It’s not the stuff of headlines, but perhaps it’s the most critical move by the administration. This month has been on trade and the effort to seek out smarter and perhaps a series of bilateral deals. There is a simultaneous effort to reform the North American Free Trade Agreement (NAFTA) but also trade with South Korea.
Reciprocal Trade
The administration continues to talk about “reciprocal trade,” suggesting that nations buy as much from American companies as we buy from their nations. That’s not going to happen just as Germans aren’t going to forsake the Mercedes Benz for a Ford. However, there is no doubt we must revamp our arrangements.
What would be the litmus test for reciprocity?
China is enemy #1 when it comes to trade, and Mexico is enemy #2 - should it be that way? Yesterday, Japan released its trade data. Exports rose for the 8th straight month, reflecting a 13.5% increase from a year ago. Most of that move came in the export of cars and auto parts heading to the United States.
America’s total trade with Japan last year was less than half of that with Mexico, but our deficit was higher. In fact, the trade deficit with Japan amounted to 35% of the total. I would argue our ire might better serve American businesses aimed at Japan and Germany more than even Mexico.
| US Trade 2016 | Combined Trade | U.S. Trade Deficit | Deficit % of Total |
| China | $579 | $347 | 60% |
| Germany | $164 | $65 | 40% |
| Japan | $195 | $69 | 35% |
| Mexico | $523 | $63 | 12% |
| Billion USD | |||
Then there’s trade with South Korea that also exports a lot of cars and auto parts to the United States. Once again, this relationship speaks more to the impact of America joining the World Trade Organization (WTO). Both nations are original members from January 1995. I suspect it seemed like a great deal for the United States in 1996 and 1997 when we enjoyed a $4.0 billion and a $1.9 billion trade surplus.
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Since then, it’s been larger deficits; coming into this year, the total accumulated deficit was $288 billion.
Ultimately, trade is about a voluntary exchange of goods and services for financial compensation. How would one value a big-screen television to a family that might never have been able to afford one if not imported from China or Korea?
Therefore, I’m leery of gimmicks when it comes to trade deals. Let’s open foreign markets, and let’s make sure the American consumer doesn’t get the short end of the stick. I know we can accomplish these things with current negotiations.
That being said, if we go through with ripping up NAFTA, Americans should brace for an initial economic hit and break down in the manufacturing supply chain. Moreover, US businesses exported close to $500 billion (Canada $267 billion and Mexico $230 billion) in goods and services to our North American partners last year.
Canada and Mexico need America, there is no doubt, but there is something of a symbiotic relationship that I would rather see adjusted than an abrupt stop.
Correction Over?
If the correction is over, it would have lasted just a little longer than the solar eclipse; and yet, it seems like the market has been down all year long. It’s because the breadth turned negative long ago, and a handful of super stocks masked internal bleeding. Now, it looks as if the correction is over for those names. Brick-and- mortar retailers, in particular, are enjoying a nice bounce. The stocks everyone wants to see move higher are those Orwellian tech names:
- (FB) Facebook
- (AMZN) Amazon
- (GOOGL) Alphabet/Google
- (NFLX) Netflix
If these names regain momentum and find a way to rally into the end of the year, they might have coattails. There will be a lot of pressure on money managers to perform. While the window-dressing game of owning these names on paper for clients might fool some folks, the next leg higher means seeking counter opportunities for outperformance.
Considering the economy is probably growing at 4% right now, a lot of value names will pop with the next round of earnings, unlike the second quarter where the market was a victim of its own success. This makes the correction a moot point of sorts.
The key is to own great companies with discounted stocks. You can sprinkle in some high Beta names for daily comfort, but the way to outperform in the second half of 2017 (2H17) will be through old-school fundamental investing.
Closing the Government
Last night, President Trump suggested if there isn’t Congressional agreement for the southern border wall he would be willing to allow the government to shut down. Those that have followed me for years know I have no problem with shutting down the government as the debt ceiling is a joke and has been raised dozens of times, which belies the reason it was established in the first place.
Washington, D.C. has no self-control as elected representatives go there to loot the joint in the name of bringing home the bacon and getting reelected.
I will acknowledge the market would freak out for a day or two before and after a government shutdown, and then like the rest of the nation, it would see the country still functions. Perhaps better.
I don’t know where the money will come from to fund the wall when I’m seeing terrible gimmicks floated to pass smart tax reforms. I’m not sure the new Trump inner circle would be okay with shutting down the government, so this could be much ado about nothing. I would like to see it closed down to protest the willful destruction of our children and grandchildren’s future in the name of bridges to nowhere.
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