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Why Are Airlines Better Investments Than They Used to Be?

The old saying is that if you want to be a millionaire, start out as a billionaire and buy an airline! But, what happened? None other than Warren Buffett, who called airlines a death trap for investors, has poured $10 billion into the four major airlines in the last couple of years. Why are airlines better investments than they used to be? Business Insider says that Buffett’s investment is everything you need to know about the airline industry.

Over the past decade, the landscape of the airline industry in the US has changed greatly. All four airlines have reported record profits, over the past two years, buoyed post-financial crisis capacity discipline, depressed labor costs, and cheap oil.

There are also fewer competitors in the domestic market to contend with.

In the year 2000, the sky was filled with names such as America West, US Airways, TWA, AirTran, Continental, ATA, and Northwest Airlines. By 2016, all of these brands had disappeared by being merged into or acquired by the Big Four. 

The remaining big four U.S. airlines are these.

  • American
  • United
  • Southwest
  • Delta

It should be noted that Buffett is investing roughly equal amounts in these four carriers. That would seem to be consistent with his stated philosophy of buying stocks for the long haul and only buying stocks when he has a clear idea of how the company makes money and will continue to do so for the foreseeable future. Airlines are better investments than they used to be because fuel costs are down along with other costs of doing business such as salaries. And the desperate game of underbidding to try to claw back passengers for rivals has pretty much gone away as the guys who were doing this have been absorbed into the remaining big four.

How Long Will the Good Times Last?

Is there still time for you to invest in US airline stocks or has the opportunity passed you buy? CNBC notes that aviation stocks are soaring but investors should be careful.

Investors have reason to be bullish right now on air travel, but domestic commercial airlines’ recent soar has some experts questioning whether there is still enough meat on the bone to get in now and still achieve above-average returns.

Several favorable market conditions continue to make airlines a good value stock: low fuel prices, low seat capacity and consolidation.

“It already had a great run, so there is always a question of ‘How much is left?'” said Jerry Braakman, chief investment officer for First American Trust, which oversees $1.1 billion in assets. The company bought stake in Delta for $10.41 a share in 2012. Last year it sold the last of its Delta stock for about $40 per share, believing the recovering airline had hit its peak. It is now trading at around $48.

Interestingly these folks looked at Delta and others as short term investments. They bought for the recovery and sold but it turns out that they sold too soon. Airlines will continue to be better investments than they used to be so long as the market remains only moderately competitive and so long as fuel and labor costs stay down. But if Trump economics really do end up stimulating the economy prices could go up across the board which could hurt the air carriers.

Why Are Airlines Better Investments Than They Used to Be? PPT

Is Ford Undervalued Today?

The so-called Trump bump has taken many already-overvalued stocks and sent them higher. Are there any good deals left in the stock market? One stock that caught our attention is the auto maker Ford. Is Ford undervalued today? The Motley Fool refers to Ford as the forgotten auto maker in an article about 4 stocks to buy that are trading near 52 week lows.

Automakers not named Tesla are having a hard time getting any love in today’s stock market. Ford has made vast improvements in the quality and attractiveness of its vehicles since the recession subsided, and now it is churning profits quarter after quarter. And no one seems to care.

The argument for buying Ford is that while it is selling and making money from SUV’s and trucks it is investing in autonomous driving and electric vehicles which are seen as the future of automobiles.

Ford in Perspective

Ford is the one of the Big Three auto makers what did not go bankrupt like GM or get bought out like Chrysler. Ford Motor Company, F, sells in the $12 a share range. In the last year it has traded below $12 and up to $14. In the last 5 years its high has been up to $17.50 a share and its low has been $9.21. If we go back 10 years we get a high of $18.27 and a low of $1.43 a share at the depths of the Great Recession in late 2008 and early 2009. In the last 40 years the stock traded at $37 a share in 1998 and around $1.90 in the late 1970’s and early 1980 taking 4 subsequent stock splits into account. Ford pays a 4.77% dividend at the current stock price.
And how is Ford doing today? According to M Live Ford’s 2016 earnings are the 2nd-best in history as Ford sent its employees profit sharing checks averaging $9,000 per employee. So, the company is making money and apparently working on the things that will sell cars tomorrow, automatic driving and electric cars.

