Iron Capital Insights

  • Iron Capital Insights
  • June 22, 2018
  • Chuck Osborne

Ugly Negotiations

Negotiating is almost always ugly. In my family we learned to negotiate as soon as my oldest sister could drive. My sister’s new license meant that Dad didn’t have to go with us to pick out our Christmas tree. He gave us about half the amount of money we actually needed and told us to go get a tree. Somehow, we always did. I remember my brother showing the tree salesperson all the needles falling off the tree. The man asked, “What do you expect this close to Christmas?” To which my brother responded, “I expect a bargain.” Those were the days.

This skill came in handy when my college girlfriend needed help buying a car. At the last second, the dealer added one of those not-previously disclosed fees. If I recall correctly it totaled about $1,000. I stood up, helped my friend up, said thank you anyway and started walking for the door. By the time we got to the door, the fee had disappeared. We turned around and completed the purchase. This is why car dealerships are now “no-haggle.” Now everyone just pays more, but we’re happy about it.

Well, this administration haggles and so do the Chinese. The markets, let’s face it, are dominated by young professionals (or the computers those youngsters program) who never had to bargain for anything. I learned this the hard way a few years ago when my wife and I sold our old house. A young couple made an offer, we countered, and they disappeared. They are probably still crying in a real estate agent’s office somewhere.  They don’t like negotiating, and they sure don’t like doing it the way this administration does it.

This market is becoming more and more fixated on trade and it is getting ahead of itself. The market, after all, does not reflect the present; it reflects the consensus of what the future will look like. When the trade talk started it reflected winners and losers; now in the past few days it has seemingly shifted to predicting that everyone will lose. The market is telling us that the trade disputes with China will offset the economic benefits of tax and regulatory reform and plunge us back to the new normal. This means people are selling everything except the high-growth FANG stocks. It is 2016 all over again. For a week anyway.

The market is not always right, and at the very least it would seem that it is early. The real economy doesn’t change that quickly. It is also possible that Trump could win this. The market isn’t giving him much of a chance, and I readily admit that I have my doubts.

When my brother got us that Christmas tree bargain, the owner of that tree lot knew that once Christmas had come and gone those trees would be almost worthless. When I helped my friend get her car, that dealer had to make room on his lot. China, on the other hand, doesn’t have to do anything. Trump is guaranteed just two more years in office, and if he were to win re-election that would be six years. Since Trump, Peter Navarro, and Wilbur Ross are the only three people in the free world who don’t seem to understand that trade is good for America, it is doubtful – regardless of party affiliation – that the next President will be as aggressive with China. Long term to the Chinese is more than one generation. They have just given their leader a lifetime term. Six years is nothing. Time is on their side, and time matters when one is trying to perform the art of the deal.

I could be wrong. The Chinese may cave to administration demands, and supposedly if that happens, then free trade here we come. I doubt it, and so does the market.

The question for us now is, how much damage will really be done? Presidents of both parties have done economically stupid things since the beginning of our nation and we have survived. The economy is good now and has been getting better. I suspect the market is overreacting to how bad this will really be. Which, of course, is unknowable.

That is why we don’t really try to guess the impact on the entire economy. We invest from the bottom-up. It is much clearer how this does or does not impact individual companies. We will be focused on what actually happens to sales and earnings at the companies we own. That is prudent investing.

Negotiating is ugly. Sometimes it is better not to look.

Warm regards,

Chuck Osborne, CFA
Managing Director