Cumberland Advisors Market Commentary – Coronavirus and Global Shipping

Coronavirus Impact on Shipping

It did not take long for the coronavirus outbreak to seriously impact global shipping. In late January, industry leader FreightWaves, in an American Shipper interview with economist Paul Bingham, director of transportation consulting at IHS Markit, expressed concern about virus effects of Chinese manufacturing cutbacks on world supply chains and container shipping in particular.

Market Commentary - Cumberland Advisors - Coronavirus and Global Shipping
Bingham noted that shipping was already taking a hit because of the annual Chinese New Year shutdown, but he added,

“What’s happening is that the gap you managed against is now extended. If these factories don’t restart or if they restart and then they run out of parts [due to issues with first-tier suppliers], how quickly that trickles down will depend on how tightly supply chains are being managed in terms of lead times and buffer stocks. But I think that it will be less than a month before you’d start to see evidence of disruptions.”

(“Q&A: How coronavirus threatens container supply chains,” American Shipper, Jan. 28, 2020, https://www.freightwaves.com/news/qa-how-coronavirus-threatens-container-supply-chains)

About 80% of world trade goods by volume is carried by sea, and seven of the world’s ten busiest container ports are in China. Everything from autos and machinery to fresh food, clothing, high-tech products, and other consumer goods is shipped in containers.

Guy Platten, secretary general of the International Chamber of Shipping (ICS), summarized the situation on the Chinese end in a Feb. 5 interview with CNN:

“The shutdowns mean that some ships can’t get into Chinese ports, as the loading and discharging of goods slows. Others are stuck in dock, waiting for workers to return to ports so that construction and repairs can be completed. Still more vessels are idling in ‘floating quarantined zones,’ as countries such as Australia and Singapore refuse to allow ships that have called at Chinese ports to enter their own until the crew has been declared virus-free.”

(“Global shipping has been hit by the coronavirus. Now goods are getting stranded,” CNN, Feb. 5, 2020, https://www.cnn.com/2020/02/05/business/shipping-coronavirus-impact/index.html)

All major ports around the world have adopted a 14-day quarantine period for vessels arriving from or transiting through China. Vessels arriving from China are required to file a report regarding the health of the crew members and passengers prior to berthing.

Non-passenger vessels are allowed to operate in the US if they have been to China or taken on passengers from China in the last 14 days, as long as there are no sick crew members. Any vessels with sick crew members are required to notify the Coast Guard at their port of call.

(“Coronavirus outbreak: Measures and preventive actions by ports,” Ship Technology, Feb. 11, 2020, https://www.ship-technology.com/features/coronavirus-outbreak-measures-and-preventive-actions-by-ports/)

The coronavirus is throwing the global shipping trade out of sync, with shipping lines having to reroute cargoes and reduce calls to Chinese ports, setting the scene for months of delivery delays ahead, industry sources have said.

Some ships have been diverted from China to ports in South Korea. South Korea’s Busan port, one of the world’s largest container terminals, has already been affected by the spillover. The port’s container capacity stands at 78% and could rise further from the usual level of 70%, a Busan port official said.

(“China’s coronavirus disrupts global container shipping trade,” Reuters, Feb. 6, 2020, https://www.reuters.com/article/us-china-health-shipping/chinas-coronavirus-disrupts-global-container-shipping-trade-idUSKBN2002K1)

At least 44 sailings between China and the Americas had been canceled as of Feb. 14, according to Sea-Intelligence, along with 17 cancellations in the Asia-Europe trade loop. The cancellations amount to nearly 600,000 containers.

(“Ships Are Skipping China and It’s Causing Turmoil for Trade,” Bloomberg, Feb. 14, 2020, https://www.bloomberg.com/news/articles/2020-02-15/ships-are-skipping-china-and-it-s-causing-turmoil-for-trade)

Reduced trade as a result of the coronavirus outbreak is costing container shipping lines $350 million a week in lost volumes, a new report says. More than 350,000 containers have been removed from global trade networks since the pandemic gathered steam last month, according to Denmark-based maritime data provider Sea-Intelligence.

Officials in Shanghai and Hong Kong, two of the world’s busiest container shipping ports, said only about half of dock workers had returned to work by Monday, Feb. 10.