The Electric Ford

According to Forbes Ford’s push into electric vehicles is coming at the right time. Along with announcing that it will not expand its Mexican facilities Ford says it will expand electric vehicle production.

A significant item in this announcement was that the company would be expanding its electric vehicle production. The U.S. based auto maker announced that it would now be producing a hybrid version of the F-150 truck and sports car Mustang, a plug-in hybrid version of the Transit Custom commercial van and two new hybrid police vehicles. This is significant news as electric vehicles are closer than ever to being commercially viable. With the launch of the new 238 mile range Chevrolet Bolt and the impending launch of Tesla’s Model 3 in 2017, EVs could finally cross over from being a fringe figure on the horizon to a mass market product.

An interesting suggestion from one analyst is that Ford should simply buy Tesla. In this regard Investor’s Business Daily suggests that Tesla will get run over by China, GM, Ford and BMW as these come up to speed and mass produce high quality electric vehicles. Along the way Ford will keep making money and staying up with new trends.

Is Ford Undervalued Today? PPT

Do You Want a Safe Investment That Yields a High Return?

Profitable investing may not always require that you analyze stocks. The most practical and profitable investments often have to do with paying off debts! We wrote about this in our article about How to Invest Your Inheritance.

The first step before you start investing your inheritance is to get rid of any high interest debts such as credit card debt. It is not easy to make a return of eighteen percent per year per year on your investments. But that is what you are probably paying on credit card debt. Pay off your credit card debt first and foremost.

Also consider buying your home instead of renting.

The best long term investment is in your home. Every cent of interest you pay on your home mortgage is deductible from your federal taxes. Own the home you live in and do not pay rent that goes into someone else’s pocket. How to invest your inheritance is to start by putting money down on your own home.

A slightly more complicated safe investment with a high return applies to home owners. You probably are paying mortgage insurance along with the principal and interest on your mortgage. You may not need to do this and fixing this can save your money resulting in a nice return on investment. The Huffington Post says to pay off your mortgage insurance for a safe investment with a high yield.

Home purchasers who were obliged to take out private mortgage insurance (PMI) because their down payment was less than 20% of the price have the right to cancel it, ridding themselves of the monthly premium. Borrowers should take advantage of the opportunity if they can but they must meet the cancellation rules.

Read the article to see how you can do this. The writer says your return on money invested to pay down your mortgage to the level where you can cancel your mortgage insurance could be as good as 8.96%. As we noted in our article about how much money you need to make a living investing, this is a reasonable rate of return to expect.

How about Stocks?

Over the long term the stock market out performs other investments. Of course you could have a crystal ball that allows you to see the next Microsoft and invest immediately once it goes public. But assuming no magic how do you find a safe investment with a high yield? The best advice probably comes from a famous investor and the second richest man in the world, Warren Buffett. Buffett avoids tech stocks because he cannot predict who the winners will be in the next 5 to 10 years. But he says that he can predict how much people will pay for Snickers bar, Coca Cola or even their life insurance. Thus he invests in companies where he understands how it is that they make their money and will continue to make their money over the years. Index funds that track the S&P 500 are a common choice as they are essentially tracking the economy. Other choices include dividend-paying utility stocks that grow over time and send you a quarterly check as well.

Do You Want a Safe Investment That Yields a High Return? PPT

How Does the US Trade Gap Affect the US Stock Market?

Although Trump wants to move manufacturing jobs back to the USA there are still lots of imported items that Americans buy. And as the dollar strengthens US products are more expensive overseas. Thus the USA has a trade gap. First a bit about the status of the trade gap and then how does the US trade gap affect the US stock market? Bloomberg says that while both imports and exports decreased in 2016 the US trade gap widened.

