Miscellaneous

Trade Tariffs – The Worst That Could Happen

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TRADE TARIFFS

As rhetoric regarding trade tariffs increased prior to the election and, with that same rhetoric continuing post-election, the danger to free trade and a strong economy is heightened.

In my article, The Danger Of Trade Tariffs, I said…

“Tariffs are taxes imposed on imported goods, ostensibly to protect domestic industries or gain a competitive edge. They are sometimes recommended and promoted by those who think they have identified an “unfair advantage” existing between trade partners.”

Special emphasis is applicable to the first three words: tariffs are taxes.

That alone should be justification for rejecting tariffs outright; however, some think there is reason to consider them in the name of “fairness”. Politicians are notorious for using the doctrine of “fair trade” to justify their threats and the imposition of tariffs (taxes) on trade partners.

The appeal to and appeasement of voters is uppermost in a politician’s mind when the “fair trade” issue is raised. For example, there are certain U.S. industries that are currently not as competitive and profitable as might be preferred. If the imported good is cheaper, then it is often claimed that the competitor uses “cheap labor”; or is “dumping their goods at cheap(er) prices”.

There might also be tariffs already imposed on domestic goods exported to another country, or countries. If a company or industry has done everything they possibly can to be competitive and profitable, the conditions can give rise to claims of unfair trade practices.

The mistake politicians and others make in calling for tariffs on imported goods is that, whether they are imposed in retaliation, or to “protect” a domestic industry and its workers, the net effect is overwhelmingly negative. Here’s why…

We said earlier that tariffs are taxes. A tariff is a tax on goods imported into a country.Currently, new tariffs are being proposed on imported goods coming from other countries. A tariff on something I buy that is made in China, or food I consume that is harvested in Mexico, means it will cost me more than I had been paying for those products.

I might choose to buy the same products after the increase in price; or, I might buy a substitute good of lesser quality. I will end up paying more for what I want, or be forced to compromise. Others will make similar choices; and neither choice leaves me, or anyone else (consumers) better off.

THE WORST THAT COULD HAPPEN

Trade tariffs often trigger a chain reaction and full-blown trade wars can result…

“America’s last major trade war happened after imposition of the 1930 Smoot-Hawley Tariff, which increased 900 import tariffs from 40-48%. It was supposed to support U.S. farmers whose land had been devastated by the Dust Bowl, but it resulted in higher food prices for Americans who were already crippled by the Great Depression.

America’s trade partners at the time hit back with their own tariffs and global trade fell by 65%, worsened the depression, and contributed to the beginning of World War II.

After Smoot-Hawley, the country suffered tremendously. The general public had little understanding of tariffs or trade agreements.” Tariffs And Trade Wars… by Anna Kucirkova

CONCLUSION

Tariffs are taxes imposed on imported goods, ostensibly to protect domestic industries or gain a competitive edge. They are usually recommended and promoted by those who think they have identified an “unfair advantage” existing between trade partners.

Trade tariffs harm small businesses and result in inefficient allocation of resources. Trade tariffs hinder productivity and economic growth; and, they can lead to trade wars. The end result is always higher costs for consumers.

President-elect Trump’s suggestion that selectively placed super-high tariffs could replace the income tax is just plain stupid. The results and the mathematics are impossibly workable and the attempt would be disastrous for international trade and the world economy. Besides, a tax is still a tax.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Bonds, Stocks, Gold, & Silver – Volatility On Display

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The bond market seems convinced that interest rates are headed lower for now.   The chart (source) below shows the price action for TLT (iShares Long-term Treasury Bond ETF) over the past seven days…

Of particular note is the fact that the succession of higher opening prices left a series of gaps on the chart. Friday’s gap is the largest so far. Also, the total increase in price from Thursday’s close amounted to more than 3%, and accounts for one-third of the entire seven-day advance.

