Trump makes no sense on tariffs Presented by U.S. Bank

NOT EVEN WH CAN DEFEND TRUMP TARIFF COMMENTS — As expected, the White House on Monday slapped 10 percent tariffs on about $200 billion more in Chinese exports to the U.S.. The levies would jump to 25 percent (Trump’s preferred number) on Jan 1. The president, however, continues to either not understand how tariffs actually work or deliberately mislead people on how they work. And not even White House officials can explain what he’s talking about.

Here’s what Trump said on Monday: “China's now paying us billions of dollars in tariffs and hopefully we'll be able to work something out.”


That’s not how tariffs work. China doesn’t pay us anything. Importers of the products pay the tariffs and either eat the extra cost or pass it on to consumers, which is what’s freaking out many Republicans who don’t want voters paying more for stuff just as the midterms and the holiday season approach.

On a conference call ahead of the tariff announcement, two senior administration officials could not offer any real explanation for Trump repeatedly saying China would pay the tariffs (AKA taxes). Asked if these were some kind of special tariffs that nobody knows about, one of the officials said: “The tariffs work the way tariffs normally work.”

WHAT’S NEXT — Trump said in the announcement that if the Chinese retaliate for the latest round of tariffs (which they probably will on $60 billion of U.S. exports), another round will be ready to go: “If China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”

That would push the total up to just about the entire $505 billion China exported to the U.S. last year. The list out Monday exempts some products including smart watches and playpens and bike helmets but it still hits plenty of stuff that consumers will notice from air conditioners to furniture. And $500 billion would pretty much hit everything. The new list is here.

Also on the call, an administration official said the White House was looking beyond the impact on U.S. consumers, retailers and manufacturers: “The goal here is long term economic growth for the United States by opening up barriers into China which is going to help all Americas.”

THE BIG QUESTION — Administration officials talk about systemic change in China to end forced technology transfers and intellectual property theft. That kind of change, while welcome, would take years and fundamental re-ordering of China's centrally planned approach. What exactly does China have to do immediately to end the trade war? MM wanted to ask for these specifics on the WH call but we did not get the chance.

REACT — Business groups largely slammed the announcement. … National Retail Federation President and CEO Matthew Shay: “As thousands of businesses have testified and explained in comments to the administration, tariffs are a tax on American families. It’s disappointing that, despite the voices of those impacted, the administration continues to advance harmful tariff policies that threaten to weaken the U.S. economy.”

National Association of Manufacturers (NAM) President and CEO Jay Timmons: “[M]ore U.S. tariffs and Chinese retaliation risk undoing that progress and moving our economy in the wrong direction.”

U.S. Chamber of Commerce President and CEO Thomas J. Donohue: “The U.S. economy runs on pro-growth policies, but that’s not what tariffs on $200 billion worth of Chinese goods deliver. The administration has serious issues to resolve with China on market access, unfair subsidies, technology theft, and cybersecurity. But there are less harmful ways to truly achieve free and fair trade with China.”

House Ways and Means Chairman Kevin Brady (R-Texas): “President Trump is clearly ratcheting up the pressure on China to come to the table and begin crafting a new trading relationship that is fairer to American farmers, workers, and businesses. … Any time tariffs are imposed I worry that Americans will be forced to pay extra costs - in this case on nearly half of U.S. imports from China.”

COHN ON THE CRISIS (AND MORE) — At an event with Reuters Breakingviews’ Gina Chon on Monday night, former NEC Director Gary Cohn steadfastly refused to talk more about revelations that he took a document from Trump’s desk that would have pulled the U.S. out of the South Korea trade deal. He clearly did exactly that, as his non-denial denials indicate.

But he had plenty to say on other topics including the financial crisis, taxes and Jamie Dimon’s presidential chances. Cohn was adamant that no bankers went to jail after the crisis because they did not commit criminal acts: “What laws were broken?” Cohn repeatedly asked. “I thought for the U.S. criminal system to work you had to break a law. I didn’t think you could be indicted because someone didn’t like what you did. I just want to know who you think broke the law.”

He also said Goldman was close to doing a deal with Wachovia at the depths of the crisis:

“The Wachovia conversation that I led for the firm went a pretty long way down in a short period of time. We had in essence a deal. The Fed was unwilling or unable to get involved.” A Goldman deal with AIG never went anywhere “because there was no understanding of what the AIG balance sheet looked like in a mark-to-market environment.”

On the impact of Dodd-Frank: “They made the bigger banks bigger because no one else could afford all the rules and regulations. … We haven’t ended too big to fail, we have created too big.”

