May 21, 2019

Old economic theories and partisan political critics say that President Trump’s escalated tariffs will cause soaring inflation going into next year’s elections, perhaps causing a recession and hurting his re-election chances. If so, raising tariffs on $300 billion in Chinese goods has to be the most dunderheaded political move in recent history – right behind Bush 41’s raising taxes after saying, “Read my lips – no new taxes.”

Bad news always sells best, so we’re seeing headlines like this one from Bloomberg last week: “Goldman Says Trade-War Escalation to Drive U.S. Inflation Higher.” Their article summarizes Goldman’s forecast:

“Trump’s latest tariff increase on Chinese goods will drive up the Federal Reserve’s preferred measure of underlying inflation, and a further escalation of the trade war will have an even greater impact on prices as well as economic growth, according to Goldman Sachs Group Inc. Goldman revised up its estimate of the tariff impact on core personal consumption expenditures inflation to 0.2 percentage point, according to a note Saturday. The firm estimates if the U.S. imposes tariffs on the roughly $300 billion remaining in Chinese goods, the effect would increase to 0.5 points.”

Further escalation of the trade war, they said, “could result in a hit to GDP as large as 0.4%, and if trade tensions sparked a major sell-off in the equity market, the growth impact could worsen considerably.’”

Such scary scenarios ignore the fact that we’ve operated under Trump’s tariffs for over a year now with minimal impact on most inflation measures. It’s now over a year since the Trump administration applied its first tariffs on steel and aluminum imports, and so far, the much-feared economic costs have yet to be seen. In most cases, there have been few or no increase in prices of goods containing tariffed products.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Predictions of inflation, slower growth and recession due to high tariffs are two years old, yet we’ve seen 3% growth and 2% inflation so far – except in China, where our tariffs are slowing Chinese growth and fueling inflation there – particularly in pork prices, partly due to swine flu in their Year of the Pig.

With a strong dollar, a devalued yuan and some cost absorption by middlemen, prices have been stable. The main upward pressure on inflation lately has come from energy (of which, the U.S. is self-sufficient), housing and health care, which are domestic industries. Inflation has not been mainly import-generated.

One major difference in today’s world vs. a century ago or in the Cold War era is that global capital is mobile. When “Made in Japan” became too expensive, factories moved to Taiwan or South Korea. When those Asian Tigers charged too much, factories moved to China. If China can’t compete due to tariffs, the owners of those Chinese factories can move to Thailand, Vietnam or elsewhere. Capital is mobile. A recent survey by the American Chamber of Commerce in South China found that over 70% of U.S. firms operating in Asia are considering delaying more investment in China or relocating production elsewhere.

The CPI Overstates Inflation, Perhaps by 2% a Year

Writing in The Wall Street Journal’s “Inside View” last week, Andy Kessler says he is “convinced that all of the common measures overshoot by at least 2 percentage points, and maybe even 5 or more. That’s because of the flaw in the Bureau of Labor Statistics’ hedonic adjustment, which totally misses the way the cost of technology declines over time.” Even Alan Greenspan, that nonagenarian technophobe, said in a Wharton interview last month, “We have a problem with measuring inflation…because products are continually changing.” He baldly said, “You’re getting statistics which are not correct,” adding that, “the 2% inflation rate as currently measured is the equivalent of zero for actually what consumers are buying.”

This is especially true for electronics, whose prices tend to continually fall. We know that simple-function calculators once cost thousands of dollars, while multi-function calculators now cost less than $10. It’s the same with smart phones vs. the old mobile brick phones. Technology also increases our productivity and makes life easier. You don’t drive to a library to hunt through stacks of books. You just “ask Alexa.”

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If you go back to 1989 and try to argue that life was better then – with the Berlin Wall intact, fuzzy TV pictures, 2400 bps modems, brick-sized cell phones, fax machines and zero Internet – you are welcome to your delusions, but if you use Greenspan’s math and subtract 2% inflation per year, 2019’s inflation-adjusted GDP would be about $26 trillion, not the $20 trillion currently reported. That would be $82,000 per capita and a 30% increase in “real” wages that you thought were flat. That means there was no slump in productivity or middle-class stagnation and our debt-to-GDP ratio is more like 77% rather than 100%.

It pays to view the received wisdom of our sacred numerology with a generous dose of salty skepticism.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander


Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives