One of the reasons I have not penned My Gut Feeling for three weeks is that I was scheduled for my annual eastward drive for the summer from Nevada to New Jersey. Originally, my son Adam and I, together with our two dogs, Scooter and Carson (who are too big to safely fly) were going to depart May 13. However, when plotting our drive, I noted that there was wintry weather to the north of us in Colorado and heavy rain and tornadoes to the east in Texas and Oklahoma. I postponed our departure by a day. Those storms did indeed hit as predicted and for the most part we missed the bad weather (except for a minor snowstorm on I70 in Utah. We made it to New Jersey in time for dinner that Friday.
A few days after we arrived east, another set of more destructive storms hit the Midwest. All told, the storms over those two weeks caused tremendous damage not only in terms of life but economically.
Yet, the financial markets were all too obsessed with the tariffs on China and Mexico, to see the real economic damage that occurred in May. The crop destruction was far worse than the tariff impact on agriculture.
It is mind boggling how the stock price of insurer Travelers (TRV) rose in May while the broad markets fell. I have been following TRV for years. The stock typically falls during a busy hurricane season and then rebounds thereafter.
There could be a hit to 2nd quarter GDP by 0.5% to 1.0% from these series of devastating storms. Trust me when I say that naïve stock market pundits and financial media outlets will blame all shortfalls in 2nd quarter GDP to tariff and trade squabbles and totally dismiss the impact from the storms.
Understand that there is a secondary consequence to the actual or (in the case of Mexico) proposed increase in tariffs. That is currency valuations. Since President Trump raised tariffs on May 10 over another $200 billion in Chinese imports from 10% to 25% and China retaliated three days later, announcing new tariffs on $60 billion of American exports; the US Dollar increased in value by about 1.15% versus the Chinese Yuan. In the last year, the USD appreciated nearly 8% versus China’s currency. The currency effect covers ALL trade whereas the new tariffs cover only a portion of trade. Recall that monthly, on average the US exports $10 billion and imports $45 billion in goods per month with China.
While the proposed new 5% tariffs on some, but not all goods from Mexico is only a threat and won’t go into force until June 10; on the day of the announcement, the USD appreciated by 2.5% versus the Mexican Peso (MXN). That USD appreciation will not only nullify the potential tariff but will be a net positive to the US consumer. It appears that today the USD is gaining more ground on the MXN.
I agree that President Trump had to get tough with Mexico with respect to the ever-escalating problem at our southern border. Costs to the United States government and citizenry arising from the massive undocumented and illegal migration to the US is exorbitant. However, I disagree with the President’s use of tariffs as the right policy tool.
Rather, he should have instituted a tax on cross border remittances to Mexico from the US. Remittances are monies sent from the US to Mexico, mostly by migrants in the US. These remittances are estimated to be $28.7 billion in 2017. No doubt it grew in 2018 and will do so in 2019, likely to a level exceeding $30 billion. It is worth noting that cross border remittances are a significant source of cross border income to Mexico. A plunging Mexican Peso only increases the amount of money flowing into Mexico from the Mexican perspective. Such a remittance tax was also considered to pay for a border wall. By the way, the second most amount of remittances are from the US go to China. The Pew Research Center has a nice analysis on such global remittances.
Furthermore, there is a third order economic effect taking place when it comes to manufacturing supply chains. This began with the 2017 tax law and accelerated with all the tariff talk. American manufacturers are rapidly re-configuring their supply chain so as de-emphasize reliance on foreign sources.
As for stocks, the May correction, in my opinion was overdone. If you need proof, just look at the bond market. It seems that everyone and their grandmother were buying US treasury securities in May and selling stock to fund those purchases. The 10-year US Treasury is at 2.12% and the 30-year is a 2.56%. You must be mad to lock in money at 2.56% for 30 years. For comparison, the Standard & Poor’s 500 (SPX) yields 2.03%. I was selling any bonds that might have been left in client bond accounts (there were very few) that mature in greater tan 8 years. All told, stock investors are being gifted with cheap / oversold stocks in the retail and technology sectors that they can pick up now.
Apple (AAPL) will conduct its World Wide Developers Conference “WWDC” today. The WWDC will be live streamed and is certain to get plenty of attention in the media today. Also getting media attention are stories of Alphabet (GOOG / GOOGL) facing an antitrust probe. We hold a tiny amount of GOOGL, having sold the bulk of it over the past year. Also, calls for the breakup of Facebook (FB) are growing louder. We exited all of our long-term holdings in FB last year but I can see the stock getting interesting for a trade in the near future.
Saturday night I took two of my sons (the bookends, Cory and Adam), my future son-in-law and his nephew to my old stomping grounds in Brooklyn for a boys night out. It was a first for all of them and an evening they all will remember. My only disappointment was my inability to ride the cyclone, because of my physical limitations; so I had to enjoy it vicariously through the youngsters.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL, GOOGL, SSO & SPXL – although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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