Miscellaneous

Trump’s Tariffs – National Security?

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A long-time friend of mine, a staunch free-market and free-trade advocate, emailed me shortly after I posted the article Trump’s Tariffs – Just More Bad News. An excerpt from his commentary follows:

“…while I still believe in free trade as a basic tool for maximum prosperity, especially in a perfect world, I have changed my view, and now I believe that under many circumstances, tariffs and even subsidies are crucial to our national security. Free trade is fine when talking about sweaters, stuffed animals, plastic bowls, and maybe even automobiles. But do we want to depend on China , or even Japan, for our steel, ammunition and pharmaceuticals? I think not.”  

I agree in principal that there may be occasions where selective use of tariffs and “even subsidies” might serve a protective purpose in our national interests.

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Trump’s Tariffs – Just More Bad News

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TRUMP’S TARIFFS 

President Trump has now followed through on his earlier threats to impose tariffs on trade partners and neighbor countries, Canada and Mexico. In so doing, he has accomplished nothing that will result in anything positive or worthwhile.

Tariffs are never justified and never produce the presumed results. They are self-inflicted open wounds that continue to fester. The action immediately raises the prices of certain imported goods which Americans buy from those countries. That forces negative financial decisions by consumers that will result in harmful economic consequences.

In addition, the danger of retaliation is heightened in this case because Trump’s actions are in blatant disregard for the existing USMCA treaty ratified by Congress during his first term in office. Actions and reactions by the countries involved escalate into trade wars that affect not just the specific countries but the entire global supply chain. There are many variables, including which particular goods are taxed, how long the tariffs are in place, etc., but the effects are always negative.

CONCLUSION

After passage of the Smoot-Hawley Tariff in 1930, America’s trade partners responded with their own tariffs. The results were historically horrible. Global trade fell by 65% and the Great Depression worsened. Some say it contributed to the beginning of World War II.

Hopefully, things will not get that bad. Just remember that nothing good will come of Trump’s tariffs. (also see Trade Tariffs – The Worst Is Yet To Come and The Danger of Trade Tariffs)

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

Liquidity Problems Could Overwhelm Inflation’s Effects

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LIQUIDITY PROBLEMS – 1929 

In 1928 and 1929, the Fed raised interest rates for the purpose of curbing rampant speculation in stocks. At that time, investors could borrow as much as 90% of the stock price for their proposed investment. The banks were just as aggressive as investors and were happy to oblige.

Raising rates did not slow stock speculation by investors or banks, however.

What it did do was cause a slowdown in economic activity. Thus, as economic activity declined, the stock market continued its rise, unabated.

As the decline in economic activity continued, both businesses and consumers were affected negatively. The money was available for investors to buy more stocks, albeit at a higher cost; but, businesses and consumers struggled with liquidity problems.

STOCK BUBBLE BURSTS 

The crash in the stock market brought illiquidity issues to light. Layoffs in the financial industry were numerous and swift. The ranks of the unemployed ballooned.

If you were an investor who had purchased stock with 10% down, it would take only a 20% decline for you to have lost twice as much as your original investment.

Now, imagine the plight of the banks who had lent money to investors using stocks as collateral. The collateral was worth as much as 30% less after one day of trading. Bank failures became almost commonplace during the Great Depression that followed.

FED RESPONSE

As might be expected, the Fed did purchase government securities in the open market and lowered the discount rate. It also assured commercial banks that it would supply needed reserves.

Unfortunately, “too little; too late” became the common descriptive phrase used when referring to Federal Reserve response to the crisis which it had caused. That is because the economic devastation was overwhelming.

Unemployment soared to as much as 25% and prices declined (deflation) by more than one-third. The aggressive, free-spending social programs of the 1930s government could not stop the slide and contributed to the length and breadth of the depression. At the depths of the Great Depression in 1932, the stock market had declined by 90%.

The stock market crash was not the cause of the Great Depression, though. The Great Depression was caused by a Fed policy of higher interest rates. Whatever the intention or merits of the action (the higher rates were imposed for the purpose of curbing rampant stock speculation), it led to a reduction in economic activity which was well underway before stocks crashed.

INFLATION, DEFLATION, AND THE FED 

The Federal Reserve officially implemented an interest rate policy of “higher for longer” almost three years ago. Rates moved up rapidly and bond prices have lost one-third to one-half of their value since then, depending on length of maturity. (see “And So Rates Will Be Higher” – Jerome Powell)

It matters not what the intention was or whether it was correct. What matters at this point are the circumstances in which the Fed finds itself now.

Most, or all, of our serious financial and economic problems are the result of a century of intentional inflation. The effects of that inflation lead to a loss of purchasing power in the currency (U.S. dollar). When the Fed intervenes in the markets either directly (by purchasing or selling securities) or indirectly (manipulating interest rates), it creates distortions which have ripple effects and are amplified.

In addition, those effects are unknown with regards to extent, duration, and timing. Remember being surprised at the higher increases in consumer prices post-Covid and economic shutdown. Those increases are attributable to government (and central banks) actions in response to the ‘pandemic’.

The economic shutdown was forced upon society by government – rightly or wrongly. As a result, the decline in economic activity led to huge financial and economic problems for society, including supply chain issues. These problems were met with phenomenally huge financial largesse (inflation) by governments and central banks, which, in turn, led to higher consumer prices (effects of inflation).

After more than one hundred years of trial and error, it is apparent that…

  1. The Federal Reserve causes the problems and crises with which it continues to grapple.
  2. The Fed is doomed to a role of reacting to crises of varying intensity (worse) and frequency (more often).
  3. Serious deflation and economic depression would overwhelm efforts by government to reverse the effects or contain the damage.

CONCLUSION 

There is no path to financial stability from the current point that does not involve a cleansing of huge magnitude. The cleansing will be accompanied by serious financial and economic pain. The Fed is continually dancing with its own devils amid music which is horribly out of tune. The only option left is to wait until the music stops. (also see If The Markets Turn Quickly, How Bad Can Things Get? )

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

5 Investments To Avoid In 2025

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INVESTMENTS TO AVOID IN 2025

While most other analysts usually tell you where to invest, I prefer to tell you where NOT to do so; at least at this particular time. The backdrop of a deteriorating world economy, recurring financial catastrophes and the volatility which accompanies them, plus exacerbation of existing problems by governments and regulatory agencies, make it difficult to recommend investments on a fundamental basis.

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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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