De-Globalization22 February 2017

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US Border Tax

Scenario: De-Globalization

De-Globalization

NEW

HiddenLevers

MARKET UPDATE

Market Update

sources: HiddenLevers, NY Times, CNBC, Kitces Blog, CNBC

New Advisor Model

Marketplaces

GOP Agenda Running in place

Yellen Fed Now

Irrelevant

HiddenLevers

PROTECTIONIST TRENDS

Protectionism: USA

Sources: HiddenLevers, CNN Money, Forbes, The New York Times, The Washington Times, USA Today, CNBC

Protectionism: Global

sources: HiddenLevers, IBTimes, CNN, CNN 2, Xinhua, Guardian, Daily Beast,

UK

First year as top 10 US trading partner, not on Trump’s radar

Much lower trade deficit than China/Mex

IT sector getting hit from Trump H1-B shift

France Mexico China IndiaPromoting domestic consumption since 2009 financial crisis

Growing clout with Europe + EM as it turns away from unwelcoming western markets

Out of EU, into better trade deals on its own

+1.7% Highest GDP in first world

60% of business leaders saying Brexit already having negative impact on firm

Fear of Le Pen, heavy populist agenda

Gap between German + French Yields greatest ever

China-France new deals on nuclear + industrial chain

Will retaliate against US, eliminating US jobs

Pivoting away from USA – Spain, Lat Am

China-Mex relations at an all time high

• Tariff of Abominations (1828)• Tariff of 1857• Morrill + Civil War Tariffs

(1861-1864)• Smoot-Hawley Tariff (1930)• Trade Agreements Act (1934)

Protectionism: Historical Analogies

Sources: HiddenLevers

Year 1929 1930 1931 1932 1933

$1.06$0.97

$0.91

$0.79 $0.78

U.S. Real GDP ($ Trillion)

-7% CAGR

HiddenLevers

US BORDER TAX

Border Tax: 101

Sources: HiddenLevers, Daily Signal

2015 U.S. GPD: $18tn

Imports $2.7tn

Exports $2.2tn

The great majority of GDP is still domestic.

Border Tax Opponents:

Wal-Mart and major retailersKoch Industries and oil refiners

Border Tax: Corporate Civil War

Sources: HiddenLevers, Fortune, Bloomberg

52-48 GOP

Border Tax Supporters:

Boeing, GE, Oracle20 other major exporters

GOP can only lose two votes in Senate:

Tom Cotton (Arkansas - Wal-Mart)

David Perdue (past Dollar General CEO)

both opposed

Border Tax: Winners + Losers

sources: HiddenLevers, Reuters, Goldman Sachs

Retailers, Apparel, Tech Hardware suffer

Aircraft, Software, Media benefit

WINNERSDiscount Retailers (Chinese imports)

Net Import Share of Products by Industry

Drivers also suffer – gas prices may rise 30 cents to offset tax on imported oil

Border Tax: Currency Impact

Sources: HiddenLevers, Nasdaq, Markwetwatch

USD action in 2017 shows border tax less likely

Rise in value of USD now may reign in US economy

Currency shift has 5y lag from trade balance

+8%

-2.5%

Border Tax: Threat of Retaliation

sources: HiddenLevers, Financial Times,

WTO

CHINA

MEXICO

HiddenLevers

SCENARIO: DE-GLOBALIZATION

SCENARIO: Currency Wars Outdated

sources: HiddenLevers

Currency Wars De-Globalization

GOOD: Tax Plan Works

source: HiddenLevers

Corporate civil war ends up growing GDP

USD gains mostly priced in

Exporters winforeign revenue

not taxed

Import tax doesn’t harm corporate

tax cuts

BAD: Punishing Mexico

source: HiddenLevers

Border Tax kills Mex imports / labor / repatriationUS impact

limited, but US jobs will be lost

Loss of immigrants

hurts US GDP

US auto + retail hurt – lot of

Mex connects

UGLY: Trade War

source: HiddenLevers

China + Mexico retaliate as Border Tax takes effect

Heavy GDP loss, China likely the

winner

Warning on 1:1 trade duties has been given

China winning trading friends

globally

SCENARIO: De-Globalization

Good:Tax Plan

Works

Bad:Punishing

Mexico

Ugly:Trade War

USD

-10%S&P 500

-25%

USD

FLATS&P 500

-5%

USD

+6%S&P 500

+14%

The positive impact of corporate and personal tax cuts overwhelms the negative impact of import taxes, driving growth and market gains.

President Trump has singled out Mexico, and might attempt a tariff or a NAFTA rollback, with modest US impact.

A trade war with China or other major trading partners might ensue if the BAT is passed. Economic growth could fall as a result, driving a correction.

De-Globalization– Take Aways

Exporters win, Importers lose

Big risk = trade war

Border tax plans will struggle in US Senate

Protectionist US handing leadership

baton to China