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I try to stay apolitical as much as possible, but this one is too interesting to ignore. How have Trump’s policies affected business? Fortune magazine put out an article, “Why Trump Is Bad for Business,” and I want to analyze that article in a little more detail because the issue is more complicated than it might seem.
The current business environment
Geoff Colvin describes in this article how Trump promised to bring back the steel industry. So when Trump was elected, people were stampeding into steel stocks. Steel prices went up for a while, but then with the tariffs they went back down again.
Then the article says that, while the current business environment looks good, it’s actually not. Inflation is low, interest rates are extraordinarily low, stocks have record highs—it should be business nirvana, says Colvin.
Let me stop there, though, and say it’s not necessarily true that it should be business nirvana.
It is good for business in general when interest rates are low because people can borrow money and buy things. But interest rates are kind of a pressure relief valve to the economy, so to speak. If interest rates are going up, it’s usually because labor costs are going up.
And then when labor costs go up, people charge more for their services, leading the market to overheat. It all depends on where you’re at in the business cycle. We have a pretty ingenious system for controlling some of this. That’s why the 70s were so weird because you had stagflation—a stagnant economy with high inflation and high interest rates—and those don’t normally go together, which is why it perplexed economists so much during that period of time.
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Consumer confidence has been waning
Then in the article Clovin says that the level of consumer confidence has been waning. At first, small business owners were rejoicing when Trump won, but then their optimism kind of faded a little bit about a year ago.
He says the fears amongst business people are that, after a strong start, the President is doing more harm than good. Are things really that bad? It’s way more complicated than we like to give it credit for being.
Were the benefits front-loaded?
The article also says that a lot of the blessings for businesses were front loaded—they were beneficial at first, but then after the initial effect wears off, they will be bad for business.
For example, the drop in tax rates increased revenue for businesses, but then it’s leading to corporate inversions—moving some of their business overseas. Because companies who have business overseas have to pay taxes to bring the money back the US, they would do these inversions that I’ve talked about many times on the podcast. As Warren Buffet pointed out, companies would lend money to each other overseas to avoid taxes. Those savings roll back into the business, which is a good thing. Besides, the tax-rate drop brought our rates in line with most other countries around the world anyway.
And then you have all the deregulation, which has been very helpful, and the article gives credit for that.
So, has this all been good or bad for companies? Well, the elephant in the room of course is the tariffs. The article is well written, but the effect of the President’s policies are more nuanced than it makes it seem. All the puzzle pieces aren’t there. When you look at the economy and how it operates, it’s pretty dog-gone complicated, and that’s why people can’t pick stocks or time the market because there are so many variables.
Over 90% of professional managers can’t beat large US stocks. They can’t find the stocks that will outperform the market on a consistent basis. It’s even worse for small companies. And then trying to figure out which are of the market will be better than others is futile. History and research have proved this time and again.
Fortune’s article goes on to say that all the tax decreases did was cause companies to buy back stock. Now, it was only a few companies that did this. Apple was one of the big ones, but the reality is that Apple got to do what’s in the best interest of their shareholders.
Is it bad that they went and bought back their stock? No, it’s because if you’ve got a bunch of profits that you’re bringing back to the US, but there’s not necessarily the unlimited ability to go and expand and do something else with the new-found profits, what should you do?
I don’t think that you’d necessarily go and do anything else other than buy back your stock. But then people say, “Well that’s not fair. They ought to hire more people.” To do what? To service what? What demand is not being serviced that there is so much more money needed to service the demand or supply? You’d be hard pressed to find something.
Now, when we look at the profits and giving them back to shareholders, it’s usually just bringing things back into balance. In other words, other countries around the world had lower taxes than these companies that are benefiting the most. So, what’s happening is profits are going back to equilibrium. You’re writing a wrong where the punitive tax policy of previous administrations was causing problems for companies. They were having to do things to avoid these higher taxes. Now that they’re not having to do it, it’s not something that’s unfair or wrong.
Consumer and small business confidence
Now if you look at consumer and small business confidence, it’s hard for companies—especially small companies—to make plans when you know the goal line keeps moving, when the rules keep changing. If you’re buying things and you’re trying to buy from suppliers overseas and one day there is a tariff on them and the next day there’s not, it’s hard to make plans.