According to the Wall Street Journal, “US retailers depend on those imports to replenish inventories heading into the spring, but the nation’s largest retail group is predicting sharply diminished shipping volumes over the next few months.”  The WSJ reports that the National Retail Federation (NRF) and Hackett Associates project that inbound container volumes at US seaports will be down 12.9% in February and off 9.5% in March from a year earlier. The forecast for container imports into the US in February and March is projected to fall short by some 370,000 containers from estimates made before the coronavirus outbreak.

“US retailers were already beginning to shift some sourcing to other countries because of the trade war, but if shutdowns continue, we could see an impact on supply chains,” said Jonathan Gold, NRF’s vice president for supply chain and customs policy.  (“Coronavirus Toll on Shipping Reaches $350 Million a Week,” Wall Street Journal, Feb. 10, 2020, https://www.wsj.com/articles/coronavirus-toll-on-shipping-reaches-350-million-a-week-11581366671)

A Shanghai broker said that at least one container ship with a capacity of more than 20,000 containers left Shanghai for Northern Europe with only 2,000 full containers.  “It will pick up more at ports on its way, but loading data show it will reach Europe around 35% full,” the broker said. “That’s unprecedented, and a lot of money is being lost because it doesn’t even cover the fuel cost.”

(“China’s Shipping Nears a Standstill Amid Coronavirus Disruption, Wall Street Journal, Feb. 14, 2020, https://www.wsj.com/articles/chinas-shipping-nears-a-standstill-amid-coronavirus-disruption-11581699854)

With the volume of containerized cargo flowing on the two main headhaul routes (China-US and China-Europe) now sharply reduced and the canceling of sailings of vessels that had been scheduled to serve these routes, there will be fewer ships available for backhaul runs from the US to Asia and from Europe to Asia.  Sea-Intelligence CEO Alan Murphy has warned shippers to “brace for the backhaul rate spike.” He predicts that “The raft of new blank sailings is likely to cause capacity issues for backhaul shippers in Europe and North American in March and April. They need to start preparing for this situation as well as for a possible spike in freight rates.”

(“Will coronavirus hike rates for backhaul US-to-Asia cargoes?” American Shipper, Feb. 12, 2020, https://www.freightwaves.com/news/will-coronavirus-hike-rates-for-backhaul-us-to-asia-cargoes)

According to Bloomberg, “The disruptions to sea cargo flows have compounded an already pressured situation for shipping lines as they struggle with weaker markets and higher costs from new International Maritime Organization (IMO) regulations on low-sulfur fuel.”  From Jan. 1, vessels had to cut emissions of sulfur oxides. As a result, the cost of the bunker fuel that ships were using collapsed, because it contained too much sulfur. At the same time, the new fuel surged in price.

Many ship owners needed urgently to have their vessels retrofitted at shipyards in China with equipment called scrubbers. The scrubbers would allow ships to keep legally burning high-sulfur fuel, saving the owners millions of dollars a year.  Supertankers that have the scrubbers fitted earn about $15,000 a day more than those that don’t have them. Over a year, that means scrubber-fitted ships earn about $5 million more.  Peter Sand, chief shipping analyst at industry group BIMCO, explained, “Coronavirus is closing down retrofit yards in China – naturally extending the waiting time for ships with a slot time for a retrofit. The uncertainty of how long this is going to take is massive.”

(“Shipping Gets Smashed by Coronavirus in More Ways Than One,” Bloomberg, Feb. 10, 2020, https://www.bloomberg.com/news/articles/2020-02-10/shipping-is-getting-smashed-by-coronavirus-in-more-ways-than-oneå)

A Scandinavia-based tanker owner complained, “We got two ships in Southern China that need to be retrofitted. They were supposed to be back in the water over the next couple of weeks, but we were told the yard has issued force majeure certificates for eight vessels they are working on, saying the virus will push back deliveries by a minimum three weeks.”  (By declaring force majeure, companies can legally seek to avoid penalties that may result from not fulfilling contracts.)

