In February, I hosted a webinar for clients suggesting people see Trump’s actions in different ways. To one group, he can do little wrong. To another, everything he does is wrong. Because his actions have consequences to the economy and markets it is important to avoid this kind of thinking.
To watch the Webinar, click February Webinar: President Trump Portfolio Implications
Remember, President Trump made his career as a negotiator and that, as a businessman, he tries things until he gets it right, knowing that it is impossible to win without some losses.
On May 31, the New York Times article, Trump Targets German Trade, and the South Grimaces, suggested Trump is starting a trade war against Germany. Trump said, “Germany is very very bad,” and threatened to levy a 35% import tariff on cars imported from Germany.
On the surface this is ridiculous, even outrageous. Our own South Carolinian friends reacted predictably. In the NYT article, USC Economist Doug Woodward stated that our foreign trade partners need to make decisions for “100 years” and that Mr. Trump’s statements are moving in the direction AWAY from open trade.
Clearly a negotiation is in progress which suggests Trump’s comments need to be considered in context.
If you have read Art of the Deal, then you know how Trump negotiates. He starts big and then compromises. This means journalists, professors, and politicians are likely to over-react to his statements.
Trade with Europe is a complicated problem. Germany has benefited from a weak Euro, Germany has a trade surplus with the US, and Germany (and other European countries) has not been paying its fair (and agreed on) share to NATO.
Trump has a duty to persuade European leaders to trade with us fairly and to pay their fair share to NATO.
Rick Danner, Mayor of Greer, SC said in the article “Trump’s tweets should be taken with a grain of salt.”
But again, you don’t have to take my word for it. On the same day the New York Times published this article, Morningstar stock analysts increased the fair value of BMW by 3 Euros on the prospect of lower corporate taxes:
“We have raised our fair value estimate on the shares of narrow-moat-rated BMW to EUR 110 from EUR 107. Morningstar now believes that tax reform under the Trump administration is more likely than not.” Morningstar stock analyst Richard Hilgert.
This suggests Trump’s policies (in total) may be better for BMW than worse.
How global trade will evolve is complicated. Digitization (winner takes all for a good idea) and globalization (jobs gravitate to low cost regions) will continue to eliminate both blue and white-collar jobs. While the implications of this are too broad to discuss here, I recommend The Second Machine Age by Eric Brynjolffson, at the MIT School of Digitization.
Because our children’s and our grandchildren’s livelihood literally depend on it, this is a problem we must address.
As investment advisors, it is our job to understand what is happening in the real economy.
And, according to researchers we admire the world economy is looking up. Not only the US, but International developed and emerging market economies are looking better. They have already been cheaper and now the earnings of companies in these countries are improving. This is especially good because it is positively affecting investments.
Now back to that Morningstar analysis of BMW. Morningstar values BMW at 110 Euro. BMW currently sells for 84.26 Euro. BMW is a holding of one of our favorite portfolio managers.
But even BMW is not a one hundred year bet according to this portfolio manager. Because in 20 years most cars are unlikely to be running on internal combustion engines (which is the key competitive advantage BMW enjoys) and it remains to be seen who will dominate the electric market.
Maybe your child or grandchild will unlock the secret to nuclear fusion (hint it’s an engineering problem). Imagine what the future would be like then.