3/4/2018 Trump Stage 2; the good, the bad, and the ugly

Sector Model	XLP	-1.17%
Full Model	Date	Return	Days
BT	8/11/2015	-50.27%	936
TMK	11/23/2015	39.67%	832
NVR	12/16/2015	74.84%	809
CMP	2/19/2016	-5.01%	744
NVR	2/22/2016	82.21%	741
AMWD	3/17/2016	88.15%	717
CASY	5/12/2016	-0.78%	661
AEM	6/7/2016	-22.92%	635
ESRX	6/13/2016	-1.50%	629
AMED	6/16/2016	16.16%	626
FRO	6/27/2016	-43.21%	615
ASTE	7/12/2016	-1.40%	600
MFC	9/1/2016	44.82%	549
SFM	9/8/2016	30.28%	542
CFFN	9/12/2016	-2.59%	538
FOSL	5/11/2017	-4.43%	297
HIBB	7/25/2017	89.31%	222
FOSL	7/27/2017	25.00%	220
HZO	8/1/2017	38.38%	215
CMPR	12/27/2017	34.61%	67
(Since 5/31/2011)
S&P	Annualized	10.80%
Sector Model	Annualized	14.89%
Full Model	Annualized	14.51%
S&P	Total	100.03%
Sector Model	Total	155.63%
Full Model	Total	149.84%
Sector Model	Advantage	4.09%
Full Model	Advantage	3.71%
	Previous	2018
S&P	98.38%	0.83%
Sector Model	172.95%	-2.34%
Full Model	145.63%	1.71%

The Full Model is once again close to parity with the Sector Model, and the ultimate goal is for it to pull ahead.  The Sector Model is, and always has been, a benchmark to beat.

So much for the model.  What of the market?  The recent skittishness over tariffs needs some mention.

First, it’s premature.  Nothing has been written or put in place, yet.  The President has a habit of speaking before things are ready.  But the tariffs certainly are one of the few matters he has been consistent about for the past 30 years.  If he has anything to do with his own Presidency – there will certainly be tariffs.

We are now, therefore, entering stage 2 of his Presidency.

I’ve made two broad statements about a Trump Presidency.  The first was that his vision of mass deportation and tariffs could, if both taken suddenly and to their full extent, trigger a global depression:

http://market-mousetrap.blogspot.com/2015/08/8302015-why-trump-would-cause-another.html

That was August 2015; before we had heard all of his campaign promises.

When Trump was elected the following year, I made a somewhat more nuanced statement – that his stated promises were both good and bad, with the good coming before the bad:

http://market-mousetrap.blogspot.com/2016/11/11132016-hail-to-ceo.html

I concluded that note with this: “The first two years will likely focus on the pro-growth agenda Trump and Ryan agree on.  After that, it will be a contest between Trump’s bad ideas and Ryan’s good ones.  Who wins that contest remains to be seen – but Trump doesn’t like to lose.”

The good ideas are to cut taxes and regulations.  Both Trump and Ryan were in favor of these positives for the economy, and they carried them through.

The bad ideas are Trump’s opposition to reforming entitlements, his opposition to an immigration compromise, and his opposition to free trade.

First, entitlements.  If you cut taxes you will cut revenue.  To make that work you have to cut entitlements.  If you don’t cut entitlements you blow up the budget, double deficit spending, and create inflation.  The Fed is already struggling with raising interest rates ahead of inflation now.  The inflation hasn’t hit yet, but once it hits in a year or two it will be difficult to control.  By that time the next Presidential election will either be over or close.  If it hits after the election Trump could win re-election.  If it hits close to the election Trump could still win re-election.  By that time inflation will be baked into the cake.

Second, immigration reform.  Regardless of what we think of immigrants, they do work, and are a net plus in the economy.  Cut workers and consumers and you cut the economy.  Doesn’t matter whether you are a supply sider or a demand sider.  The economics is the same: less workers and consumers, less economic growth.  Deport them fast enough and you can create an economic contraction right when inflation kicks in.

Remember stag-flation?

Yeah, Carter.

But it gets worse:

There’s also that final nail in the coffin – Trump’s new tariff toy.  It seems that a President doesn’t need congress to raise tariffs.

Tariffs are a tax on you.  If he raises a 25% tariff on steel, then you, dear American consumer, pay 25% more for steel.

A tariff is basically the same as the government sending an agent to any business offering a sale, and arbitrarily collecting what you could have saved on the sale.  Imagine a Joe Furniture Spring Sale of 25% off all merchandise.  You drive across town, and find that although the furniture really is on sale, you don’t get to save any more because the government is charging you the difference.  So that 1000 dollar table you thought you could get for 750 dollars you still have to pay 1000 dollars for.

But won’t that help local steel workers?

Yes, but for every steel manufacturer who benefits, three other companies that make goods with steel will suffer.

George W. Bush tried a tariff on steel in 2002 and had to rescind it after 21 months had passed and Americans had lost 800,000 jobs.

But there is a darker history than 2002.  There is also 1930:

https://en.wikipedia.org/wiki/Smoot–Hawley_Tariff_Act

Remember the great depression?

Want to make depression great again?

I don’t.

So why are we playing around with tariffs?  Why are we all wanting to “wait and see” how it turns out?  If we survive unscathed it won’t be because of the tariffs, but in spite of them.

So now we enter Trump stage 2.  Stage 1 went as I expected; positive moves on regulation and tax reform.

We’ve had the good.

Now for the bad and ugly.

Tim

 PS -- unless there is a negative gap tomorrow, I plan to sell XLP and buy XLE on the sector model.