No. of Recommendations: 47
Rambling moment
The US administration has taken some large steps to balance all bilateral trading in goods. A whole lot of ink has been spilled on how they went about it a clumsy way. Whether true or not, I think that misses the most important point: that bilateral capital account surpluses (trade deficits) are utterly meaningless quantities, as it's only the aggregate balance of a country that matters. i.e., the single sum of all positive and negative accounts across all trading partners.
Imagine the US sells machine tools and licenses for a chip design to Taiwan (in return for money), they make chips and send them to China (in return for money), China assembles an electronic widget and sends it to the US (in return for money). It's entirely possible for the net trade sum for all three countries to be balanced (no country has an aggregate current account surplus or deficit, no trade surplus or deficit), but all three bilateral relationships to be "unbalanced". There is nothing wrong or unsustainable about this, and in fact all three countries are probably much better off for the trade having taken place. If one of those three insists on balancing its bilateral trade with one or both of the other two, all three are poorer.
Some people think a trade deficit of $1 is a loss of $1 and simply can't be persuaded otherwise, forgetting that you do get stuff in return (duh). And usually more than the amount of the same stuff you'd get for $1 bought from somewhere else or made locally (or else you wouldn't have bought it where you did), so it's usually a net value gain for the importing country. That isn't to say that there aren't other smaller effects both benign and unfortunate from importing, but it certainly isn't a loss of $1 for the importing country.
Trying to balance all bilateral trade relationships is like an airline captain trying to get the port/starboard balance right by getting every single person to sit in the middle of the aisle instead of just making sure the plane is balanced. Uncomfortable, and much lower capacity, but mainly...utterly pointless. And having a focus on goods while ignoring services is like seating everybody painfully in the middle but totally ignoring the weight balance in the cargo hold.
I guess that even Berkshire will have to brace, brace for turbulence. A share of Berkshire costs 7.2% less than it did a week ago, measured in a mix of currencies. (6.2% down in dollars, and the dollar is down 1% against others). Yet I would hazard a guess that that share is no cheaper than it was then, and perhaps more expensive, as the intrinsic value of all of their likely real earnings in the next 20 years is now going to be lower. That has nothing to do with discount rates, just plain lower total earnings from a weaker economy over a long period. Shareholders can hope that this will be slightly offset by having a greater opportunity set for deploying cash, but the average elephant in the forest is a older and sicker now.
My biggest investment theme tip: ignoring the tax stuff, economic uncertainty has exploded is likely to stay high for a long time. Uncertainty hits the economy very hard as all players sit on their hands to see how things shake out, but it hits capex several times harder than it hits consumer goods. I would advise keeping away from machine tool makers. In case anybody wants numbers, a recent study in Europe notes that the "average" uncertainty shock caused GDP growth to be .45% lower in the next year, and the investment hit at about -1.2% is about 6 times the size of the consumer hit. Dairy Queen may do better than Iscar.
Jim
