Iron Capital Insights

  • Iron Capital Insights
  • March 9, 2018
  • Chuck Osborne

Real Steel

“We are bigger than U.S. Steel,” said Hyman Roth to Michael Corleone in the classic film, “The Godfather Part II.” That scene was placed in a Cuban hotel shortly before the conclusion of the Cuban Revolution in 1959. The irony being that both the mob and U.S. Steel had begun to decline in importance by the time the movie came out in 1974. Those trends have continued to this day.

Who knows, in 1959 steel production might very well have been an issue of national security, but I’m not sure how important domestic steel is in a world where our greatest threats come from terrorists and cyber-attacks while all that foreign steel comes from our arch nemesis…Canada. This I do know. Protectionism was one of the main causes of the Great Depression and helped to create an international environment that eventually led to World War II. The lesson we supposedly learned from this is that trade promotes both prosperity and peace. After all, we should want to “keep our friends close and our enemies closer,” as advised by Michael Corleone also in “The Godfather Part II.”

So, what are these tariffs really going to accomplish and how will they impact our investments? Now that they have been announced, not much. With Canada and Mexico being exempt this really becomes more political theatre than anything else. It does, however, bring to mind something that goes with the mindset of the tariff supporters. Those who back such policies tend to see commerce as a zero-sum game. In other words, they see day-to-day transactions as having one winner and one loser. This is how most sports work, after all, and we tend to use lots of sporting analogies. Next week we will begin March Madness, one of the best times of the year for college sports lovers. At the end of each game, one team will go home and one team will move forward.

That, however, is not how commerce works. When I go buy a new suit, it is not a zero-sum game. The store where I go wins when they sell me a suit, and I win when I have a new suit to wear and enjoy. Commerce is by nature win-win. Good business people understand that they only win over the long term if their customers win. Good customers also understand that if they want to have good service and enjoy quality products, then the companies they choose to do business with must want to have their business. It is relational, not transactional.

This is one of the many reasons tariffs are so disastrous. It just sends the wrong message, and eventually it does not work as companies find alternatives and workarounds. When I was in college many years ago we learned about the foolishness of sugar tariffs and how Americans paid far more for sugar than most people around the world. Those tariffs protected sugar beet farmers but hurt food companies. Now Americans enjoy high fructose corn syrup.

If tariffs raise the cost of steel for large manufacturers like Ford, or Boeing, they will simply ship the steel to a plant somewhere outside the U.S. and then make whatever they were going to make there. One would think an administration which just reformed the corporate tax system would understand this.

This is not the first time economic realities which have been proven over time have been ignored by politicians. George W. Bush slapped a tariff on steel, before removing it. The Obama administration used price-fixing in their healthcare law, another proven economic loser. We don’t seem to learn, do we?

This folly is yet another reminder of how important it is to invest from the bottom-up. Know what you own and why you own it. These exemption-filled tariffs should not be a factor.

Warm Regards,

Chuck Osborne, CFA

Managing Director