All posts by Dr. ESP

Know When to Fold ‘Em

Economics

I think it was a big mistake, this Chinese escalation, because they’re playing with a pair of twos.  What do we lose by the Chinese raising tariffs on us? We export one-fifth to them of what they export to us, so that is a losing hand for them.

~Commerce Secretary Scott Bessent

If nothing else, everyone in the Trump administration from the top down is all in when it comes to poker analogies.  Just months after Donald suggested that Ukraine did not hold the cards needed to continue its resistance to the Russian invasion, we have a former hedge fund manager telling the Chinese they have a weak hand when it comes to Trump’s trade war.  The last time I sat around a card table, a pair of twos looked pretty good compared to $36 trillion worth of IOUs.  More importantly, Bessent once again proved that these supposed Wizards of Wall Street often do not know squat about business.  Let me explain with the following example.

Trade wars have a lot in common with price wars except in price wars the goal is to undercut the competition by offering similar goods and services for LESS money.  In a trade war, the prime directive is to INCREASE the cost to your consumers of the competition’s goods and services.  In both situations, the winner is always the entity that has the resources to take a short term hit to achieve its long term objectives.  This is exactly what happened during the 1980’s energy crisis.

I will start with a brief history of oil prices during this volatile period.  In December 1979, the price of a barrel of oil peaked at just under $40 ($158 in 2025 dollars) due to three primary factors: (a) increased demand driven in large part by economic growth in China and India; (b) OPEC’s restructuring of the global production and distribution system; and (c) uncertainty in the Middle East (Islamic Revolution in Iran).  The historic oligopoly of American and British firms (known as the “Seven Sisters”) responded in hopes of retaining their market share. First, the higher per barrel price made it profitable to invest in infrastructure to increase exploration, drilling and production.  Second, oil companies began investing in non-traditional means of extracting oil.

Perhaps the most infamous example was the Colony Shale Oil Project in the Piceance Basin of Colorado.  It began in 1964 as a pilot project between Standard Oil of Ohio and Tosco, which had developed technology to extract and refine the oil embedded in shale rock.  Atlantic Richfield joined the partnership in 1969, followed by Ashland Oil and Shell Oil in 1974.  In 1980, Exxon bought a majority share in the venture for $300 million and began construction of a commercial scale shale oil plant with a capacity to produce 46,000 barrels of shale oil per day.

In the mid 1980s, when I held the position of deputy director of the Texas Economic Development Commission, I was invited to attend a roundtable sponsored by the Hunt Oil and Petroleum Company, owned by the Hunt family then headed by the Lamar Hunt, son of the founder H. L. Hunt.  I wish I had a transcript of Lamar Hunt’s opening comments.  However, I never forgot three things he told us that day.

  • All the sheiks who oversaw oil operations in OPEC member nations were educated at the finest American universities including Harvard Business School, University of Chicago and Wharton.
  • OPEC members built huge cash reserves while the per barrel price between 1980 and 1986 doubled and even tripled the margin per barrel.
  • If and when OPEC believed substitution of alternative sources (e.g. shale oil) would threaten their market share, OPEC would drop the price per barrel of their oil to make any alternative economically unfeasible.

And that is EXACTLY what they did.  In July 1986, the price of oil fell to $9.25 a barrel when OPEC flooded the market.  Over the next four years, U.S. oil fields were abandoned, and the Colony Shale Oil Project was shuttered.  And the price of oil eventually returned to its pre-1980 levels, peaking at $30.86 in October 1990.  FOOTNOTE: In addition to the $5.5 billion dollars of sunk costs Exxon put into the Colony project, they also had to compensate Tosco to the tune of $380 million.

Exxon was not the only loser.  Interest rates, especially for mortgages, rose to 19 percent.  Inflation reached a high of 14 percent.  Unemployment averaged 11.1 precent in 1982 and 12 percent in 1983.  The housing market collapsed with many homeowners holding outstanding mortgages higher than the total value of their real property.