According to the Wall Street Journal, ship broker Clarksons PLC has said that deliveries of new tankers, bulk ships, and container ships will also probably be delayed in coming months because of coronavirus.  The WSJ reports that “Chinese shipyards have 960 vessels in their order books worth a combined $27 billion, according to VesselsValue Ltd., a London-based maritime service.  “We are working at around a quarter of our capacity,” said an executive at China State Shipbuilding Corp., which employs more than 300,0000 workers. “The supply chain for some yards has been seriously impacted. Spares aren’t being delivered and engineers are still at home.”

(“Coronavirus Toll on Shipping Reaches $350 Million a Week,” Wall Street Journal, Feb. 10, 2020, https://www.wsj.com/articles/coronavirus-toll-on-shipping-reaches-350-million-a-week-11581366671)

The shipping industry naturally does badly when Chinese demand slackens, but the coronavirus outbreak has not only reduced the amount of cargo that needs to be shipped and disrupted shipping routes, it has also prevented many owners from making their ships commercially viable.  Bloomberg reports that “The huge capesize carriers that take iron ore and coal to China are now earning less than $2,600 a day, according to the Baltic Exchange in London. That’s just a fraction of what they need even to pay their crew, and 93% below a 2019 peak. Supertankers transporting 2 million-barrel cargoes of crude have collapsed about 95% from their high point last year.”

(“Shipping Gets Smashed by Coronavirus in More Ways Than One,” Bloomberg, Feb. 10, 2020, https://www.bloomberg.com/news/articles/2020-02-10/shipping-is-getting-smashed-by-coronavirus-in-more-ways-than-one)

To put ship owners’ losses into perspective, the breakeven rate for a capesize carrier is over $10,000 per day.

American Shipper notes, “Coronavirus has come at an extremely inopportune time for the sector. The LNG commodity price in Asia is now at a historically low level, making it uneconomical to ship U.S. LNG to the Pacific Basin. Clarksons Platou Securities estimated that LNG spot shipping rates were $49,500 per day on Friday, down 42% month-on-month.”

Shipping firm equities are suffering, too. According to Frode Mørkedal, managing director of research at Clarksons Platou Securities, “Shipping equities finished last week down materially again, bringing the US and European-listed equities to year-to-date losses of 22% on average.”  The Jefferies Shipping Index is down 30% year-to-date, and the Capital Link Maritime Index is down 24% year-to-date.

Randy Giveans, Jefferies shipping analyst, said, “Last week, many shipyards in China declared force majeure related to the coronavirus outbreak.”  J. Mintzmyer, shipping analyst at Seeking Alpha’s Value Investor’s Edge, noted, “Thus far, the average tanker stock decline has wiped out between 23 years of implied average profits.… The market is saying that the current conditions have essentially destroyed the entire bull cycle. Does this make sense? I think we’ve already massively overshot any rational fundamental impact, but if the coronavirus does inspire an economic collapse in China, which triggers a global recession, then obviously things will come down far faster.”

(“Coronavirus fallout for ocean shipping intensifies,” American Shipper, Feb. 10, 2020, https://www.freightwaves.com/news/coronavirus-fallout-for-ocean-shipping-intensifies)

There has been considerable uncertainty in markets the past few days over the question of whether the coronavirus pandemic is still accelerating, or plateauing and maybe even subsiding. However that question is resolved, the economic effects will certainly be profound, and shipping executives speaking at the Tradewinds Shipowners Forum New York event on Thursday, Feb. 13, cautioned against market optimism:  “I think the markets and many people are still underestimating the knock-on effects that the coronavirus will have,” warned Angela Chao, CEO of the Foremost Group, a dry bulk shipping owner that does business with China.

“…the U.S. [stock markets] were still up,” she said. “There’s still not a full realization of the interruptions to the workforce, of people trying to get back to work in China, to our supply chains. All of that is going to have a tremendous effect….“People are still likening the coronavirus to SARS. The viruses are very different, and more importantly, China’s position in the global economy, both in terms of its connectedness as well as its impact, is completely different.”

