Messaging

If you wanted a lesson in “Markets price in all existing information and future expectation in today’s prices”, you just received it.

The downs in the market with the big gaps were when the tariffs were announced and in effect. Look at the end of this chart with the big green candle. A rumor filtered through the market that Trump was going to do a 90-day pause, and more rumors that many other countries will go to 0% tariffs as long as the US goes to 0% tariffs.

Howard Lutnick was on television yesterday morning. I didn’t see it, but the reports indicate that he wasn’t very cogent or good. Peter Navarro, Trump’s leading economic advisor came out and said, “Even if everyone says they will go to 0% tariffs, the US doesn’t have to do that.” Navarro is alluding to the fact that there are plenty of internal government policies that limit free trade beyond tariffs.

Except, I don’t think the American people are on board with Navarro. This has been characterized as a tariff thing from the beginning. No one said anything about legislative policies.

Hence, if Vietnam goes to 0%, America ought to go to 0%. The market would appreciate that.

But, Navarro is correct. There are plenty of government policies countries put in place to protect local industries. The United States has plenty of them that protect local industries. You can just look at regulations or laws that were put in place to protect the US auto or steel industry as but one example.

That gives Trump another opportunity if he chooses to take it. If he wants a lot of growth, putting the screws to the US legislature to get rid of protectionist measures as long as other countries do the same is a good idea. Getting rid of subsidies, tax breaks, and carve-outs will help decrease the deficit, make American companies more competitive, and increase the benefits to American consumers.

Getting rid of tons of red tape regulations will spur more investment inside the US than getting rid of tariffs will. My friend Buck wrote this today about airline travel in the US. Why is it seemingly broken?

My guess is that, first and foremost, it is heavily over-regulated, so there is no failure. More regulation to get rid of 100% of the failure actually causes more failure. It is very hard to compete in the airline industry because the startup costs are so high. You have to get gates, which are heavily regulated. You have high equipment and labor costs. Ongoing maintenance costs are expensive. Even the cost to exit the business is expensive. So, airlines can’t ever be business school “perfectly competitive”.

I do not know what the elasticity of demand is for airline tickets. But, it seems to me if there was a market for a high service, high touch airline, one of the existing carriers would do it. They segment the market already with first/business/luxury economy/economy class. Airlines are champions of price discrimination theory and they also are masters at logistics. They know how many people will want to go from point A to point B and at what time. When was the last time you were on an empty flight?

Every industry in America from banking/insurance, commercial real estate, airlines, steel, and farming, has a lot of regulation, subsidy, or tax carve-outs to favor them. Those policies have nothing to do with economics and everything to do with politics.

Tariffs are actually easy to get rid of. Tell me, which farm state legislator is going to go back to their district or state and tell the farmers that the US is ending farm subsidies? Which legislator is going to go back to their steel producing state and tell their constituents that they are getting rid of all the protectionist policies for the steel industry?