For the last several weeks, the market has been falling down, but after the “fed speak” earlier this week, it came to life with a booming day. The market could go higher, although I think it is unlikely.
Why do I think this?
With the constant risk of escalating tariffs, no business leaders are very likely to expand their operations. Most of the solutions to rising tariffs are moving production facilities to more favorable locations and stock piling components from tariff effected regions. Moving production is a very expensive and time consuming process. Some will just “sit on their hands” waiting for stability to return to markets. Some have started the moving process.
Moving production is very expensive and will hit companies P&L’s. Additionally, no one knows if tariffs will expand to other locations. The worst thing is to go to a lot of expense and, then, get hit with tariffs in the new location. All this will cause many business leaders to go in a “holding pattern”. That will not add to growth and it will likely decrease growth. With so many large US companies being internationally exposed with their production, the effect will be negative.
The effort to stockpile is only a temporary solution. No matter how much is stockpiled, eventually more purchases will be required. In the near term, stockpiling has improved GDP as businesses prepare for the storm. Stockpiling will also cause inventory stocking costs to increase. The more a business stockpiles, the longer they will be insulated from the storm of tariffs. But, there is a cost in doing so. The less a business stockpiles, the lower the impact will be on stocking costs, but acquisition costs will increase with the tariffs. Eventually, all will be feeling the pressure of the tariffs. It is just a matter of time!
In economics, what is one person’s income is other’s costs. The consumer drives 70% of the GDP. Businesses have been cranking out record profits which are most recently starting to tail off. While stockholders and business executives are making out well, the average worker hasn’t seen a rise in their income for many years. Who is going to buy all the increasing goods to drive the economy? Sure consumers can borrow and funds are available. Once the “tide” of the economy psychologically changes, those funds will dry up quickly and overburdened consumers will be losing jobs. None of this is great for an expanding economy.
Let’s look at the fed now. The fed indicated they will be accommodative which drove the market earlier this week. The feds job is to keep the economy lubricated with monetary resources. It is businesses responsibility to drive production. It looks like a football game that the fans are focusing on the people taking care of the turf the game is being played on versus focusing on the strategy and efforts of the players on the field. This is just plain silly. Is the turf team supposed to bring victory?
Until there is more stability in the constant “tariff scare” and more spreading around of the wealth through wider and less concentrated monetary benefits to the few, economic growth is destined to suffer.
While I am an investor, I do not see near term favorable growth prospects. Many high paid professionals in the market are just oblivious to what is going on all around them. To get real growth, everyone must benefit from executives and stockholders to employees and customers. It is that simple.