(“Some shipping execs fear markets underestimate virus,” American Shipper, Feb. 12, 2020, https://www.freightwaves.com/news/some-shipping-execs-fear-markets-underestimate-virus)

Cumberland portfolios have minimal exposure to shipping and no direct stock exposure.  Shipping is a small part of the broad based ETFs.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Wuhan Coronavirus Series
by David R. Kotok

https://www.cumber.com/wuhan-coronavirus/


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David Kotok: Discussion of Financial Markets with Chuck Jaffe – Money Life (Radio)

David Kotok, Chief Investment Officer/Co-Founder, Cumberland Advisors, joins Chuck Jaffe on his program, Money Life, for an interview about what to expect for 2020.

David-Kotok-Radio-Money-Life-Blue

LISTEN BELOW OR AT THE LINK HERE: https://soundcloud.com/user-195074568/david-kotok-discusses-financial-markets-on-money-life-with-chuck-jaffe

Cumberland Advisors Podcast - Listen on SoundCloud
Like this interview? Listen to a previous 2018 interview David had with Chuck.

 

If you like this interview, many more are to be had at the moneylifeshow.com website.

NOTE: Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.


If you like podcasts, check out this one from 2015 featuring David Kotok talking about his background and Camp Kotok with Barry Ritholtz. They also talk about the history of Cumberland Advisors since its founding, and delve into fundamental principles of investing and valuation.


Links here
https://itunes.apple.com/us/podcast/masters-in-business/id730188152?mt=2

And here
http://www.bloomberg.com/podcasts/masters-in-business/




Cumberland Advisors Market Commentary – Does Trump-Navarro Equal Smoot-Hawley?

George Santayana said “Those who cannot remember the past are condemned to repeat it.”

Market Commentary - Cumberland Advisors - Global Trade

In an article titled “The Smoot-Hawley Tariff and the Great Depression,” authors Theodore Phalan, Deema Yazigi, and Thomas Rustici assess the role the Smoot-Hawley Tariff Act played in the Great Depression:

“In 1930, a large majority of economists believed the Smoot-Hawley Tariff Act would exacerbate the U.S. recession into a worldwide depression. On May 5 of that year, 1,028 members of the American Economic Association released a signed statement that vigorously opposed the act. The protest included five basic points. First, the tariff would raise the cost of living by ‘compelling the consumer to subsidize waste and inefficiency in [domestic] industry.’ Second, the farm sector would not be helped since ‘cotton, pork, lard, and wheat are export crops and sold in the world market’ and the price of farm equipment would rise. Third, ‘our export trade in general would suffer. Countries cannot buy from us unless they are permitted to sell to us.’ Fourth, the tariff would ‘inevitably provoke other countries to pay us back in kind against our goods.’ Finally, Americans with investments abroad would suffer since the tariff would make it ‘more difficult for their foreign debtors to pay them interest due them.’ Likewise, most of the empirical discussions of the downturn in world economic activity taking place in 1929–1933 put Smoot-Hawley at or near center stage.” (https://fee.org/articles/the-smoot-hawley-tariff-and-the-great-depression/)

In 2019, nearly every economist disagrees with the Navarro-advised Trump tariff policy. At our recent gathering in Maine we polled the group, which represented about $2 trillion in assets under management and thousands of households and many hundreds of thousands of beneficiaries of retirement plans and millions of investors and savers in the US. Asked about Navarro, 1 supported him, 36 opposed, and 3 weren’t sure. Asked about the Trump trade policy, about 3/4 of our group opposed it and saw it doing increasing damage to the US.

The late Allan Meltzer noted in A History of the Federal Reserve Volume 1: 1913-1951 that “Research suggesting a small effect [i.e., from tariffs] ignores the pronounced effect on farm exports, distress, bankruptcies, and bank failures in farm states” (p. 564, note 299). Readers are invited to check the rising bankruptcy statistics in farm states in 2019. The Trump-Navarro trade policy is responsible; the correlation between the Trump trade war and rising distress is very high.

How historic and vital are the fundamental economic lessons of the Smith-Hawley Tariff Act and its consequences? As Milton Friedman and Anna Jacobson Schwartz note in A Monetary History of the United States, 1860–1967, “To find anything in our history remotely comparable to the monetary contraction of 1929–1933, one must go back nearly a century to the contraction of 1839 to 1843” (p. 299, chapter 7). I recommend that readers who wish to take a deeper dive study all of Chapter 7.