OTHER MARKETS

Other markets did not fare so well; particularly stocks, which sold off in aggressive fashion on Thursday and Friday.  The NASDAQ Composite Index lost 6.7%, while the S&P 500 and DJIA were both down about 4 1/2%.  This stands in stark contrast to the sharp increase in Treasury bonds. See charts for all three stock indexes below…

 

 

INCREASE IN VOLATILITY 

Oxford Languages defines volatility as “liability to change rapidly and unpredictably, especially for the worse.” People tend to focus more on “especially for the worse” when referencing volatility; however, the past two trading days in all markets have highlighted that “rapidly and unpredictably” might be more descriptive and accurate.

In addition to the volatility evidenced in both stocks and bonds, there was a better example on display in the metals markets. In early morning trade spot gold was priced as high as $2478 oz., $32 higher than where it closed the day before. Then, in the space of one hour, the gold price dropped $70 oz. to $2408. Over the course of trading gold rebounded and closed at $2443, down a negligible $3 oz.

Silver’s price action was even more rapid and unpredictable. After rising to a daily high of $29.30 oz, which was up $.84 over its previous close, the white metal dropped nearly 5% ($1.40 oz) during the space of one hour. The daily low was $27.90. Afterwards, the price rebounded to close just a few cents above its prior day’s closing price.

Here are charts for both GLD (SPDR Gold Shares ETF) and SLV (iShares Silver Trust ETF) for the same time period shown in bonds and stocks above…

 

CONCLUSION 

As we said last week: “Rate cut or not, what happens after will not be as expected or intended.” There has been no announcement yet, but the bond market is acting as if it is a done deal. It is possible that stocks are selling off under a similar presumption. Here is why…

Most investors drove stock prices higher in anticipation of rate cuts in the near term, expecting that lower rates would trigger additional economic growth and lead to capital expansion and higher stock prices. Unfortunately, the effects of a potential rate cut are already accounted for in current stock prices. The highly anticipated announcement isn’t likely to have much positive impact on stock prices and could actually trigger more selling. Also, the rapidly weakening economy could override any possible stimulus from the cut(s).

Meanwhile, volatility, i.e., the liability to change rapidly and unpredictably, especially for the worse, can be expected to increase in all markets.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Gold, Oil, Wheat, & Stocks Since 2020

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GOLD, OIL, WHEAT, STOCKS 

Financially speaking, the markets have been all over the map in the past four years since the onset of Covid and the self-inflicted wounds from forced economic shutdown. I went back to August 2020, five months after the festivities began,  and pulled up some charts which show the price action since then for gold (money), wheat (food), crude oil (energy), and stocks (S&P 500). I will make some comments after each chart and provide observations at the end of the article. We’ll start with gold…

Gold Prices (August 2020-April 2024)

Peak prices for gold reached in August 2020 at or near $2000 oz. were not exceeded until late last year, more than three years later. Currently, gold is up about eighteen percent from its average closing price ($1971) in August 2020. At one point, in October 2022, the gold price was down by a similar amount and percentage.

Oil Prices (August 2020-April 2024)

Since August 2020, the price for a barrel of crude oil has risen sharply from $51 to a current price of $83; an increase of sixty-two percent. Almost two years ago, though, the price was at $114. There has been a decline of twenty-seven percent since then.

Wheat Prices (August 2020-April 2024)

The price of wheat soared from $5 per bushel to $12 (up 140%) in barely a year and one-half; then collapsed by almost sixty percent. Currently, at about $6 per bushel, wheat is up twenty percent since August 2020.

S&P 500 Index (August 2020-April 2024)

The S&P 500 stock index has risen by forty-four percent, increasing from 3500 to 5048.  At one point in 2022, stocks had dropped one-third in price almost wiping out previous gains after August 2020. The relentless move higher afterward is quite impressive, regardless of fundamentals or logic to the contrary.

THOUGHTS AND OBSERVATIONS 

By late 2020, most markets had risen quite assertively from their Covid-induced lows. There was no let-up in sight, though. Oil, wheat, and stocks continued their runs upward without hesitation. Gold refused to join the party and the others soon topped out and followed suit with all of them dropping for most of 2022 as higher interest rates took their toll on the markets.