The U.S. trade deficit widened last year to the biggest since 2012 as exports fell more than imports, though a narrowing gap in December suggests demand is stabilizing overseas for American goods.

For all of 2016, the deficit increased 0.4 percent to $502.3 billion, including a wider annual gap with Mexico and a smaller one with China, Commerce Department figures showed Tuesday. The monthly shortfall shrank 3.2 percent to $44.3 billion. The median forecast in a Bloomberg survey of economists called for a deficit of $45 billion in December.

As the economy improves, which it has been doing, people buy more. And much of that is from offshore. To the extent that consumers buy imported goods as opposed to made in America it increases the trade gap. To the extent that the dollar is too strong it makes American goods to expensive and no competitive offshore which also increases the trade gap. Until such time as this situation remedies itself how does the US trade gap affect the US stock market?

Where Does the Trade Gap Money Go?

One might assume that when the USA runs a trade deficit that the money is lost forever. However, that is really not the case. The Carnegie Endowment asks if Trump’s advisor, Peter Navarro, is wrong on trade.

Whether the U.S. current account deficit is harmful or not to the U.S. economy depends on the assumptions we make about capital scarcity. In a world awash with excess capital and insufficient demand, the U.S. current account deficit is a drag on growth.

Is this true? Here is what Navarro says.

When net exports are negative, that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth. In 2015, the US trade deficit in goods was a little under $800 billion while the US ran a surplus of about $300 billion in services. This left an overall deficit of around $500 billion. Reducing this “trade deficit drag” would increase GDP growth. These trade-related structural problems of the US economy have translated into slower growth, fewer jobs, and a rising public debt.

And if growth is less the US stock market will fall. However, there is another opinion on this issue. Dan Ikenson, a trade policy specialist at the Cato Institute says this.

There is no inverse relationship between imports and GDP, as Navarro asserts. In fact, there is a strong positive relationship between changes in the trade deficit and changes in GDP. The dollars that go abroad to purchase foreign goods and services (imports) and foreign assets (outward investment) are matched almost perfectly by dollars coming back to the United States to purchase U.S. goods and services (exports) and U.S. assets (inward investment). Any trade deficit (net outflow of dollars) is matched by an investment surplus (net inflow of dollars). That investment inflow undergirds U.S. investment, production, and job creation.

In this sense the USA is a lot better off than China with its opaque investment environment. Investors trust the USA, its legal system and its open markets. Money invested in the USA, versus Europe, China or Brazil helps the economy and helps the stock market. What will hurt the US stock market will be trade policies that start a trade war that shuts down trade and foreign investment in the USA.

How Does the US Trade Gap Affect the US Stock Market? PPT

What Stocks Made the Most Money over the Long Term?

If you are into investing for the long haul you ought to look at what stocks made the most money over the long term. In this regard an article in Yahoo Finance is useful. It turns out that just 14 stocks are responsible for 20% of all stock market gains since 1924.

In what truly is one of the most amazing statistics to ever come across our desks here at 24/7 Wall St., we recently saw a chart that showed that just 14 stocks have created 20% of all stock market gains in dollars since 1924. That is a phenomenal figure, considering the sheer number of companies that have come and gone in that time, and the overall wealth created in the stock market in the past 93 years.

The chart, which was sourced from Bloomberg/Henrik Bessembinder through a Jefferies research piece, contains many companies that have been around for years, but also sports four tech companies, albeit one has been around since 1911.

Here is the list starting with the ones that created the most stock market wealth.

  1. Exxon
  2. Apple Inc.
  3. General Electric Co.
  4. Microsoft Corp.
  5. International Business Machines Corp.
  6. Altria Inc.
  7. General Motors Co.
  8. Johnson & Johnson
  9. Wal-Mart Stores Inc.
  10. Proctor & Gamble Co.
  11. Chevron Inc.
  12. Coca-Cola Co.
  13. AT&T Inc.
  14. Inc.

Are all of these companies relevant today? If so, are they good investment? Here are the stock prices and notes regarding the last ten years for the first half of the list.