Dear readers, this is a brief response to the events of Friday, August 23, 2019. I could easily add 100 citations.

Peter Navarro owns the advisory role and the argument in favor of the present US trade war policy. President Trump owns the decisions. Together they are digging a hole, and that hole is getting deeper. Market agents know it. Farm-state voters know it. Financial agents know it.

No matter what Navarro says and whom Trump blames, the truth is that the responsibility for the economic slowdown and the financial volatility lands squarely on the Oval Office desk and in the lap of the president and his advisors. He does not have the courage to admit an error. He avoids any self-blame. He constantly bashes the Fed since it (and Jay Powell) is a convenient and distracting target.

There is a fitting adage attributed to Will Rogers: “If you find yourself in a hole, stop digging.”

Mr. Navarro, Mr. Trump, read history. You are digging a deeper and deeper hole for the nation and the world. Stop digging.

David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio


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Cumberland Advisors Guest Commentary –  Trump, Trade, Taxes, Troubles.

Guest Commentary by Bob Brusca
Bob Brusca, Chief Economist of Fact and Opinion Economics, sent a research note entitled “Why Trump is nagging Powell.” He included this chart. Note the dates.ISM ‘Trump’ rankings

The table above ranks the change in the ISM (Mfg.) and its components from their levels on the eve of Trump’s election to the current month. The ISM and other indicators initially jumped after Trump’s election, but now all that exuberance is gone. The ISM is the weakest it has been since November 2016. So are order backlogs, production, prices, new export orders, and import orders. There is a somewhat better ranking on inventories (not a good result, since inventories are still relatively high while output is on its lows). Nothing in that table will be liked by Trump or his economic team – his bragging rights are “slip-sliding away.”

We thank Bob Brusca for giving us permission to use his chart. We agree with his assessment.

Dear Readers, if you want to see the toll taken by the tariff war, here it is. Remember, no one wins in a trade war. Both China and the US are losing. Both are blaming the other side for the deterioration. Before this trade war started, the data in the chart pointed toward growth. Now it has reversed. There is little prospect for improvement unless and until there is a reversal in the trade war.

For months we have written about this issue. Trump’s supporters have hammered us and accused us of political bias. We want to remind them that we supported the original tax cuts, and we strongly supported the repatriation program that Trump originated and that he got passed in the first of Trump’s two congressional sessions. Now Trump is embroiled in various and sundry nastiness contests, and the upcoming election will mean a stalemate for legislative initiatives.

Meanwhile, Trump has squandered all the gains from the tax cut and repatriation and reversed the benefits by following the broad tariff approach advised by Peter Navarro. We have written and still believe that Navarro is sinking his president, and we watch as the defenders of Trump’s policy are digging in.

Markets are proving this assessment correct. And market agents see right through Trump’s blame-the-Fed and blame-Powell Twitter storm. Powell didn’t make the mess that is shown in that chart; Powell and the Fed have to navigate monetary policy because of it. Powell didn’t create the tariff wars. And Powell did not create the global economic weakness from trade war effects, nor did he promote the negative-interest-rate policy that now has $14 trillion in debt trading at an interest rate below zero.

I’m not defending the Fed’s communication. They have made a few gaffes, and they could be much clearer in their messaging. Trump’s blistering attacks on them doesn’t help anything.

Also, the Trump attacks, which call for lower interest rates on the capital-market side, ignore the reduction of interest earnings on household savings. Thirty million American households watch their interest earnings go down every time the Fed cuts rates. Actually, the number may be much larger than 30 million. The metrics used to estimate the effect of a lower interest rate on savings are debated. But no one debates that when you cut the earnings on savings you cause consumers to retrench out of fear and raise their savings to protect themselves. That is the effect.

What would the political fallout be if millions of Americans realized that the Trump call for lower Fed rates, which is directed at Powell, is also a Trump call for a lower amount of interest to be paid to every American with a CD or a savings account? Why hasn’t media commentary focused on the savings/earnings side? Why only the capital-market side?

Anyway, we’re in a summer of intensity. The Fed outlook is still unclear and uncertain. The Trump Trade War has just ratcheted up another notch. The economy is grinding along. The world looks beleaguered.