Beginning in late 2022, rumors, hints, and speculation about the possibility of a Fed pivot sent stocks and gold higher. Wheat and oil prices continued lower for the time being.

At this point, wheat is the biggest loser, down fifty percent from its peak in February 2022, net of its recent rebound from the $5 level. That seems somewhat surprising. The effects of inflation have shown up in higher prices for goods and services, especially food and groceries. It seems reasonable that a healthy portion of the earlier wheat price increase was attributable to the effects of inflation. Supply chain disruptions likely accounted for much of the balance. So, why the sharp reversal and decline in the wheat price afterward? I don’t see evidence that food prices are coming down. Are wheat speculators deflationists?

The descent in oil prices was arrested last October when Palestinian militants attacked southern Israel from the Gaza Strip. Iran has shown its cards, too. As long as tensions remain high in the Mid-East, oil prices will be more vulnerable to upside shocks. But the downside could be just as shocking, depending on the circumstances. We saw an example of that with the economic shutdown during Covid. Without further escalation of fighting which could disrupt oil supplies and deliveries, might oil prices be much lower right now, along with wheat prices?

The rising cost of money (higher interest rates) has had observably negative effects on the financial markets. Higher prices for stocks seem more anticipatory of the beneficial effects of lower interest rates if/when they happen. It doesn’t  seem reasonable that stock prices could keep making all-time highs while bond prices flirt with twenty-year lows and have been decimated by higher interest rates. The booze isn’t as cheap as before, but it is still available for now, apparently.  That could change quickly. If it does, stock prices could drop faster and farther than bonds, or, anything else.

Gold has been the least volatile of the group. The increase in the gold price of eighteen percent doesn’t seem to warrant the enthusiasm that it is being accorded. Rather than cause for celebration, it is a merely a reflection of the most recent effects of inflation – the loss of purchasing power in the U.S. dollar that has occurred over the past four years. At $2338 oz. today, gold is still cheaper than its August 2020 inflation-adjusted price of $2375 ($1971). Gold’s price action is supportive evidence of its role as a long-term store of value.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

SVB, MMT, TNT

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SVB (Silicon Valley Bank)

The Silicon Valley Bank fiasco is an in-your-face example of the systemic risk inherent in fractional-reserve banking. (see Elephant In The Room)

You cannot reliably expect to avoid indefinitely the results of reckless behavior. That should be apparent to all of us after 2008 – 2011. Sooner or later, the full onboard cost will be paid.

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Orderly Markets vs. Chaos

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A SYSTEM OF ORDER

For the most part we are the beneficiaries of orderly financial markets.  For more than two hundred years market makers and traders have bought and sold – for themselves and in behalf of others – without long-term disruptions to the orderly function of markets.

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Gas Is Cheap – Quit Complaining

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GAS IS CHEAP 

It hurts to pay $5 per gallon for gasoline. It hurts more when we are used to paying a lot less for it.

For a brief time during the spring of 2020, the price of regular, unleaded gasoline dropped  below $2.00 per gallon. I filled my tank at the time and savored the moment for a couple of weeks.

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Asset Price Deflation

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BEFORE ASSET PRICE DEFLATION

Before we talk about asset price deflation, let’s review what happened before 2022.

Most financial assets benefited enormously from the Fed’s hugely gratuitous efforts to support, sustain and reinflate prices after the 2020  collapse and the ensuing forced economic shutdown.

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Gold, Stocks, Bonds, Crypto And More

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GOLD, STOCKS, BONDS, CRYPTO…

Is this the all-asset crash that some have expected? Looks like it could be. Before discussing that, though, let’s look at four charts (source) in sequence: GLD (gold), S&P 500, TLT (long-term US Treasuries), and Bitcoin…

 

GLD (Gold ETF)

From its high of 193 in early January to its recent low of 168, GLD has declined thirteen percent.

SPX (S&P 500 Index)

From its high in late December at 4818, to its recent low of 3858, the S&P 500 Index has declined twenty percent.

TLT (Long Term US Treasury Bond Index)

From its high point in early December at 155 to its recent low at 112, this ETF of long-term US Treasuries has declined twenty-seven percent.

