Trump’s Protectionism Will Cause Financial Collapse
President Donald Trump’s protectionism could have some benefits for the real economy in the short term. But those same benefits will crush stocks, triggering a financial collapse.
The coming financial collapse won’t affect all stocks equally. Some will fare much better than others (to see which ones, keep reading).
But before we consider what those stocks might be, it’s important to understand how the virus of financial collapse was born.
Main Street Wins and Wall Street Loses Amid Financial Collapse
In the post-Cold War era (1990 onwards), the economy has tended to favor Wall Street at the expense of Main Street.
Is it any wonder that the American middle class has lost the importance and dominance it once enjoyed?
It was the victory of finance over industrial America. From being tools of the economy, investment banks and financial services became its masters.
Encouraged by free-trade treaties and “globalization,” mines, steel plants, car factories, and appliance manufacturers moved production and jobs overseas. This increased unemployment and underemployment in the United States—and in other Organisation for Economic Co-operation and Development (OECD) countries.
Ultimate Goal of Business Has Become Ever More to Please Shareholders
The overriding concept in the economy for the past 25 or so years has been to lower the cost of labor to improve earnings.
Look at this chart of the Dow Jones index since 1989. The Dow moved ever higher until it reached the subprime crash.
Chart courtesy of StockCharts.com
And the subprime crisis was the inevitable result of the overriding importance of finance in the economy.
The even sharper subsequent climb reflects the fact that the subprime crash failed to teach any lessons.
To achieve it, corporations and politicians have encouraged free trade. Unfortunately, it wasn’t so much the free trade among “equals” that they encouraged.
It was free trade with countries with an abyss of difference in average wages.
That may not have been the original impetus for the North American Free Trade Agreement (NAFTA), but its effect was certainly to put pressure on U.S. auto workers.
Outsourcing Gone Mad
Free trade and shareholder interest also drove companies to ship production of just about everything to China.
Such is the extent of the malaise that even China has become too expensive.
For example, many clothing companies have been moving more and more production to Bangladesh, Vietnam, or Pakistan, where labor costs can be even cheaper than China.
The Trans-Pacific Partnership (TPP), which President Trump scrapped, would have emboldened more businesses to “up the outsourcing ante.”
The TPP would also have further enhanced earnings, putting on the afterburners on an already overheated stock market.
Granted, Trump’s tax cuts have already achieved that.
But his protectionism could send the markets into an out-of-control stall. That’s because protectionism, understood as an effort to bring jobs and manufacturing back to the United States, will ruin the very thing that fuels a bull market: earnings per share.
Granted, some companies—I’m looking at you Tesla Inc (NASDAQ:TSLA)…and maybe even Amazon.com, Inc. (NASDAQ:AMZN)—are able to sustain gravity-defying valuations without even a hint of earnings.
But they are rare examples that exist only in certain industries, which both the “zeitgeist” (the sign of the times) and investors have decided will form the foundations of the future.
Eventually, however, the lack of earnings does have a way of catching up.
Earnings Going Down
Trump’s protectionism, however, will reduce earnings for many companies, even if revenues increase.
Indeed, American workers won’t suddenly get paid more.
They will probably face greater pressure to accept lower wages because companies will have to hire more of them and fewer Mexican or Chinese people.
This is not just a matter of employment and earnings; it’s also market competition.
Apple Inc. (NASDAQ:AAPL), by far one of the biggest ever winners on Wall Street, faces a real threat: a financial collapse all on its own.
Having made its fortune producing its world famous and coveted high-end products such as the “iPhone,” “iPad,” and “iMac” in China (and, indirectly, Malaysia), it now faces the prospect of transferring production to U.S. soil—or having its products heavily taxed on entry in the United States.
How many iPhones do you expect Apple to sell if its retail price doubles? Even with tariffs, products from Apple’s Chinese and Korean competitors could cost less.
And even if they don’t, Apple is staring at the prospect of a massive drop in both revenue and earnings.
Countless other companies and stocks will face similar dilemmas. That’s why the markets are not just marching toward a crash but a wider and systemic financial collapse.
Which Stocks Will the Financial Collapse Spare?
Not all stocks will suffer. Some will continue to thrive, and they are the ones related to companies that never participated in the kind of Apple- or Nike-style globalization.
In a word, think aerospace and defense stocks, the ones related to companies like Lockheed Martin Corporation (NYSE:LMT), General Electric Company (NYSE:GE), Boeing Co (NYSE:BA), and even United Technologies Corporation (NYSE:UTX).
That’s because their overseas production more than often addresses local market needs, making them less vulnerable to retaliatory tariffs.
The stocks cited above are related to companies that upheld a skilled and well-paid workforce in the United States. Lockheed Martin, Boeing, and others like them have maintained the bulk of their engineering and production in the United States.
Moreover, given the massive cost, management complexity, and the variety of skills needed to design and build a new airplane, the aircraft market has become ever more saturated.
There’s little room for new players. And even then, such as the case of Bombardier, Inc. (TSE:BBD.B), it’s only for niche market segments. Moreover, aerospace workers in the West—unlike other types of manufacturing—compete on equal and well-paid terms.
Earning margins depend more on delivering the product the customer wants (and each airline is different) than price.
Surely, aerospace and defense stocks will suffer in a financial-collapse situation. But they won’t suffer as much as others. More importantly, they literally have the wings to start flying again.