By Mark Bern, CFA
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North Korea denuclearization.
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Trade negotiations.
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U.S. pulls out of Iran Nuclear Pact.
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New services coming soon!
North Korea
President Trump may not get everything he would like but it
appears likely that he will get more concessions from North Korean leader Kim
Jong Un than any previous president has obtained. He has created more leverage and leaned on
China effectively for help. Kim may not
give up all of his nuclear ambitions but it is very likely, in my humble
opinion, that he will give up testing and development of long-range missiles
that could endanger the U.S. The hope of
regional U.S. allies, of course, that North Korea is willing to give its bombs
as well.
The biggest uncertainty that looms in the air presently is
the apparent discord between China and the U.S. over trade. But I believe that an agreement with North
Korea will probably get done prior to any conclusions in negotiations with
China. If a trade war were to break out
between the U.S. and China, both would suffer but China’s economy would suffer
more. So, it behooves this
Administration to bring negotiations with North Korea to a conclusion quickly
while the leverage with its benefactor remains in place. A trade war could unravel any deals with
either party. I could be wrong, but I
don’t expect that to be the end result.
Trump and the Republicans will want to get this done before
the mid-term election for political reasons.
The American people will want it done for security reasons. The President could sign the treaty without
the consent of Congress, similar to how the Iran treaty was handled by
President Obama. But then the treaty
could be overturned by the next Administration.
With passage through Congress it would become binding upon all future
administrations. It is a big
difference.
If the treaty goes before Congress for approval I would
expect Democrats to attempt to slow the process but such a maneuver could prove
damaging to their campaigns. If they can
come up with a plan to neutralize the fallout they could try to block it, but I
suspect that to be too risky. So, the
more probably outcome will be stalling the vote, if possible, until after the
elections. How it all plays out will
depend upon polling of voters.
Democrats will probably demand minor changes to the
agreement publicly calling them absolutely necessary, just as Republicans
conceivably would if the tables were turned.
In the end, it could come down to the President signing without
Congressional approval in order to garner the win going into the mid-terms.
Trade Negotiations
You already know my expectations from my previous musings,
so I won’t go into great detail on everything, but it seems important to
explain what is going on at this point in the process.
The President allowed temporary waivers of tariffs on steel
and aluminum for Canada, Mexico, the EU (European Union) and other allied trade
partners. The important word in that
last sentence is “temporary.” If those
trade partners come up with concessions that remove trade barriers against U.S.
companies in time the waivers could become permanent. But, if they do not, time is running out and
the waivers will expire. This is a
negotiating tactic to level the trade playing field and reduce the one-sided concessions
historically accepted by the U.S. It may
or may not work with the EU and Japan but I give it a better chance with Mexico
and Canada because those countries exports to the U.S. of those commodities are
significant and meaningful to their respective economies. The states that could be hurt the most from
an increase in steel and aluminum import costs (due to tariffs) are Missouri,
Louisiana, Connecticut and Maryland.
Overall steel and aluminum imports account for only about 2%
of U.S. imports and idle domestic capacity could easily come back online to
fill any gap were the price to be more stable (without the potential for
subsidized imports) at reasonably profitable levels. The
states that could be hurt the most from an increase in steel and aluminum
import costs (due to tariffs) are Missouri, Louisiana, Connecticut and
Maryland. These states imports of those
two commodities range from 7.5% to 5.5% of all import costs, respectively.
EU GDP growth slowing in 2018
Last year ended with stronger growth in aggregate for the EU
block at 2.4% for 2017. But the first
quarter of 2018 has slowed considerably, clocking in at 1.7%. The first quarter is often slower than the
rest of the year so expect GDP growth for the EU closer to 2.0% for the full
year. That is far below the expectations
for 2018 from forecasters at the beginning of the year which averaged around
2.5%.
Such a disappointing showing is likely to encourage the ECB
(European Central Bank) to continue its quantitative easing program into 2019. That is good for global growth for as long as
cheap money is still available institutions will borrow and reinvest wherever a
better return can be had.
It also means that the Euro is likely to devalue relative to
the USD (U.S. dollar). That will
probably have negative consequences for many emerging market investments where
much of the debt in those economies is denominated in USD. But, because the trend is likely to be
gradual the turmoil should be contained having little affect on the U.S.
economy.
Iran
I suspect that the President wants Iran to denuclearize, as
what we may see in North Korea. But, in
order to achieve that outcome, he had to tear up the original agreement because
it only puts off the inevitable.
The argument on the other side of the coin is that the
current agreement could be extended when it was originally scheduled to
end. But now we will never know if that
were possible or not.
What I hope President Trump wants to achieve is a better,
more permanent agreement that will forestall a nuclear race in the Middle
East. I think that he believes that this
would be the eventual outcome if nothing were done. But that would have impossible as long as the
current deal existed because Iran would have absolutely no incentive to amend
the agreement.
So, the President decided to pull out of the deal, against
the advice of leaders around the globe, and attempt to create a position of
strength from which to conduct future negotiations. Iran could take a similar stance and try to
advance its nuclear program. This may
turn out to be a contest of will and we can only hope that the President is
right and much smarter than most of us believe.
As always, I attempt to remain neutral politically. Is he crazy or crazy like a fox? We shall see.
New Service from Bern
Factor LLC coming soon
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the other will have a dividend growth orientation. The third model portfolio will be an index of
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classifications) identified. The index
will include all but the 40 industries that I determine to possess the least
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This model portfolio will be equally weighted and designed to provide
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I will manage all three portfolios with a long-term horizon
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More information and detail are to come as each model portfolio
launches.
Respectfully and Candidly,
Mark Bern, CFA
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