Surviving a trade war depends on the following:  sufficient resources to minimize the negative impact, patience and public support.  Already faced with massive debt, does the Trump administrative really think it can afford to write checks to farmers and companies to compensate them for lost markets?  Or juice the economy with tax cuts?  Both could have dramatic effects on inflation and interest rates.  Will the American public tolerate a new round of inflation and higher consumer prices before taking to the streets?  (Oh, they already have.)  And finally, even if there is a light at the end of this tunnel, business leaders and financial analysts agree it is years in the offing.  Will Americans wait that long for some uncertain payoff?

China’s retaliation is unhampered by any of these three concerns.  They have the reserves.  They can play the long game.  And they can suppress public opposition.  Which is why Secretary Bessent’s assessment in the opening quote is wrong.  China’s hand, at a minimum, holds THREE twos, not just a pair.  And the U.S. still has a stack of IOUs that is likely to grow dramatically in the near future.  Trump may think his on-again, off-again tariff chaos is akin to holding his cards close to the vest.  Does he not realize most of it is public information?  And what is not being reported by the media is probably available on a Signal chat or Gmail.

For what it’s worth.
Dr. ESP

Cheerleading the Apocalypse

Media

Where you stand depends on where you sit.

~Miles Law

Skeptics of the efficacy of Miles Law need look no farther than a six minute interview on this morning’s edition of CNBC’s “Squawk Box.”  Co-anchors Becky Quick’s and Joe Kernan’s guest was Michael Wieder, president of Lalo, a baby products company founded in 2019 by Wieder and partner Greg Davidson. 

The interview, as evidenced by the following transcript, is best described as a “tale of two careers.”  Quick’s education and professional pursuits are centered on the field of journalism.  While working towards a B.A. in political science at Rutgers University, she served as editor-in-chief of The Daily Targum, the school newspaper, and was awarded a Times-Mirror fellowship.  Before joining CNBC, Quick reported on retail and e-commerce for The Wall Street Journal.

Kernen is “a host of a different color.”  Despite a University of Colorado B.S. in cellular biology and an M.S. in molecular biology from MIT, he began his career as a stockbroker at Merrill Lynch before taking management positions at EF Hutton and Smith Barney.  He then joined the Financial News Network as a stock analyst moving to CNBC following the 1991 merger with FNN.

With this background information, no one should be surprised how the segment played out.  Quick introduced Wieder, during which she explained why he had been invited on the program.  Lalo is a small business that imports much of its inventory from foreign suppliers. 

QUICK:  He estimates he may need to pass on 10-20 percent increased costs from tariffs to consumers at this point.

WIEDER:  We import product from several foreign countries including China, Turkey, Taiwan, Vietnam and Thailand.  We anticipated this. We dropped prices on a lot of products.  We expected tariffs.  People may find that shocking, but the cost of child care has gone through the roof.  We didn’t want the price of essential products to go up, but this changes everything.

QUICK:  How did you do that?

WIEDER:  Deepening relationships with our partners.  Negotiating. Three week ago we launched in Target.  We are reaching way more consumers through that market.  We launched the company one year to the day of the COVID lockdown.  All of these challenges test the resiliency of a small business.

QUICK:  I would imagine you are also trying to figure out your own margins in the face of these tariffs which were higher and more extreme than anyone was expecting.

WIEDER: The number we should be focusing on is not even 34 percent. It’s 79 percent because it’s stacking.  This is not a supply chain that exists anywhere else in the world.  Most of our products are made in China and that’s because over decades there has been an industry focused on creating regulated, safe products for parents and children in China.  That doesn’t exist anywhere else.  We don’t want to jeopardize safety.  We don’t want parents to make decisions based on the cost of the goods.  What happens if you don’t put your child in a car seat because it’s too expensive or a high chair or a proper bath tub?

QUICK: What would it take to get you to manufacture back here in the United States?

WIEDER:  To be honest, it’s not even really possible.  There are decades of engineering talent, compliance talent understanding the safety and regulatory components that go into making the products that we make.  We looked into it.  China is making food grade silicone.  The United States is making dirty industrial products.  So it’s a massive shift.  It can’t happen overnight.

