Thanks to the St. Patrick’s Day editorial page of the Wall Street Journal, I learned about American Keg in Pottstown, PA, the only remaining U.S. manufacturer of stainless steel beer kegs. Their biggest seller is the 15.5 gallon keg, very popular with fraternities, bars, and restaurants. Despite competition from Germany and China with cheaper kegs, American Keg has survived by selling to craft brewers that want to support American workers and steel. So far this is an inspiring, patriotic story about American businesses that prioritize their values over the cost of production as much as they can to stay viable.
But now the story starts to go haywire. Donald Trump has been salivating over tariffs for many, many years. Upon his election, U.S. steel producers began raising prices in anticipation of Trump’s tariffs. Consequently, the cost of American hot-rolled steel has increased by more than 35%, and when Trump signed the tariff orders on March 8, prices increased by more than 4% in one day.
CEO Paul Czachor worries that Trump’s tariffs could put American Keg out of business, and he has already laid off 10 of his 30 workers. Trump’s destructive tariffs may help 140,000 workers in steel production but punish 6.5 million workers in steel dependent industries. Trade policies are complicated. Tariffs are not something you blurt out at a surprise meeting blindsiding your chief economic advisor and all U.S. manufacturers and trading partners. The steel tariffs cover only raw steel materials, not finished products like imported kegs, so the kegs from Germany and China will have even more of an edge over American Keg. Craft brewers can only stand so much patriotism before their ideals turn destructive to their business results.
“Why would you do that, Mr. President, when we would rather work than be on welfare?” asks Mark Foster, age 55, one of the 10 workers laid off at American Keg. The Journal editorial concludes that American Keg is being punished, not by competition, but by President Trump’s “rotten policy.”
Phases One and Two
As fiduciary investment managers, we appreciate the positive returns for our clients helped by Trump’s business friendly developments, including deregulation and tax cuts. The February jobs report revealed that non-farm payrolls grew by 313,000 new jobs, and 800,000 workers came off the sidelines to join the labor force, the largest labor pool rise since 1983. This is a big deal. 2017 fourth quarter corporate earnings grew by 14.8%, and Ed Yardeni, veteran Wall Street researcher and author, reports that the tax cuts have nearly doubled Wall Street’s expectations for the 2018 S&P 500 earnings growth rate from 10% to 19%.
I think of these positive developments as Phase One of President Trump’s economic accomplishments. I am concerned however that Phase Two is beginning with destructive behavior that could undermine everything good from Phase One. It seems likely that chief economic advisor, Gary Cohn, resigned because Trump went around the process that Cohn had developed for economic decisions. How do you deal with an organization that operates without processes? It has been true since the beginning of our republic that the president gets too much credit for a strong economy and too much blame for economic weakness. No man or woman makes the market or the economy.
All Talk/No Action
On April 3, Yahoo Finance featured this headline; World Financial Markets are Betting that Trump is All Talk and No Action. It is apparent that Trump likes to begin negotiations by punching his opponent in the face. The all talk/no action aspect is manifest in Trump blurting out his blanket steel and aluminum tariffs followed by exemptions for almost every trading partner including Canada, Mexico, and the EU. There was the punch in the face followed by the backing off. As a result, steel prices have been volatile making it very difficult to run a manufacturing business. It may be too late for American Keg. Maybe Trump’s financial friends can convince him of how much he is harming the U.S. economy and market.
Trading Partners Respond
Our trading partners have been very clever and strategic in their retaliation announcements if Trump followed through with his metal tariffs. The EU threatened to put tariffs on Kentucky Bourbon, the home of Republican Senate Majority Leader Mitch McConnell, and Harley Davidson motorcycles in Wisconsin, home to the Republican Speaker of the House, Paul Ryan. Choosing these two products to punish is not a coincidence. The EU is getting the attention of Republican leadership. China is taking a similar approach with its retaliatory strategy by going after pork and agriculture, the heart of Trump voters in Iowa and all of the agricultural states.
Tariffs will punish the American consumer. Thanks to world trade, we have enjoyed low prices for many years, which improves our quality of life. 42% of the clothing and 72% of the footwear purchased in the U.S. come from China. How would you like to experience a 25% increase in the cost of clothing and food this summer? On March 31 in the Wall Street Journal, FactSet, a U.S. financial research company announced that the tech companies in the S&P 500 are poised to post 22% earnings growth in Q1 2018. The force of economic growth in the U.S. and abroad will prevail over Trump’s histrionics.
There is a lot to think about here, so I am going to reflect at my favorite craft beer garden, Drakes Dealership on Broadway in Oakland.