On the Volker Rule: “98 percent of losses in banks were in loans and loan origination and had nothing to do with trading.”

On Jamie Dimon: “I think Jamie would make a phenomenal president.”

POLITICS IN 60 SECONDS — Check out my latest video for GroundZero Media breaking down the week in politics in less than one minute.

GOOD TUESDAY MORNING — Email me on [email protected] and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver on [email protected] and follow her on Twitter @AubreeEWeaver.

DECREASING CONFIDENCE IN U.S. MARKETS — Via POLITICO’s Patrick Temple-West: Lack of leadership in the Trump administration and the fear of a trade war prompted the first drop in confidence in U.S. stock markets in seven years, according to polling by the Center for Audit Quality and Morning Consult.

Confidence in U.S. capital markets dropped 11 percentage points to 74 percent in 2018, the first drop since 2011, according to the survey. Additionally, the number of people expressing little or no confidence in public companies increased for the first time since 2011, the survey found. View the full results HERE.

TRUMP BEATS OBAMA ON THE ECONOMY? — Per the Manhattan Institute: “President Trump far exceeding GDP growth expectations per the Congressional Budget Office — a striking illustration, especially when compared with the Obama years.

“Over eight years, President Obama’s economy produced $6.4 trillion less GDP than was projected when he took office in January 2009. That initial projection already incorporated the recession that began in 2007. Since President Trump took office in January 2017, CBO has raised its projection of the cumulative 2017–24 GDP by $3.3 trillion.” Graphic.

BREXIT IS A … MESS — POLITICO’s Cat Contiguglia in London: “The range of issues left to solve to secure a smooth Brexit is ‘daunting,’ which makes a Brexit deal with a transition period crucial to avoid ‘serious disruptions’ in the short term and ‘substantial costs’ to the economy in the long term, the International Monetary Fund said today.

“In its annual statement on the health of the U.K. economy, the IMF highlights how growth has already slowed since the EU referendum and is expected to stay subdued, averaging about 1.5 percent this year and next as a result of slow income growth and restrained investment due to Brexit uncertainty.” Read more.

TECH FIRMS LEAD SLIDE AMID TRADE WORRIES — AP’s Alex Veiga: “A slide in technology companies helped pull U.S. stocks lower Monday, snapping a five-day winning streak for the market. The sell-off came amid speculation that the Trump administration was preparing to impose tariffs on another $200 billion worth of Chinese goods. The two governments have already imposed 25 percent tariffs on $50 billion of each other’s goods, and another round of tariffs would represent a significant escalation in the trade dispute between the world’s two largest economies. …

“Investors used the prospect of a deeper U.S.-China trade conflict to take some profits, especially in technology stocks, the market’s biggest gainers this year. Department stores and other consumer-focused companies also accounted for a big slice of the losses. Safe-play sectors like real estate and utilities rose. Oil prices fell, erasing early gains.” Read more.

CHINA’S STOCKS DROP — Bloomberg’s Kana Nishizawa: “China’s sinking stock market reached an unwelcome milestone, with the Shanghai Composite Index closing at the lowest level since 2014, erasing the last traces of its recovery from a boom that turned into a $5 trillion bust. The Shanghai gauge dropped 1.1 percent to 2,651.79, below its January 2016 bottom. Back then, officials had just introduced and then hastily scrapped a disastrous circuit-breaker program as they grappled with one of the market’s worst-ever routs.

“While it’s been a slower burn this time round, the steady losses show that sentiment toward Chinese equities hasn’t recovered from the 2015-2016 crash. Turnover is dwindling and some companies are finding themselves cut off from equity financing, forcing them to raise more debt. The benchmark index is heading for a fourth quarter of losses, its longest string of declines since 2008.” Read more.

KUDLOW BLAMES DEFICIT ON SPENDING — WSJ’s Michael S. Derby: “A top economic adviser to … Trump said Monday the U.S. is ready to engage in serious trade talks with China, in comments that also shrugged off massive U.S. government budget deficits as largely a function of too much government spending and not tax cuts.

“‘The trade system around the world has been broken’ and ‘China is the biggest culprit’ for the current troubles, Lawrence Kudlow, head of the White House National Economic Council, told a gathering of the Economic Club of New York. ‘Do not blame Trump for this. He inherited this mess,’ Mr. Kudlow said. While he declined to say anything about the possibility of meetings with Chinese officials, Mr. Kudlow said ‘we are ready’ to talk and negotiate if the effort is ‘serious and substantial.’” Read more.