I have clients in mind that run companies that have to buy things from overseas, and they’re having to change suppliers, wondering,
How do I do it? Who do we need to change to? Do we need to change? Does it need to be a long-term thing? Or is this just a short-term tariff so I can stay with the same supplier, pay a little bit more for the short run, and then when it goes back everything will be fine again? Or do we need to buy more supply than we really need and expend more money in the short run because tariffs are coming down the road and maybe I have to go into debt or actually spend more money than I want to right now.
Imagine if you’re a business owner, what a pain in the neck that can be right now.
Is the trade policy working?
That said, the puzzle piece missing is whether this constant shift in trade policy is having the intended effect that it is designed to have—particularly with China. People are concerned about intellectual property and those types of things. Here’s the question, though: What other strategy do you have to deal with this issue? Tell them if you have a better idea on dealing with intellectual property issues and how it might affect you. Look at American security issues and answer: How else would you deal with this?
It reminded me a lot of when Reagan was dealing with Russia and the arms race, and I remember the Star Wars program, everybody ripped on him for that, and they were picking on him for spending so much money on defense. Of course, what ended up happening is he got the intended impact that he wanted. And in hindsight we can look at that and say, “It worked out pretty well.”
Well, will what’s happening today cause collapse? Will it cause China to change their ways? I don’t know. And China’s not necessarily great at telling us exactly what’s happening economically for them. We just don’t know. Is there going to be an uprising in China? We don’t know if the increased awareness of the concentration camps over there will cause a backlash which might drive change.
How is Hong Kong going to play out? Are they going to cause other nations to cut taxes too? This is a totally different area, but you could have other nations around the world go, “Hey, you know what, the United States reduced their taxes, maybe we need to reduce our taxes to become more competitive.”
It would be nice if the world were a little less dependent on the American consumer. Think about it: As goes American consumers and our purchasing behaviors, so goes the rest of the world. It would be nice if some of these other countries would get their economy going fast enough so that we wouldn’t be totally dependent upon the American consumer.
I’ve seen this in previous decades where suddenly America looked like it was going to fall behind, and everybody else was doing well—these changes are cyclical.
We put up with bad stuff as humans for only so long before we get sick and tired of it and force change. The stock market is run by human nature and anticipates these moves. It’s not as if the stock market waits for the changes to take place before it moves. It moves in advance, because investors are always looking around at what might happen next. Stock prices have all the future ideas about what might happen built into them, and then prices will go up and down in advance of those things happening.
There is a lot of room for growth internationally. If we look at the average pay level of people around different parts of the world… if you’re only making 20,000 a year, you’re in the top 3% of income earners worldwide. That’s crazy. Government corruption is a huge issue all around the world. What could be unleashed if corruption is reduced?
And we don’t always hear about the good stories, but there are a lot of places around the world where people are starting to fight back. They want fairness. They want a better life. They want to live in a better economy with a better lifestyle and more opportunity. It’s the human will. We have a drive for change.
But it’s so complicated. Would they know what to do with the freedoms if they got them? If you’ve lived your entire life under one system, it’s not easy to retrain yourself to think as a capitalist thinks. That’s why we can’t pick stocks or time the market. But the beauty of it is we are always trying to move forward as humans.
The policies in the short-run
President Trump’s policies in the short-run have helped big companies and the economy at large. To say he’s bad for business is a stretch. He’s been really great for some companies, but it hasn’t been totally widespread. You have to look at it in a balanced manner.
Smaller companies have struggled, international companies, which as an investor you should want to own, have also struggled. But it’s reflected in their prices, so it’s not hidden knowledge. If his policies breakthrough, things could be on the verge of a very positive impact. And this is why we stay diversified, because you don’t know when these changes are going to take place. They are often a total surprise.
He’s not, however, the lone factor benefiting big companies more than smaller companies. A couple of weeks ago, I talked about how Google’s search engine has been favoring big companies at the expense of smaller ones according to the Wall Street Journal study.
Here’s the thing that I always point out: No matter who is elected, companies are going to do the same thing you’re going to do—whatever they’ve got to do to thrive. And it may not necessarily be great for the American economy, but they’re going to figure out a way to get by.
So, would you, if the person who you didn’t want got elected to office, would just say, “That’s it. I’m walking into my job on Monday and I’m quitting.” No, you’re going to say, “Let’s suck it up. Let’s figure up what we gotta do to succeed under the new scenario.” So, I’m always optimistic. I don’t ever worry about this kind of stuff. But it makes for interesting conversation.
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