by several other well known traditional land based retailers and the assumption that Costco was suffering a similar fate. The market misjudged Costco as reported results were better than expected. Costco indicated that customer behavior was unchanged.

My local store visits prior to the earnings release revealed no significant changes in visible metrics like store traffic and parking lot occupancy. Gasoline lines were also present as they have been for months. In short, I observed no change in a business with ongoing robust traffic and significant customer loyalty. Customer loyalty is apparent as evidenced by the consistent significant check out lines in my local stores and the published 90% membership renewal rate. As a customer you clearly understand why you renew each year which may or may not be the case for the professional money management crowd. If you own a piece of this business via the equity market it pays to know something about its competitive position, in my humble opinion. Being a customer is helpful on this front. If you are a friend of mine you already know that I am a customer and exhibit an obnoxious pride in ownership as I acquired my equity stake at just under $30 per share more than a decade ago. You also know that I have been a buyer in this stock for years. My latest buy before the earnings release was in the low $140's which meant that the market was pricing the equity near estimates of the intrinsic value of the company based on forward assumptions I was willing to bet on. Costco remains my biggest position.

In September 2015 I disclosed many of my holdings. I continue to hold onto most of the names mentioned although the position sizes have changed. Recent buys include Costco (discussed here) as well as Disney and Apple acquired post the most recent company earnings releases that disappointed Wall Street.



(1) James Grant, Mr. Market Miscalculates, November 2008

Sunday, October 11, 2015

Investing is a Personal Journey

What do you want to do? What do you want to own? What is your approach? These seem like simple but are actually complicated questions. Although you and I can study the processes of great investors like Warren Buffett for example and even own some of the same securities, we cannot be Warren Buffett as we have to follow our own journey and live with the results. The investing world is outcome oriented, but to be successful over time an investor's decision making process must be personal, disciplined, adaptable and process oriented.

Michael Mauboussin illustrated this concept in a 2004 research paper where he categorized the process used to make decisions (in the probabilistic field of investing) and outcomes as; (a) good decision making process = deserved success or bad break; or (b) bad decision making process = dumb luck or poetic justice.(1)

To survive over the long-term, a successful investor's decision making process and overall approach must fall into category (a) which says bad breaks will come and go but deserved luck will eventually emerge over time. So if you have not done so already, you will need to develop a sound process, knowing that your short-term results will not be indicative of long-term results. Since you are completely responsible for your results over time you must take this to heart in your decision making process.

In an age of information overload, you must learn to source and process information effectively as well as focus only on what is truly meaningful. This is an acquired skill that is influenced by your investment process, background and personal circumstances.

Through experience as an individual investor that will include losses and setbacks you will have the  opportunity to figure out what advantages and disadvantages you have compared to professional investors on Wall Street. It is important to have this awareness or to develop this understanding. While individual circumstances vary, there are some advantages and disadvantages generally common to all individual investors which include but are not limited to:

Advantages

1) Ability to enter or exit a position or market at your will assuming you have staying power with your capital. Professionals do not have this level of flexibility;
2) option to hold onto investments for the period of time you choose (minutes, hours, days, weeks, months, years and decades, etc.). Professionals do not have this flexibility due to the fund flows of their investors which they do not control, among other factors;
3) ability to not be focused on meeting or beating performance benchmarks in the near term or over time; 
4) flexibility to pursue a strategy that matches up with your strengths, weaknesses and circumstances. Professionals cannot do this as they must live within the constraints of their asset class and investment mandate; and
5) ability to self critique your process and performance in private along with the ability to avoid chasing performance.

Disadvantages

1) In general, less skill and training;
2) less access to timely and quality information along with less knowledge about how to use it;
3) potentially higher information and transaction costs;
4) typically less access to company management teams, experts and centers of influence, among other factors; and
5) performance risk that exists due to lack of sound approach and quality decision making.

My recommendation is that as you develop, alter or refine your process-approach you take the above and other personal circumstantial issues into consideration. Doing so will increase the odds of  achieving better long term results. There is also a massive amount of information available on investment approach and process that I will highlight over time. Savvy consumption and application of this information is critical to long term success as investor. The journey is yours.

(1) Michael J. Mauboussin, "Decision-Making for Investors, Theory, Practice and Pitfalls," Legg Mason, Mauboussin on Strategy, May 24, 2004.