Tariffs: Chinese Checkers or Chess?

After a favorable end of 2017 and beginning of 2018, geopolitical uncertainties hurt foreign markets and currencies in the second quarter. The media coverage of a “trade war” has helped fuel increasing volatility. Increased volatility, coupled with increased fed rates, has resulted in a stronger US dollar and weaker foreign currencies.

Despite these short-term setbacks for non-US markets, we feel confident that what the media calls a trade “war” will likely be resolved somewhat amicably but with much needed adjustments of trade tariffs.

Much is being written about the Trump tariffs being levied on China. Despite all of the initial hair-on-fire reporting, we believe that the US and China will ultimately come to some agreement as to fairer trade.

Regardless, we’d like to put it in perspective. China has succeeded in becoming a consumer-driven economy, with the most recent reported consumer spending accounting for ~65% of GDP (up from ~40% a decade ago), similar to the US and EU which are ~70%. China’s net exports (Total Exports – Total Imports) are roughly just 2% of its overall GDP. Trump’s initial proposal is to collect $50 billion via a 25% tax on imports of some Chinese goods.

According to data compiled by CEIC (www.ceicdata.com) and the CIA (www.CIA.gov), that amount is only 10% of the total amount of last year’s Chinese exports to the US, which are only 18% of the total of all Chinese exports to begin with.

This means that the tariff Trump has proposed and which has generated such incredible coverage would at most apply to just 1.8% of China’s total GDP. Hence, we anticipate that the impact on China’s economy from tariff increases will be minimal.

While we are not in the business of forecasting, other economists have put this at a 0.1% decrease in China’s GDP. Coincidentally, the Q2 number for China’s GDP came in at 6.7% increase over Q2 2017. The previous number? 6.8%...

One of our best performers for the quarter was Teva Pharmaceutical Industries (TEVA). It should be noted that Berkshire Hathaway (BRKA) initiated a position in TEVA in the 4th quarter 2017 when the stock price was trading at a multi-year low. In the 1st quarter 2018, the stock price declined even further, and Berkshire more than doubled its original position.

With many investors and followers of Warren Buffet and Berkshire Hathaway, stocks often get a “Buffet Bump” after holdings have been announced. TEVA’s large gain for the quarter could be a Buffet Bump, a short-squeeze, or that the stock had just become oversold.