BITCOIN FUTURES CME

From its high point of just under 70,000 (69,355) in November past, the price of the most-watched crypto currency has declined a whopping sixty-three percent to its recent low at 25,350.

ALL-ASSET CRASH? 

Before trying to answer that, there is another question to ask first that will help clarify the situation: Has any asset class or investment been going up lately? None that I am aware of – except energy and food.

Also, being short something is not an investment in a particular asset or asset class as much as it is a speculation on dropping prices. So we can rule out inverse ETFs, put options, and selling short.

We can also rule out real estate which seems to be treading water at best, with the possibility of going under as rates keep rising.

What about silver? I thought you’d never ask. Here is a similar chart to those above; this one is for SLV…

SLV (Silver ETF)

From its 52-week high last June at 26.43 to its recent low at 19.01, SLV has declined twenty-eight percent.

Has anything gone up or at least not dropped recently? Well, yes; commodities in general. This includes primarily foodstuffs and energy which we have already mentioned, and some industrial commodities.

CRB INDEX

Since the beginning of the current calendar year the CRB Index has increased more than thirty percent. That is in direct contrast to nearly everything else we have mentioned thus far.

The index consists of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, RBOB Gasoline, Silver, Soybeans, Sugar and Wheat. (source)

DIFFERENCES AND DISTINCTIONS

When we talk about the financial markets, we are referring to stocks (equities) and bonds (debts). We are also talking about derivatives based on those underlying items, such as ETFs, options, swaps, and spreads.

The financial markets are separate and distinct from the commodities markets. The fundamentals for both markets are different, yet, there are factors which can affect both markets.

The currency markets are also separate and distinct from the commodity and financial markets, although, what goes on in the currency markets can have significant impact on the financial (stock and bond) markets and, to a lesser extent, the commodities markets.

As in the financial markets, there are also derivatives in the commodities markets (options and futures) and currency markets (usually involving currency exchange rates).

FINANCIAL ASSETS ARE OVERPRICED

In the case of prices for stocks, bonds and other financial assets, the recent high prices  discounted years of profitability.

Even allowing for a highly generous application of price-to-earnings ratios,  prices far exceeded the most favorable expectations for future growth.

The problem is much worse, though, than simple overvaluation of assets. The US and world economies are debt-dependent. The excessive valuations in financial asset prices are the result of an abundance of cheap credit.

Most economic activity is funded primarily by cheap credit; whether it be mortgages, business activity and corporate expansion, or retail consumption. Without access to unlimited amounts of credit the world economy would come to a standstill. The situation is precarious.

A FRAGILE ECONOMY AND A LOOMING DEPRESSION

Some are quick to assume that the Fed will take whatever steps are necessary to arrest the hellish descent. Of course, they will try. But they likely won’t be successful.

We have advanced too far down the path of money substitutes and cheap credit.

Also remember that the Fed is reacting to the effects of inflation and cheap credit which it (the Fed) created. (see Fed Action Accelerates Boom-Bust Cycle)

Whatever the Fed’s intentions are (or were), they caused the Great Depression of the 1930s and the Great Recession of 2008-2010.

The Next Great Depression will be worse and last longer. (Yes, I have said that before.)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Having Some Fun With NFTs

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SOME FUN WITH NFTs

Both my son and grandson collect sports trading cards. I began a group text with them the other day. Here is how it went…

me: Do either of you have any of these in your collection? (I attached a link to NFTs of Rob Gronkowski on OpenSea)

son: Do you have a potato chip shaped like President Lincoln’s top hat? 

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Investors, Speculators, Gamblers, Instigators

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Investors, speculators, gamblers, and instigators – four types of  ‘investors’. Which one are you?

Nowadays, it seems that anyone who owns anything fancies themselves to be an investor.

However, does buying a fractional unit of bitcoin in an online trading account qualify someone as an investor?

Are fanciful dreams of striking it rich by running with the social media herd the foundation of fundamental investing? Maybe there is more to it than that. Let’s take a look.

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