Iron Capital Insights

  • Iron Capital Insights
  • July 26, 2018
  • Chuck Osborne

It’s All Connected

Different people see the world differently, and until you learn that, it can be difficult to communicate with someone who simply does not see what is so plain to see from your perspective. For me, it is connections. I see connections almost everywhere and sometimes I can grow impatient with people who don’t see it.

We currently have two connected things happening that I am not sure many people see. The administration is negotiating trade with the European Union. There is a threat of adding a 25 percent tariff on auto imports from Europe. Let’s ignore for a second that European car companies currently export more cars from their plants here in the United States than they import. There is a reason the new football and soccer stadium in Atlanta is named Mercedes-Benz Stadium, and most BMWs one might see on American roads were built in South Carolina. But we are going to pretend that German vehicles are actually all made in Germany. Even in this fictional world, does the tariff threat make sense?

The idea of tariffs on foreign cars is to protect our car companies from unfair competition. By adding 25 percent to the cost of foreign cars, our car makers can afford to sell their cars at a higher price and still be competitive. There is just one problem: We also put tariffs on aluminum and steel. This may seem like a totally unrelated issue, but they are connected.

Wednesday morning General Motors (GM) reported earnings. They actually did ok for the past quarter, but they reduced their full-year guidance. For those who don’t spend their lives analyzing the stocks of companies, managers of companies whose stock is publicly traded usually share with investors what they believe their short-term business results will look like. We call this guidance. In the case of GM, how many cars do they think they will sell and how much money will they make on each car.

GM told us today that they will make less money on each car because the cost of aluminum and steel has increased exponentially. Stock of General Motors is, as of this writing, down more than 7 percent. A 25 percent tariff on European automobiles will not overcome the increase in steel and aluminum cost. GM and Ford will still lose. I am guessing that Chrysler will end up having to pay the tariff since they were given to Fiat and are therefore European. Even if I’m wrong about that, they still lose.

Of course, the biggest loser in tariffs is the consumer, or to be more clear, you. Cars are about to become more expensive, and when this happens, many people will be out blaming it on capitalism. They will all but forget about the tariffs that started this painful cycle. They just don’t see the connections.

The administration says that all of this tariff business is part of negotiating. They say they would actually like to see no tariffs. This is just the “art of the deal.” In this regard we all should be pulling for them, because if this all works then it will lead to a better world. I have my doubts about this working, but there is no doubt that in the meantime GM’s stock is down 7 percent and the markets as a whole are just stuck and going nowhere. They are going nowhere in spite of a currently growing economy. They go nowhere because the threat of tariffs loom. You see, it is all connected.

Warm regards,

Chuck Osborne, CFA