Last night Trump backed away from the proposed Border-Adjustment tax plan the Republicans had been touting.
From the WSJ:
President-elect Donald Trump criticized a cornerstone of House Republicans’ corporate-tax plan, which they had pitched as an alternative to his proposed import tariffs, creating another point of contention between the incoming president and congressional allies.
The measure, known as border adjustment, would tax imports and exempt exports as part of a broader plan to encourage companies to locate jobs and production in the U.S. But Mr. Trump, in his first comments on the subject, called it “too complicated.”
“Anytime I hear border adjustment, I don’t love it,” Mr. Trump said in an interview with The Wall Street Journal on Friday. “Because usually it means we’re going to get adjusted into a bad deal. That’s what happens.”
Although some US trading partners might be breathing a sigh of relief, I don’t think anyone should be assuming Trump will embrace a free trade philosophy anytime soon.
Trump’s protectionist bias runs deep. Have a look at this great paragraph highlighted by Modest Proposal:
Trump has indicated the Republican Border-Adjustment tax was too complicated, and it is easy to understand why. Over the past week I have tried to wrap my head around all the implications from the proposed tax program. It has not been easy.
The American President was elected on a platform of saving jobs for the disappearing manufacturing class. This will be a tall order. One that will most likely fail. The last thing Trump wants is a program not easily understood by those who elected him. No, he wants to be able to point to all the tariffs he imposed on ‘unpatriotic’ companies.
Some market pundits believe Trump’s bluster regarding trade is merely a negotiating tactic. I have stopped trying to read some alternative motive into Trump’s rhetoric. Although for a while I wondered if Trump’s extreme positioning was an act, and one that would find him running back towards the centre once elected, I have given up hope.
For me the final straw was Trump’s first press conference as President elect. I would try to explain my disappointment regarding his performance, but ZeroHedge posted an article that captured my sentiments better than I ever could:
“Total fiasco, utter circus!” cried the CIO. “KGB videos, golden showers, kompromat, and his temper tantrum over that CNN reporter,” he continued, breathless. “Single worst press conference for a world leader in history. The $2bln Dubai deal. That random pile of manila folders. The dopey lawyer. Gimmicks, conspiracies, rambling bluster. We didn’t learn a single thing about policy. For the sake of our nation, pray The Donald sticks to Twitter.”
Yet the really funny part of the ZeroHedge article was the next couple of lines:
And he paused, collected himself. “But the thing that upsets me most is that it didn’t spark a big enough correction to let me back into all my favorite Trump trades.”
Trumphoria runs so deep, even a fund manager that describes Trump’s appearance as the “single worst press conference for a world leader in history,” is only upset because the stock market did not decline enough for him to buy.
Investors are so optimistic about Trump’s igniting of animal spirits that, even faced with an “utter circus,” all they want to do is write more blue tickets.
Well, I am not nearly as optimistic.
I think Trump means what he says, and will legislate much like he campaigned - off the cuff, erratic and completely ignoring the so called “experts.” He won the Presidency by expressing his beliefs - no matter how cringe worthy they happened to be.
Trump does not believe in free trade. In fact, he thinks it is the root of most American economic problems. Just because he doesn’t support the Border-Adjustment tax doesn’t mean he is done trying to change America’s trade policy.
Last night Trump commented on the strong US dollar. Much to everyone’s surprise, he did not support a strong US dollar policy like previous administrations. I don’t know why this is news. It is obvious that Trump will also use a weak dollar as another trade tool.
Trump will use all his levers, in the most unconventional means, to accomplish what he wants - to bring manufacturing back to America. Full stop. It is not more complicated than that. To believe otherwise is naive.
What this means for the markets is more complicated. I would argue that trade wars are not stock market friendly, but so far I am blowing in the wind. Until now, most other countries have refrained from responding to Trump’s rhetoric. But do you really think China or Germany will simply lie down and take Trump’s policies without retaliating?
I suspect that once Trump is elected, the market will be surprised at how quickly he enacts trade tariffs. And then, the market will be caught even more off guard by the retaliatory responses. I am shocked at how most market pundits are missing the Smoot Hawley’ness of all of this.
All I can figure is everyone keeps thinking Trump will not go that far. He will pull back before anything really bad happens. Well, sold to ‘em.
The biggest mistake of 2017 will be to assume Trump doesn’t mean what he says.
As for specific trades, I think there is an interesting opportunity presenting itself from recent developments. Although most markets are underestimating follow through from Trump’s rhetoric, there is one country taking it on the chin.
Mexican markets have shit the bed. Big time. Since Trump’s victory, the peso has been clobbered by almost 20%. Fears of Trump’s ire being taken out on Mexico has created an environment where investors have fled with a shoot first ask questions later attitude. It has been made worse with the recent developments of a couple of US car makers’ who had planned Mexican plant expansions being threatened by the President elect.
In the mean time, the US’ other neighbour has quietly been ignored.
As Canadians we are used to being ignored, but I think the market is missing the massive potential economic ramifications Trump’s policies could have on the Canadian economy.
Many market pundits don’t realize it, but Canada is America’s largest trading partner. In fact, America trades almost as much with Canada as they do the entire European Union!
Now it is true that the balance of trade with Canada is much more equal than other countries that Trump is singling out. But we would be fools to think Trump’s focus will not turn to Canada.
Recently Honda announced a $400 million expansion of their Canadian plant located in Ontario. How long before Trump is tweeting that this investment should be redirected towards the US?
This risk is being overlooked by the market.
Canada is much more vulnerable to Trump’s trade war than anyone else, yet our markets have not corrected at all.
I am shorting CAD. I don’t want to be exposed to the US dollar as I don’t think Trump wants a strong greenback, so I am hedging my short CAD by buying some Mexican pesos on the other side. Whereas the risks of Trump’s policies are under appreciated when it comes to Canada, it terms of Mexico, the market has assumed the worst. Mexico’s fortunes are not nearly as bleak as most predict.
Finally I am also shorting some CAD versus AUD. Although I understand all the risks to China, and by extension Australia, I want to find another commodity currency to be long against Canada. Australia fits the bill.
Either way, I think shorting CAD against almost every other currency except the US dollar offers a great risk reward opportunity.
It almost seems unpatriotic of me, so to make up for it, I leave you with an actual ad that we ran a couple of weeks ago when the Canadian junior hockey team was playing… Yup - you read that right. We even take our junior hockey seriously…
Thanks for reading,