We have a cash reserve. Thanks to the Fed and to President Trump, who gutted the cut he badgered Congress to win, the earnings on that cash just declined a quarter point.

Camp Kotok is in Maine in a few days. The conversations will be fierce. We will report on them.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Too Many Uncertainties

Excerpt from Barron’s

Too Many Uncertainties
06/21/2019 By Paul Farrell

Cumberland Advisors William Bill Witherell Ph.D.

Barron’s writer, Paul Farrell, assembles a collection of outtakes for his piece titled, “Too Many Uncertainties.”

Destabilizing

Second-Quarter 2019 Review
by William Witherell, Ph.D. of Cumberland Advisors

June 20: The factors that have led to high volatility in the global equity markets during the quarter are still present. Foremost are the destabilizing effects of rising trade and technology tensions, which are hurting manufacturing sectors in many countries, disrupting global value chains, and weighing heavily on investment decisions. Global trade has slowed dramatically, from a 5.5% annual pace in 2017 to a projected rate of 2.1% this year. The second cause of market volatility, related to the first, has been the slowdown in global economic growth and increasing concerns about the possibility of recession in major economies including the US. Along with the trade concerns, the easing of growth rates in China, India, and many other emerging markets; the contracting of the manufacturing sector and consequent weakness in Europe; and the stagnating Japanese economy have added to growth worries.

–Bill Witherell

To be considered for this section, material, with the author’s name and address, should be sent to MarketWatch@barrons.com

Read the full collection of excerpts at the Barron’s Website


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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U.S. Trade Representative is grilled on Capitol Hill about China and Mexico

U.S. Trade Representative is grilled on Capitol Hill about China and Mexico

June 18, 2019

Yahoo Finance - David R. Kotok - U.S. Trade

President Trump’s top trade negotiator Robert Lighthizer was in the Congressional hot seat today facing tough questions from lawmakers on trade and tariffs. Rick Helfenbein, American Apparel and Footwear Association CEO, joins Yahoo Finance’s Julie Hyman and Adam Shapiro, Cornell Capital’s Ann Berry and Cumberland Advisors Chairman David Kotok to talk about the latest trade headlines.

“The tariff wars create winners and losers. You just hear from losers. They’re worried. With good reason. There are no tariffs on the healthcare sector. You can’t name them. It’s 18% of our GDP. In our portfolios, we’re overweight in the healthcare sector. Why? Do we want this tariff war? No. But as a portfolio manager and investment advisor, you have to pick and choose. And tariff wars by definition pick winners and losers and they have unintended consequences. And we’re just seeing the unintended consequences revealed now,” says David R. Kotok.

Watch at Yahoo Finance or in the embedded player below.




More on Tariffs

Assessing the impact of the series of US tariff changes in 2018 and 2019 is difficult. The tariffs have been revised and updated over time. Indeed, MarketsInsider lists about 27 tariff-related events and announcements between March 2018, when President Trump announced tariffs on steel and aluminum imports from all countries, and May 23, 2019.[1] They have involved different countries and have impacted literally thousands of products. Sometimes tariffs have been imposed without allowing enough time for buyers of the products to arrange new suppliers or to make other supply chain adjustments. Still, it may still be possible to assess the impact of the tariffs based upon work done by independent groups like the Tax Foundation, the Peterson Institute for International Economics, and various Federal Reserve Banks.

Contrary to public opinion, the first round of tariffs on Chinese imports was not focused on consumer goods but rather mainly on intermediate goods and capital goods, which amounted to products worth about $32 billion against which tariffs would be levied. The following graphic shows the breakdown. In the case of these products, the importer paid the tariff and either absorbed the cost, negotiated a lower price from the China supplier, and/or passed the price increase on to the final goods producer as an input cost increase.

Policy changes in June 2018 added some products to the China import quota list and dropped others. For example, flat-screen televisions and aluminum were dropped, while tariffs were imposed on semiconductors and plastics. Changes were also made to components of other intermediate and capital goods. Not long after these tariffs were imposed, impacted countries responded with tariffs on US exports. The following table details those tariffs. The impact of China’s tariffs on US agricultural products is clearly significant. But interestingly, the impact was delayed, since much of the crop had already been planted and pre-sold. However, come fall, substitute crops in Brazil were planted and subject to sale to China. The real impact on US farmers didn’t show up until this planting season, when demand has dried and prices have been halved.

