The big news this week – historical, in fact – is that Britain submitted its letter stating its intention to formally withdraw from the European Union, triggering the formal Article 50 exit process. This, and our own example of nationalism and inward-looking policies prompt me to think about the 1930s, when protectionist trade policies contributed to an extension of the Great Depression in the US and Europe. I characterized Brexit as like playing Russian Roulette with five rounds loaded in the cylinder and Trump’s proposed economic policies seem at least as bad.
Cargill chief warns against protectionist policies (Financial Times). This article caught my eye because of the potential impact to Union Pacific – a firm about which we have published a good amount of research. One surprising datapoint I found in this article was that roughly one-third of America’s agricultural acreage produces food for export.
Exxon urges Trump to keep US in Paris climate accord (Financial Times). Roughly half of Exxon’s portfolio is comprised of natural gas assets. As such, the firm has a dog in the fight when it comes to clean air regulation, since natural gas is considered a clean alternative to coal power production. Exxon has long said it wants a seat at the table of the Paris accord for much the same reason that border control officers want a see-through fence rather than a solid wall: so they can see what’s happening on the other side and have some influence over it.
Long-term investment, the cost of capital and the dividend and buyback puzzle (OECD). Note that this is an academic paper and is kind of wonky. The big takeaway is this: One of the big reasons for quantitative easing (QE) has been to put more money into banks in order to spur lending for capital projects. This paper finds that the super-low interest rates brought about through QE does NOT prompt increases in capital spending. Instead, the large differential between the cost of debt and the cost of equity encourages companies to issue debt to execute stock buybacks – effectively tilting their capital structures toward debt.
Remember When Trump Said He Saved 1,100 Jobs at a Carrier Plant? Well, globalization doesn’t give a damn (Bloomberg). Interesting expose regarding United Technology’s decision to maintain part of its Carrier heater staff at its Indiana plant.
Trump signs order at the EPA to dismantle environmental protections (Washington Post). I got the same feeling reading this article as I did when George Bush’s director of the Federal Emergency Management Agency announced at a press conference that “The agency didn’t have much experience in managing emergencies.” Shouldn’t be a heavy lift to assume that the name of an agency actually describes the purpose of that agency. Call me a socialist.
Five charts that show why Trump can’t deliver on his coal promises (Brookings). Our Trump Era Investing report mentioned the economic argument against the President’s promise to Make Coal Great Again, and we discussed these during one of our Office Hours as well. Good charts and a good reminder. Relates also to our research on Union Pacific.
Carmakers’ shares hint at what lies ahead (Financial Times Short View). I’m not sure if Lynch was right about this, but the following quote caught my eye: “Peter Lynch, the former star Fidelity fund manager, never met a cheap cyclical he liked. He believed that very low valuation, alongside record profits that have grown for many years, means the market anticipates a downturn.” My valuation of Ford was an important and not too painful lesson to me.