[At this point Kernen jumps in, dressed in a crop top, pleated skirt, waving pompoms to derail Wieder’s affirmation that the Trump assessment his tariff roll-out is “going really well,” is complete BS.]

KERNEN: Didn’t they have that terrible baby formula.  When was that?  [Several seconds of dead air] So there’s no way you can bring it home?

WIEDER:  Unfortunately not.  Not in a considerable amount of time…

KERNEN:  [again interrupts Wieder]  You’re not talking about labor over there.

WIEDER:  Labor does play a part because there is assembly over there.  But for us, we want to make the highest quality products and we want to make sure we’re delivering safe products.  And at the right price.

QUICK:  Do you hope there are exemptions?

WIEDER:  Yes, you look at Section 301.  List 4b included baby products for a reason.  The administration protected American families.  Our hope is that will continue.  [NOTE: This exemption was negotiated in December 2019 by Trump’s trade representative and remained in effect until Tuesday’s “Liberation Day” announcement.]

KERNEN:  [Again interrupts with a smirk on his face] Actually it was 17 years ago, [reading from a piece of paper] Chinese dairy company intentionally tainted baby products to increase profits and pass quality control tests.  Six infants died and 6,200 were sickened.  So you’re saying your main thing is silicone.  [Wieder starts to respond but Kernen interrupts] You can’t get clean silicone in the United States?  What do they put in breast implants?  No, seriously.

WIEDER: I’m not familiar with that industry.  But what silicone is made in the United States is mostly industrial products, car parts and things like that.  You don’t have that talent that understands the compliance and regulatory requirements.

QUICK:  Thank you for joining us this morning.

I will leave it to the reader to decide whether Kernen’s contributions to this discussion are (a) irrelevant, (b) offensive, (c) moronic or (d) all of the above.  But it might not surprise anyone this was not a one-off.  After all, Joe Kernen is the same guy who asked a guest during a discussion of bank notes in India:

[Imitating an Indian accent no less] Is the Indian rupee accepted as currency at 7-Eleven stores?

My guess is Kernen honed his faux Indian accent listening to South Asian classmates at MIT who actually became molecular biologists instead of chasing a fast buck on Wall Street.

For what it’s worth.
Dr. ESP

Ghost of April Fools Day Past

Random Thoughts

During last night’s edition of “A Closer Look,” Seth Meyers compared Donald Trump’s tariff announcement to Caligula’s appointing his horse to the Roman senate.  Although Meyers described the story as “apocryphal,” he wondered if such a presence in the United States Senate would result in the equine always voting “neigh” on legislation.  Or whether a Cory Booker-like speech in the Senate chamber by a female member of the “world’s greatest deliberative body” would be known as a “filly-buster.”

I am always amazed what triggers long-shelved memories.  In this case, I returned to my senior year (1966-67) at Thomas Jefferson High School (TJHS) in Richmond, Virginia during which I served as sports editor of our student newspaper The Jeffersonian.”  As I still try to do on this blog, I viewed that year as an opportunity to approach my responsibilities counter-intuitively, including stories outside the usual high school sports fodder. 

Emulating my then sports journalism idol George Plimpton, I finagled an interview with Meadowlark Lemon of the Harlem Globetrotters which included a brief game of one-on-one.  (I did not embarrass him.)  Or during pre-game warm-up, playing catch with future New York Yankee pitcher Ron Reed when he was still on the roster of our hometown Triple-A Yankee affiliate the Richmond Virginians.

But the most outrageous effort to push the envelope and the subsequent series of events occurred in April 1967.  In 1966, President Lyndon Johnson introduced what he called “The President’s Challenge” to promote physical fitness among the country’s youth.  Participants received points for various physical fitness activities or sports participation.  Based on the number of points amassed, students received a Presidential Champions Award ranging from bronze to platinum.

In the April 7, 1967 issue of The Jeffersonian (that year April Fools Day fell on a Saturday), we published a story describing how TJHS embraced Johnson’s fitness initiative by adding polo to the school’s sports programs.  The article include a picture of the president seated on a polo pony.  (For you youngsters out there, PhotoShop was decades away.  The picture was created by cutting and pasting printed pictures and then photographing the resulting montage.)  The caption read, “President Johnson on his favorite filly, Buster.”  You can imagine my delight when Meyers made a similar reference 58 years later, proving that some puns are timeless.

But the story does not end there.  We sent a copy of the newspaper to the president.  And much to our surprise, we received a letter on White House stationery thanking us for establishing a polo team at TJHS.  It was signed by “Lyndon B. Johnson” (or more likely by his autopen).  The text was included in “Letters to the Editor” in a subsequent issue though many students thought we had also manufactured the response.

POSTSCRIPT

While researching the history of The President’s Challenge, I came upon a reference to a story on the U.S. Department of Agriculture webpage “MyPlate.gov” which was summarized on Wikipedia as follows:

The Trump administration terminated the program on June 30, 2018. The reason stated was that the private sector created many other tools that have the same purpose, so it was discontinued to invest in newer ways to help Americans have a healthy lifestyle.

When I clicked on the Wikipedia link to the source material, it took me to “MyPlate” which now informs readers.

We’re sorry. The page you are looking for could not be found. You can try using the search box on the top of the page.

Thank you for visiting MyPlate.gov. Have a happy and healthy day! 🙂

One can only assume the private sector companies to which the Trump administration referred included KFC, McDonalds and E-Z-GO/Cushman golf carts.

For what it’s worth.
Dr. ESP

Liberation Day Math

Economics

Former Daily Show host Trevor Noah often reminded viewers, “Two things can be true at the same time.”  One of his most famous examples concerned the dichotomous responses to George Lloyd’s death in May 2020 at the hands of Minneapolis policeman Derek Chauvin.  As a Black man who grew up in South Africa during apartheid, Noah said he did not consider it an oxymoron to be supportive of Black Lives Matter and opposed to defunding the police.  Taking both sides of an issue is possible when we are focused on interpretation of the facts, not the facts themselves.

Which brings me to the topic du jour, Donald Trump’s designating April 2, 2025 “Liberation Day.” There has never been a better example of the difference between opinion and fact. At the heart of Trump’s performative White House celebration is a new round of global tariffs.  Commerce Secretary Howard Lutnick (the billionaire who wants us to believe his mother-in-law lives hand to month but would not complain if she did not get her monthly Social Security check) “… promised Americans that grocery prices would start coming down in early April but warned that there would be price increases on foreign goods as a result of the Trump administration’s anticipated reciprocal tariffs.”  (Source: NBC News)  In contrast, “One model constructed by the Federal Reserve Bank of Boston suggests that in an extreme scenario, heightened taxes on U.S. imports could result in a 1.4 percentage point to 2.2 percentage point increase to core inflation.”  (Source: CNBC)

Proponents say reciprocal tariffs will encourage America consumers to purchase goods and services produced by domestic manufacturers leading to sustained job growth and lower unemployment.  Critics suggest tariffs on raw materials and parts needed to produce those goods and services will result in a rash of business closures and/or downsizing leading to supply-chain disruptions, long-term inflation and higher unemployment.  Prior to implementation of the tariffs and analysis of the ensuing data, it is impossible to determine who is right and who is wrong.

Not so with one aspect of the tariff regime which Trump has touted on numerous occasions.  As reported by the non-partisan Tax Foundation:

Last week, former President Trump took his affinity for tariffs much further, floating the possibility of entirely replacing the federal income tax with new tariffs.  (June 18, 2024)

The Tax Foundation went on to put this proposal in historical perspective.  Using the most recent available date (FY2021) as a benchmark, they report Americans paid $2.2 trillion tax on $15 trillion of individual income.  That same year, tariffs on a total of $3.4 trillion in imports generated revenue of $80 billion (not quite tit for tat).  Extrapolating these figures to determine the tariffs required to achieve Trump’s policy objective, the Tax Foundation found, “To replace the roughly $2 trillion of revenue raised by the individual income tax with tariffs would require astronomically high tariff rates.”  They project fully replacing the individual income tax would require a 69.9 percent tariff on ALL imported goods and services. 

