Random Musings on Markets 33⅓ - The (Probably Not) Final Musing

This week, we offer you quick coverage of the EU once again fining a big tech firm, the hullaballoo over two words the Fed head uttered, trade talk^[i] and the “Three California” initiative’s death. As ever, none of these are huge market movers, but they are a collection of small observations we hope are enjoyable—and help inform your market views.

EU Gets Bored, Fines Tech Firm for Being Tech Firm

By now you have probably heard that the EU fined a Tech firm whose trading name rhymes with Floogle for doing what basically all companies who sell an operating system do: Preloading a bunch of hardware with said operating system and pre-installing its own apps. The EU has decided this runs afoul of antitrust laws and ordered the company not to pass Go until it pays $5.1 billion. As this follows the EU’s decision to slap fines on companies whose names rhyme with Flapple and Flarbucks for allegedly avoiding corporate taxes, some observers are worried about an increasingly adventurous Brussels whacking Tech giants with regulatory uncertainty.

While this EU version of what we call “government creep” doesn’t strike us as the most wonderful development, we also doubt it does much harm. Multibillion dollar fines look big to those of us who don’t have billions of dollars. But to companies worth several hundred billion—and who can pull in around $100 billion of sales or more each year—paying a couple billion here and there isn’t so dire. And as this New York Times analysis shows, it hasn’t historically hurt the targeted stocks. We also daresay it isn’t a surprise, as investors are increasingly aware of the EU’s tendency to treat foreign Tech firms as its personal cash cow, perhaps to make up for member-states’ inertia on “harmonizing” corporate tax rates.

The Fallacious “For Now” Furor

Two weeks ago, referring to speculation over the BoE’s rate-hike plans, we showed you forecasting central bankers’ actions—based on their words or data—is impossible. They are a small cabal of humans, a particularly unpredictable species.

But it seems global financial media didn’t get the memo.^[ii] Earlier this week, Fed head Jerome Powell testified before the Senate Finance Committee (read his full testimony here). In it, he stated:

With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that—for now—the best way forward is to keep gradually raising the federal funds rate. [Boldface ours.]

Those two bolded words drove a flood headlines. To Bloomberg it signaled “…Fed Rate Hikes Not on Autopilot.”^[iii] MarketWatch claims this use of “for now” is unprecedented.^[iv] Australia’s Sydney Morning Herald piled on, arguing those two words “…Put the World on Alert.”^[v]

We don’t think so. Monetary policy was never predictable. Policymakers adjust their views based on their (biased) interpretations of incoming data—and their forecasts of future data. You can’t know which data points they stress (smile counts?) or how they interpret them, much less how they will interpret them in three, six, nine months. Time and again policymakers in America and elsewhere set expectations—then dash them. Remember 2012, when the Fed set expectations of rate hikes as soon as unemployment hit 6.5%? They didn’t do it. Ditto for January 2016, when the Fed’s “dot plot” supposedly foretold four rate hikes that year. They hiked once. BoE Governor Mark Carney went against his own forward guidance so much, one lawmaker likened him to an “unreliable boyfriend.” So take Powell at his word: The monetary policy you have seen is the monetary policy “for now.” However, that isn’t news—just a statement of the obvious.

The Art of the Trade Deal?

There is a lot more tariff talk in the news this week, but more interesting to us are some under-the-radar trade-related nuggets. For instance, while President Trump and EU trade officials jawbone about auto tariffs and retaliation, Trump’s trade team has been quietly discussing reducing auto tariffs—potentially to zero—on both sides of the Atlantic. EU Commission chief Jean-Claude Juncker is reportedly bringing a freer-auto-trade proposal with him to Washington, D.C. next week. Midweek, White House economic advisor Larry Kudlow let slip that the administration and Chinese officials have largely agreed on a plan to cease their trade spat and address some of the administration’s concerns about market access and intellectual property protections, but Chinese President Xi Jinping is sitting on it for now—an assertion China rejects. Friday morning, Trump told CNBC he was ready to tax effectively all Chinese imports,^[vi]repeating an earlier vague reference.

There is a lot of hearsay in the preceding paragraph, and who knows whether any of these potential things will come to pass. But it does strike us as evidence these tariffs are more about leverage and negotiations than anything else. It is classic Art of the Deal strategy: Start big and crazy, then slowly moderate till you get a deal. We don’t like tariffs, but they do seem to be spurring talks.

This is a big reason we believe fearful headlines are probably overstating the economic impact. Most media coverage presumes the tariffs will keep snowballing and remain in effect permanently. Their apparent purpose as negotiating tactics cuts against that. This is also why we don’t really buy the occasional headlines that the stock market is somehow complacent about or ignoring trade war risks. Markets price in all widely known information. Fed surveys, global fund manager polls, Purchasing Managers’ Indexes and just about every sentiment gauge out there show businesses are uniformly worried about tariffs and their potential economic impact. Stocks are fully aware. Perhaps this is just one of the many cases where the market is rightly looking past the hype and weighing probabilities, rather than wretched distant possibilities.

You Can’t Have It Both Ways

The EU is reportedly considering retaliatory tariffs if President Trump enacts global auto tariffs. To us, this highlights an odd commentary/behavior mismatch among America’s trade partners. Their reaction to Trump’s (tiny) tariffs seems to go as follows:

• Step 1: Outrage! Tariffs are bad! We agree, they are, though the recent ones are very small.
• Step 2: Claim tariffs will shoot America in the foot by jacking up prices on consumers. True, though the recent ones are too small to do material harm, in our view.
• Step 3: Implement retaliatory tariffs and possibly global ones, in part to prevent producers from sending excess goods to your nation below market prices. (“Dumping” them.)

Wait.

What gives with step three? If 1 and 2 are actually what these nations believe, why would retaliatory tariffs ever make sense? If an American import tariff is self-defeating, aren’t EU import taxes … the same? Sorry, Brussels. You can’t have it both ways.

Further, if you follow the logic in step 2—that tariffs harm consumers by inflating prices—why try preventing “dumping”?

We guess we shouldn’t be surprised, as reason is to politics what oil is to water. It is a popularity contest, with hypocritical rhetoric common.

Prop 9, We Hardly Knew Thee

Last month, Californians itching for a protest vote against their state’s clunky administration and unchecked one-party rule got some timely news: Venture capitalist Tim Draper’s proposed ballot measure to split the state into three had received over 600,000 signatures, earning it a place on November’s ballot. But Thursday, the state’s Supreme Court nixed it. On one hand, this makes us sad because the vote would have been tremendously interesting. On the other, it eliminates possible uncertainty over state regulation and taxes that could have resulted.

The plan, which would have carved out a beachside state from Los Angeles to Monterey County and split the remaining portion into northern and southern halves, was never going to actually come to fruition. Even if it passed, the actual split probably would have needed a two-thirds majority vote from the state government and approval from Congress. Getting even one of the two to agree to allow a blue state to split itself into two blues and a red? Unlikely. Yet at the same time, we were really looking forward to the vote. One, it would have been amusing. Two, philosophically speaking, Draper sort of has a point? This is a really, really, really big state with diverse industries and competing interests. What’s right for Hollywood may not be right for Silicon Valley, probably isn’t right for Redding and quite likely makes no sense for Central Valley farmers. Even if Prop 9 passed but went no further, perhaps Sacramento would at least get the message that voters want more federalism within the state.