Since the initial rounds of import and retaliatory export tariffs have been imposed, many changes have been made in US policies, and the US has negotiated a revised trade agreement with Canada and Mexico, known as USMCA, which has yet to be approved by Congress. For example, the US lifted tariffs on steel and aluminum imports from Canada, Mexico, the EU, South Korea, Brazil, Argentina, and Australia in March, 2018. But then in June of 2018 the US removed the steel and aluminum exemptions for the EU, Canada, and Mexico, resulting in a 25% tariff on steel and 10% tariff on aluminum from those countries. Predictably, the affected countries retaliated with tariffs on US exports, detailed in the table above, that included whiskey, boats and yachts, motorcycles, blue jeans, corn, and peanut butter. Note that the tariffs imposed on most of these products and others listed in the table above impact farmers in the Midwest and manufacturers in Ohio, Michigan, and other states that supported the president in 2016. At first, it appeared that the US and China might agree on a compromise trade deal, but in early May 2019 negotiations between the US and China came to a standstill, and both countries have now imposed additional tariffs on each other’s goods.

Now, in an abrupt departure from normal trade negotiations, the administration has suddenly imposed a 5% tariff on all Mexican exports to the US as a tool to force the Mexicans to do more to stem the flow of asylum seekers through their country to the US. Furthermore, the tariffs would increase by five percentage points each month until 25% is reached unless Mexico deals with the immigration issue. Left unspecified is what steps Mexico should take, but more upsetting is that this apparent switch in policy seems to be absent a tariff strategy and puts the USMCA agreement in limbo. The uncertainty that this surprise policy has introduced is reflected in reactions not only from the US Chamber of Commerce but also from investors.[2] The Dow Jones index dropped over 350 points on Friday, May 31. Some have argued that the administration has exceeded its executive powers and that Congress should step in to address this issue. Indeed, key Senate Republicans have stated that they don’t support the proposals to impose tariffs.[3]  Stop-and-go, kneejerk government actions without a cohesive strategy have far-reaching economic implications for business decision making and are not good for the economy or for international relations.

Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
Email | Bio





Sarasota financial advisor: Don’t panic over trade tariffs!

Sarasota financial advisor: Don’t panic over trade tariffs!

By Ray Collins | May 15, 2019

John Mousseau says it is important not to get caught up in concerns about a trade tariff war with China.

“If you’re sitting there and you read just the headlines, it looks like a cannon ball shot across the bow of the ship. In essence what it is, is just a shot in a longer term negotiation. I think it was long overdue to negotiate with some trading partners. The U.S. — in terms of being a world partner — has given up more than it has gotten in the last few years,” Mousseau said.

Mousseau said neither the U.S. or China wants a full-scale trade war.

Read and see more stories by Ray Collins here:  https://www.mysuncoast.com/authors/raycollins/

 




Cumberland Advisors Market Commentary –  Robert Brusca Ph.D. on Tariffs, Trade, and the Fed

Market-Commentary-Cumberland-Advisors-Trade

My longtime friend and veteran international economist, Bob Brusca, has given us permission to publish his superb discussion of the trade war effects.

Here is the link: Robert Brusca, Ph.D. of FAO-Economics on Tariffs, Trade, and the Fed

-David




This Is a Serious Confrontation Between World’s Biggest Economies, Says Cumberland’s Kotok

This Is a Serious Confrontation Between World’s Biggest Economies, Says Cumberland’s Kotok

Bloomberg Daybreak Asia
May 9th, 2019, 9:10 PM EDT
Bloomberg-This Is a Serious Confrontation Between World’s Biggest Economies, Says Kotok

David Kotok, chairman and chief investment officer at Cumberland Advisors, discusses the U.S.-China trade negotiations and their impact on markets. He speaks on “Bloomberg Daybreak: Asia.” (Source: Bloomberg)

Watch at on Bloomberg.