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DK Analytics, Post #41: Trump, the “real US worker deal” and Hooverism, revisited?  7/4/2018

Trade weighted US$: 89.97;  US 10-yr: 2.83%;  S&P 500: 2,713;  Oil: $73.64;  Gold: $1,256;  Silver: $16.08

The good:

“Red state” Americans, yours truly included, are grateful that President Trump is calling out the fake news for what it is: fake — and out to get any powerbrokers that threaten its pervasive media dominance.  Clearly, a media with a revolving-door to bureaucrats has facilitated unprecedented industry consolidation since President Clinton signed the Telecommunications Act of 1996.  The increasingly incestuous, oligopolistic relationship between big government and big business has resulted in a crony press that rivals the Pravda (“truth”) press in the former USSR.  Thus, instead of news and a check on increasingly abusive government power as the Framers intended, the misnamed “Main Stream Media” (MSM) has been generating propaganda supportive of an increasingly fascist regime, i.e., the US government.

Billionaire real estate and successful entertainment tycoon Donald Trump refused to become part of today’s MSM quid pro quo.  He didn’t have to, nor did he want to.  Instead, he took his “America First” (including bringing jobs back home) message to “flyover country” via the Internet/his Twitter account and as supplemented by his frequent, rousing, and well-attended speeches.  Critically, he was also backed by the one largely anti-leftist entity in the MSM, ratings dominating Fox News, which has long resonated with “red state” Americans.  Thus, the battle lines were drawn.  An all-out MSM backlash against this nonconformist ensued, and “news” morphed even more completely into statist, anti-Trump propaganda, a.k,a., fake news.  It wasn’t only fabricated stories, one-sided allegations or quotes taken out of context, but utter and complete suppression by the vast majority of the MSM of lawless behavior by those positioned at the top echelons of federal power during the prior administration as well as unconstitutional behavior being carried forward into the current administration and into the 115th US Congress.

The Trump administration, however compromised, appears to be making a largely clandestine effort (via sealed indictments) to smoke out the “deep state” (the unelected bureaucracy and its hangers-on both inside and outside the government) lawlessness that it has been a victim of.  Any success here, no matter how unlikely given the de facto “broad daylight conspiracy” — criminal decision makers keeping quiet buttressed by their staffs wanting to maintain the huge bureaucracy’s unconstitutional power, their outsized compensation and their privileged benefits status quo — would be monumental.  Such an achievement could spark a rule of law revival, arresting our B.R. trajectory. Meanwhile, a strategic return to greater constitutional fidelity is getting a sorely needed lift by Trump’s fine judge/justice selections!

 

The bad:

Trump’s integrity.  Is it there, when it counts, beyond his stellar judge selections and beyond the fact that he isn’t an “unindicted felon,” i.e., Hillary Clinton?  This isn’t an idle concern, for integrity begets and nourishes credibility, which is critical to a president’s “bully pulpit” efficacy in “troubled times.”  Some worrisome signs include:

 

The ugly:

A potential Trump trade war is a huge risk to both the US and the global economy, but the US is especially vulnerable.  This is due to America’s largely self-inflicted manufacturing enfeeblement, its huge net dependence on foreign goods (just go to WalMart’s non-grocery aisles) and foreign financing, and its dependence on continued widespread overseas acceptance of dollar-based trade, … despite America’s $7.9trn net debtor status vis-à-vis the rest of the world, over $21trn in US debt, and the US’s decade-long $1trn plus average yearly expansion in federal debt.  Some reflections:

  • Is Trump going the Hoover route (dangerous “interventionism” and an escalating trade war)? Hoover was a leading industrialist before he became president.  Are we about to revisit this dark chapter in history?
  • A nation that has an $800bn plus annual deficit in goods trade and has lost a vital portion of its manufacturing base can ill afford to start a trade war, from consumers’ or producers’ perspectives. It needs component parts that are often made only overseas nowadays (think the “787” or US-assembled cars) to produce high-value added finished products for domestic consumption and for exports, much less give it the ability to restore a domestic supplier base and address destructive corporate governance and compensation (more below).
  • Tariffs are taxes on Americans that the feds collect – we thought Trump was about shrinking government?
  • Protectionism (tariffs) is the worst form of cronyism: domestic steel and aluminum shareholders and their “Wilbur Ross cronies” will do fine, but domestic manufacturers of Maytag washers, Ford trucks, Harley Davidson motorcycles, GE locomotives, CAT dozers, Carrier chillers, etc. (and their workforces) will be negatively impacted or worse (bankruptcy). This is thanks to the resulting uncompetitive materials costs and/or retail prices that are out of consumers’ reach both domestically and in export markets, where outfits such as Harley will face a one-two punch of higher domestic steel and aluminum prices and tit-for-tat import tariffs for US made bikes.
  • Trump should solely be talking up lowering tariffs globally — e.g., seeking Mexico’s zero tariffs to 44 nations.
  • As is widely known, our top brass corporate compensation structure (CEO compensation was some 20x the average worker in 1965 and 271x in 2016), including $7m CEO signing bonuses and relatively rapid vesting of untold millions of underpriced options, coupled with litigation and regulatory insanity have come together to yield a “slash & burn” business model. In today’s world, the C-Suite a) no longer has parallel strategic organic growth interests (p. 5) with American workers, taxpayers, and communities, b) is incentivized to cut/gut domestic cap ex instead of investing, and c) is motivated to outsource and fire domestically instead of hiring and training American workers.  Today’s senior management is rewarded for slashing costs while buying back stock with both cash flow and by issuing trillions in new debt to give EPS a “financial engineering lift.”  The C-Suite focus: drive up the stock price ASAP instead of focusing on building globally competitive products, which is an unending effort.  As such, “corporate anorexia“ has become the destructive norm.  Coupled with lacking trade schools, a failing educational system, and perpetually large government deficits, these are the true flies in the ointment!

Unfortunately, such truths don’t make for great soundbites, but they remain truths.  Plus, other high-wage workforces (with generally better paid workers than in the US) operating in generally strong currency nations — e.g., Switzerland, Germany, and, for a long time, Japan — have generated sustained and substantial trade surpluses of recent vintage that sometimes extended for decades, and typically included surpluses with China.

Commensurately, those that blame high US wages or a strong buck as “America’s chief culprits” are just not getting the big picture right, much less how to best address it: with “brick-by-brick” home-grown solutions (for largely home-made problems) instead of with misleading, silly, and patronizing claims of having (virtually) instantly “made America great again!”  Moreover, reputational integrity does matter when a president is attempting to make constructive deals for his country.  Yes, Virginia, both policy and integrity (character) matter.

 

Allocation conclusion:

If, against all odds, the rule of law is restored in the US and the lawless actors infesting the governing class/controlling the instrumentalities of power are brought to justice, the profound  and breath-takingly stunning “gravity of it all” would rapidly turn greed into fear in terms of so-called “traditional asset” valuations.  In other words, sales would drive risk premiums much higher and net present values much lower, pricking today’s “bubble valuations.”

In the meantime, the US government’s reckless, deficitary fiscal policy would be even more exposed in a GDP-pummeling trade war — we are already way overdue for a recession amidst a historically weak, waning-productivity, debt-encumbered, artificial recovery.  Huge US commitments, political calculations, and a fiat currency — “The US can pay any debt …, it just can’t guarantee purchasing power” — could result in unprecedented amounts of dollar printing.  It appears to be more a question of “when” rather than “if.”  This suggests that the buck will be sacrificed in a tactical attempt to protect money center bank balance sheets (and the Fed itself) from “valuation meltdowns” and to meet “nominal dollar commitments” of a strategic nature.  Monetization of debt would become permanent and be expanded upon.  How does one spell “doubling-down on currency debasement?”  Against this backdrop, it is hard to imagine a secularly more bullish case for undervalued precious metals — and a more opportune time to reduce exposure to massively overvalued bonds and stocks.  (And please recall, markets are “reversion beyond the mean machines!”)

Finally, it is fitting indeed, on Independence Day, that we celebrate America’s historical blueprints — The Declaration of Independence, which led to the first-ever strict enumeration of governmental powers and codification of individual liberty and inalienable rights, otherwise known as the US Constitution, including the Bill of Rights.  How appropriate that Americans, and proponents of codified freedom around the globe, still have the unique opportunity to fortify their financial fortunes with the very “constitutional money” that could prove pivotal in the challenging times ahead in terms of supporting their families and in terms of helping to rebuild a return to free market capitalism and constitutionalism.  An increasing number of originalist/constitutional judges should be of strategic help.  Thank you, Mr. President.

Sincerely,

Dan Kurz, CFA

www.dkanalytics.com

This commentary is not intended as investment advice or as an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion of the author at the time of writing.  Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not a complete summary or statement of all available data necessary for making an investment decision.  Liquid securities can fall in value.