What does that mean for the average consumer?  A Hyundai Tucson which sells for $38,000 today, according to their model, would now cost $64,562.  Which explains why Trump’s proposal makes even less sense.  Trump claims the tariffs will encourage Americans to buy domestically produced automobiles.  Let’s assume he is correct.  In which case, the $3.4 trillion total value of imports would decline significantly, requiring an even higher tariff to reach the tariff/income tax break-even point.

In other words, two things can be true at the same time when it comes to opinions.  But not when it comes to facts. Just one more example how the stable genius sitting behind the Resolute Desk can turn an oxymoron into something just simply moronic.

For what it’s worth.
Dr. ESP

Surviving Trumponomics

Economics

In his platform for reelection in 2024, President Donald Trump promised to “build the Greatest Economy in History.” But in his first 60 days as president, the stock markets have dropped like a rock: The S&P 500 is down 7%, the Dow Jones has dropped 6%, and the Nasdaq has plummeted 10%.

~Fortune Magazine

If you are one of those people who took pride in the return on investment (ROI) of your 401(k) or IRA during the Biden administration, congratulations.  But do not consider yourself a financial wizard.  The scope of broad-based gains across most investment instruments assured that whatever choice you or your advisor made would have produced more than satisfactory results.  Of course some ROIs were better than others, a good indicator being whether your ROI was above or below the ROI if you had only held shares in an S&P 500 mutual fund.

As noted in the above quote, the situation in the opening months of Trump 2.0 suggests one metric of financial acuity would be whether your portfolio decreased percentage-wise less than the S&P 500.  Though “I only lost five percent compared to seven percent” is not very satisfying.  Here is where yesterday’s post “Telegraph” comes into play.

Donald Trump does not play by the old rules.  Maybe you should not either.  For example, financial advisors have historically said that you are better off letting your investments “ride” during stock market booms and busts.  That axiom is based on the assumption that it is hard to predict the top of a bull market or the bottom of a bear one.  However, you do not have to be an unintentionally invited member of a policy chat on Signal to know exactly what Donald Trump is going to do to roil the markets and when he is going to do it. His “attack plan” against the world economic order is so clear even a political scientist can figure out the impact on stock prices.

I call it the “penny saved is a penny earned” approach to survival in the Trump economy.  Here’s how it has worked so far.  Despite promises of new global tariffs, it was clear financial pundits at the Wall Street Journal, CNBC and Fox Business (another cohort of oligarchs’ useful idiots) believed this was more Trump bluster.  And as lemmings do, investors heralded the second coming of Trump with optimism resulting in a rise in the S&P index by almost two percent in the first 30 days since January 20th.  So for the very short term it made sense to let your investments ride.

But even the dumbest investors realized that Trump had convinced himself (again, his one man game of telephone) that tariffs were the answer to all the country’s ills. So on day 31, all you had to do was put all your IRA or 401(k) assets in non-equities (e.g. money market accounts, CDs or bonds), resulting in the following payoff.

Assume you had a portfolio valued at one million dollars.  On February 20, you put it all in a money market account at the current interest rate of 4.05 percent.  We are not talking about a “penny” saved.  By March 20, you would have saved $70,000.  Additionally, on March 31 you would receive $3,375 in interest.  If and when the Trump administration concedes “no mas” and takes off its tariff gloves, which he will surely telegraph in time for you to buy back into the market, you will have saved tens of thousands of dollars in the interim.  And if he does not, the savings will keep accumulating.

No need to stop there.  There are already opportunities to increase total savings.  For example, you plan to buy a new car this summer.  Yesterday, CNBC.COM reported if you make that purchase before April 2, you will save an average of $8,000 on the transaction.  Another “penny,” or in this case 800,000 pennies, saved.

Bottom line.  What Trump, et. al., are doing to America is not normal.  Neither should a creative response to Trumponomics follow norms.  The new metric of choice should be savings, not ROI, at least until the point in time ROI stands for “rejection of insanity.”

For what it’s worth.
Dr. ESP