ELAM: The tariff nightmare begins

“This past week brought more early warnings of Trump’s simplistic “us versus them” view of trade.

Last year the president set this potential disaster in motion by instructing the Commerce Department to investigate if steel and aluminum imports threaten national security under Section 232 of the Trade expansion Act of 1962. As instructed, Commerce concluded they do.

The stock market remains the same. The previous high of DJIA 26,600 still stands. Unless the Feb. 16 high of 25,432 is taken out, the more likely direction for stocks is down. Leadership is ever more narrow with just three stocks moving the NASD.”

>> This column, Feb. 23, 2018

Readers can’t say I did not warn them. Columns in this space on Jan. 26 and as noted above, and Feb. 23, warned of the danger of impending tariffs. Now the immediate results are clear to see.

Far more industries which use steel and aluminum will suffer from higher prices than an offset in jobs created in U.S. steel and aluminum industries.

President Barack Obama was informed that lowering corporate tax rates would bring in more tax revenue, and bring back more investment dollars from overseas. He stubbornly ignored that advice and left the corporate tax rate at 35 percent. The result of course was that no companies chose to pay the tax. Obama’s emphasis on what he called fairness brought neither tax revenue nor investment.

In similar fashion, President Trump believes a tax on 25 percent steel and a 10 percent aluminum import tax will stimulate demand for American steel. Politicians cannot force market behavior. Faced with higher domestic steel prices, American companies will likely import completed goods built from foreign untaxed and therefore less expensive steel and aluminum. Today’s Wall Street Journal reports that steel using industries (like our Permian Basin oilfield) employ some 6.5 million workers. Steel makers employ about 140,000. Clearly the larger group will be disadvantaged.

Immediate results are apparent. The Dow Industrials dropped more than 700 points intra-day. Boeing, Caterpillar, and the auto stock prices all tumbled. Ford was down 3 percent. Halliburton HAL is down 1.63 percent pre-market this Friday and dropped .84 percent yesterday. Every company from HVAC makers to autos to appliances to pipelines is affected.

China supplies but 2.2 percent and Russia 8.7 percent of the steel we use. Ironically Canada imports 50 percent of U.S. steel exports. But whacking Canada with various tariffs and continuing to snit about NAFTA will surely result in far fewer U.S. steel exports. Frankly I would not be surprised to see a 50 percent tariff from Canada on U.S. steel. This is precisely what we warned about in recent columns. Other countries are not going to sit idly by and be shut out of this market. They will ink their own Trans Pacific deals with China as the deal maker.

Last week we allowed that if the Dow Industrials took out the previous 25,432 high, a shot at the all time January high of 26,600 was possible. It was not to be. The index reached 25,759 and then began falling. All the 2018 gains have now been wiped out.

After Thursday’s official 400 point loss, the Industrials are already down another 277 points at 24,343 in Friday pre-market trading. Yes steel and aluminum shares rose but, I mean, does anyone you know own any of those shares?

There was a clear winner-gold. The gold price fell right into the predicted low time frame of early March to $1,305. This morning it has rebounded $18 to $1,323. Just two days ago it fell $18 in one day. There is yet another example of how social mood toward an investment can turn on the proverbial dime.

I thought both Trump and the Saudis would be losers. Falling world markets will make it more difficult to sell 5 percent of ARAMCO. Trump will lose much of what Republican support he has, gain no more support, and will have to defend a now falling stock market. His personality will not allow him to regret taking credit for the stock market advance. Instead he will no doubt blame that on those who do not “understand the wisdom of his policies.”

Higher prices on steel and aluminum will no doubt eventually raise oil prices. Gasoline prices are also rising. Stop and think about the impact of higher steel prices on oil refiners! There will be no choice but to pass along the higher steel prices via higher gasoline prices.

It is said the hallmark of a bad movie is one written, directed and produced by the same person. That warning is being played out with Trump’s disastrous tariff plan.

Follow Dennis at themarketperspective.com