“Over a thousand Americans are working today because we stopped a surge in Chinese tires.”
President Barack Obama congratulated himself for a job well done in his 2012 State of the Union address.
In the first year of Obama’s presidency, China was dumping tires into the U.S. market. This was great for consumers who needed a tire change… but bad for American manufacturers.
To get China to “play by the rules” of world trade, Obama slapped a 35% tariff on Chinese tires.
Sounds like the tariff was successful, right?
We’re not so sure…
A New Era
Here at the Daily, we’re about making money in the markets. We don’t take sides on political debates.
But the truth of the matter is, we see a large trend taking place in the world. And politics is right at the heart of it.
To recap last week’s discussion: Right now, we are seeing a great unraveling of global trade. Citizens around the world are electing protectionist candidates to power. Much like Trump’s own rise to power, they’re pinning hope on the candidates’ ability to “put the people’s needs first.”
We told you that we are entering a new era of peak globalization—a time when countries are ending a 65-year trend of cooperating in favor of economic nationalism.
Even progressive countries like France are taking protectionist measures. And soon, we expect to see countries putting up a greater number of barriers to trade.
On one hand, this might look like a good thing. Closing borders and “putting America first” means we can advance our own needs at home.
But it also means there will be a lot less trading together for the greater good. And a lot fewer win-win deals.
Chinese Tires and Chicken Feet
By some measures, Obama’s tire tariff of 2009 was a success. A thousand people still had jobs.
But we must ask… at what cost?
The Peterson Institute for International Economics (PIIE), a centrist think tank, estimates that this tariff forced U.S. consumers to spend $1.1 billion more on tires in 2011 than they would have otherwise.
PIIE believes the tariff saved, at most, 1,200 jobs (which jibe with what Obama said). If you take $1.1 billion and divide that by 1,200 jobs, you will find the cost to save each job was $900,000. That’s a steep price for society to pay to save jobs.
And that’s just the cost Americans paid in higher tire prices. Other costs may have been even higher…
In retaliation to the tire tariff, China put a tariff on U.S. chicken parts. Apparently, we send a lot of chicken feet over to China. Chicken producers lost an estimated $1 billion. So now we have $2.1 billion less in the economy.
How many retail jobs were lost because of fewer dollars? There’s no way to know for sure. PIIE estimates it cost over 3,000 retail jobs. By that math, we lost a couple thousand jobs because of this tariff…
In short: A small trade war over tires and chicken parts cost the U.S. at least $2.1 billion. If the U.S. and China taxed or restricted more items, it could have cost us many more billions of dollars.
The Hidden Costs of Tariffs
Tariffs take money out of the economy. And as proved by the example above, they create higher consumer prices.
A smaller economy with higher-priced goods is the definition of stagflation. And stagflation is one of the worst possible things for an economy.
As we’ve told you, stagflation turns into a vicious cycle. As prices rise, people purchase less. That leads to lower production… then layoffs follow. With factories producing less, they have to charge higher prices to make a profit. But workers have even less money because fewer are employed. The cycle continues.
We mentioned last week that this last happened in America in the 1970s. There were gas shortages, double-digit price increases, civil unrest, and overall chaos here in the U.S. and around the world.
For now, we’ll close our discussion on peak globalization and its consequences. This week we’ll return to another theme we have our eye on: quality businesses.
But before we do, a final caution for you: As the unwinding of global trade accelerates, get rid of multinational companies. Stick to companies that do a majority of their business in America.
This is important because, as we’ve said before, all foreign sales could be in jeopardy as trade restrictions increase.
Also, look to add some chaos hedges to your portfolio, like gold and—if you haven’t yet—bitcoin.
Nick Rokke, CFA
Analyst, The Palm Beach Daily
P.S. It’s worth mentioning: Palm Beach Letter and Palm Beach Confidential editor Teeka Tiwari and his lead analyst Greg Wilson are doing some great work showing readers how to hedge their portfolios with cryptocurrencies. (If you’re a paid-up reader who hasn’t diversified into cryptocurrencies yet, click here to learn how—and gain access to PBRG’s Cryptocurrency Survival Guide.)
We’ve been covering a bit of their work here in the Daily and we continue to get reader feedback every day. You can continue to follow along here for the latest cryptocurrency developments.
We’re halfway to stagflation already.
Remember, stagflation occurs when prices rise and the economy shrinks. Right now, inflation is skyrocketing.
The Consumer Price Index—which measures the prices Americans pay across a broad basket of goods—came in at 2.5% in January. This is the highest level in almost five years.
Also, as inflation grows, the Fed needs to raise interest rates to battle it. The Fed set its inflation rate target at 2%. Now that inflation is higher than that, they should raise rates.
Rising interest rates means the dollar will strengthen. A stronger dollar makes U.S. goods more expensive for foreign purchasers—just another headwind for U.S. multinationals.
Battle of the Hedges: For the first time ever, one bitcoin has become more valuable than an ounce of gold. But the yellow metal isn’t out of the fight yet. Experts have noted that this move has a lot to do with the Fed’s likely interest rate hike this month, which could be beating down gold’s price. Chinese government regulations on bitcoin—and the potential of “the Winklevii” Bitcoin ETF—have also provided plenty of ground for crypto speculation. Whoever wins this fight, PBRG readers should come out on top.
No Way in Hell This Ends Well: “When CNBC suggests you ‘just buy everything,’ you should turn off the television immediately. Get some fresh air. Forget everything you just heard.” Those strong but wise words come from our friends over at Casey Research, who liken this year’s “Trump rally” and the media’s bullish sentiment to the run-up to the dot-com crash in 2000. Their advice for investors holds fast—sell your weakest positions, don’t overpay for stocks, and own gold for the long haul.
Get Used to the “New Normal”: A new report from Deutsche Bank analysts suggests that, if the U.S. enters another recession in the next several years, the Fed would likely turn to another $1 trillion round of quantitative easing (QE). If that were to happen, all the recent talks of Fed balance sheet normalization could fly out the window, granting a huge tailwind to gold’s already bullish prospects.
Editor’s Note: How would you react to the news of the Fed starting another round of QE? Let us know right here.
Our friends over at Agora Financial say they have proof of the next big tailwind for the gold AND biotech sectors.
Click here or on the video below to see their research.