More specifically — Reuters: “The United States is ready to negotiate a trade deal with China whenever Beijing is prepared for serious talks that will reduce tariffs and eliminate non-tariff trade barriers, [Kudlow] said on Monday. Kudlow, speaking at the Economic Club of New York, also said China’s economic reforms were moving in the wrong direction and that he expected the United States would soon announce tariffs on an additional $200 billion worth of Chinese goods.

“‘We are ready to negotiate and talk with China any time that they are ready for serious and substantive negotiations toward free trade to reduce tariffs and non-tariff barriers, to open markets, to allow the most competitive economy in the world, ours, to export more and more goods and services to China,’ Kudlow said.” Read more

WALL STREET SALARIES SOAR — AP’s David Klepper: “Salaries on Wall Street rose last year to their highest level since the 2008 financial crisis, according to a report issued Monday by New York state Comptroller Thomas DiNapoli. The report puts the average salary in New York City’s securities industry in 2017 at $422,500, a 13 percent increase over the year before the highest since 2008. …

“Overall, Wall Street posted $24.5 billion in pre-tax profits in 2017, rising 42 percent from 2016′s figures. Profits for the first half of 2018 stand at $13.7 billion, 11 percent higher than the same period last year. Securities jobs have the highest average pay of any occupation in the city. They account for 21 percent of all private-sector wages in the city but make up less than 5 percent of all private-sector jobs.” Read more.

FLORENCE CAUSES ESTIMATED $2.5B IN INSURED LOSSES — Bloomberg’s Ivan Levingston: “Hurricane Florence, which made landfall in North Carolina Friday as a Category 1 storm, is estimated to have caused insured losses totaling $2.5 billion, according to catastrophe modeler Karen Clark & Co. That figure includes privately insured wind, storm surge and inland flooding damage, while excluding losses covered under the federal government’s National Flood Insurance Program, the Boston-based company said in its advisory.

“By Monday, the deadly storm had caused record floods with water levels expected to continue rising. Rains and tornado warnings continue to bedevil both Carolinas as the storm moves northeast, while many rivers are still days from cresting. At least 17 people were killed in the storm, according to the Associated Press, and almost a half-million homes and businesses are without power.” Read more.

ELECTION UNCERTAINTY SPURS INVESTORS TO HEDGE — WSJ’s Gunjan Banerji: “While the U.S. stock market continues its march higher, investors are increasingly turning to options to protect their bets ahead of the U.S. midterm elections.

“Autumn tends to be a volatile period for the equity market; and this year, investors have been increasingly focused on a particular date: Nov. 6, when voters head to polls to determine whether Republicans will maintain their slim control of Congress or lose ground to Democrats. Options prices on the S&P 500 index show investors are taking protective measures against higher volatility the week of Nov. 6, according to a Wells Fargo Securities note last week.” Read more.

MOST STATES LACK RESERVES TO WEATHER NEXT RECESSION — Reuters’ Laila Kearney: “While U.S. states’ financial health has strengthened in 2018 compared with last year, fewer than half have enough financial reserves to weather the first year of a moderate recession, according to an S&P Global Ratings report on Monday. Only 20 states have the reserves needed to operate for the first year of an economic downturn without having to slash budgets or raise taxes, S&P said.

“‘In their fight against recessions, budget reserves are what states send to the frontline,’ the report said. ‘They are an internal source of immediate liquidity and can provide transitional funding to agencies before budget cuts take effect.’” Read more.

THE COST OF SHORTING CANNABIS STOCKS — NYT’s Stephen Grocer: “Betting against cannabis stocks has come with large losses and big fees this summer. A case in point: Aurora Cannabis. Short sellers, investors who profit when a stock price falls, have poured into the Canadian cannabis company’s stock since the start of August. The number of shares shorted rose 76 percent over that period. Their price, though, has climbed 46 percent, including an 18 percent gain Monday after BNN Bloomberg reported that Coca-Cola had held talks with Aurora to develop beverages. That rise has cost short sellers $50 million over the past six weeks, according to S3 Partners, a financial technology and analytics firm.

“Since the start of August, shares of publicly traded pot stocks have gained 30 percent, on average, according to IHS Markit. Over that period, short sellers have lost $626 million, according to S3 Partners.” Read more.

Follow us on Twitter Mark McQuillian @mcqdc



Ben White @morningmoneyben



Aubree Eliza Weaver @aubreeeweaver



Victoria Guida @vtg2



Katy O'Donnell @katyodonnell_



Zachary Warmbrodt @Zachary



Kellie Mejdrich @kelmej