Exxon sells today for $83 a share and in the last ten years has come up from $75 with a high of $102 and a low of $57. Its current dividend is 3.6% a year.

Apple trades at $130 a share today and pays a 1.75% dividend. Ten years ago a current share traded for $12 and the course of the stock has been generally upward for the decade.

General Electric trades for $29 a share and provides a 3.24% dividend. Ten years ago a share sold for $36 and in 2009 in the depths of the recession you could buy a share for $7. The course of the stock has been steadily upward for the last 8 years.

Microsoft sells for $63 a share and provides a 2.46% dividend. Ten years ago it sold for $29 and during the recession fell to $15 a share. It has grown steadily since then.

IBM sells for $175 a share and pays a 3.2% dividend. Ten years ago it sold for $97 a share and dipped to $74 a share in the recession and peaked in the $214 range over 2012 to 2013.

Altria sells for $71 a share with a 3.41% dividend. Ten years back the stock rode a five year peak up to $85 a share and fell abruptly to $20 in 2007. It has recovered steadily since then.

General Motors sells today for $36 a share and pays a 4.175 dividend. The old GM was the one responsible for all that growth and it went bankrupt during the Great Recession. The new post-bankruptcy company has been around since the beginning of 2011 and has traded between a 2012 low of $19 and a 2013 high of $49.

If you are interested in long term investing and want the stocks that made the most money over the long term look at the details as well. AT&T is not the phone company that connected America. Altria is no long the money machine that was Phillip Morris. IBM missed the boat on personal computers and is no longer the dominant force that it once was. Nevertheless this is a good list to start from for choosing long term cash cows to fund your retirement.

What Stocks Made the Most Money over the Long Term? PPT

How Much Money Do You Need to Make a Living Investing?

One of the reasons we invest is that eventually we won’t need to work. Many people aim for a retirement in which investment income covers living expenses. If you are really good at investing that day may come sooner. Which brings up the question, how much money do you need to make a living investing? And that gives rise to the questions how much money you need to live on and how fast your investments grow. The Simple Dollar writes about when your investment income covers your living expenses. They talk about the cross over point.

The crossover point is the point at which your investments begin to earn more money than the cost of your living expenses. The crossover point is usually reached by keeping your living expenses lower than your income and investing that amount for the long term. For many people, the “crossover point” is a major goal. It’s the point at which your gainful employment has absolutely no impact on your ability to live your life; you can simply walk away and do whatever you want.

To get to the point where you can make a living investing you need to have a steady income first of all and no interruptions in your income as your assets grow. And you need a rainy day fund which we mention in our article about how much money you need to start investing.

The quick answer is that you do not need a lot of money to start investing. However, it has to be money that you can afford to lose! When asking how much money to I need to start investing the beginning investor needs to be looking at money in excess of basic needs and several months’ worth of expenses in savings. And, don’t forget those credit cards! Paying 18% on a revolving loan, which is what credit cards often turn out to be, is a burden that requires a strong investment portfolio to overcome. How much money do I need to start investing in the stock market can be as little as $500 with some brokers although to trade online a broker will typically require $5,000 to $10,000.

At today’s interest rates you can get 2.5% on a 10 year treasury, the most secure investment. If you would like to have $100,000 a year to live on, then you need $4 million to make a living investing. To get a better return on your investment you need to take on more risk. You could have invested in an S&P 500 index fund on March 6, 2009 when the index was 683 and then today your holdings would be three times greater as the S&P 500 is 2276 on February 1, 2017. That comes to a 12% return on investment. However, if you had purchased two years earlier before the market crash the S&P 500 was around 1500 and your return on investment would have been around 8%. If we take the lower ROI and assume that this will hold true over the years you will need $1,250,000 to create that $100,000 a year income to live on without working. Of course if you find the next Microsoft and multiply your initial investment by a thousand or more as the stock splits and splits again and then provides dividends you could start with a few thousand and eventually retire without a need to work. That is the beauty of successful investing in the stock market. But, the devil is in the details

How Much Money Do You Need to Make a Living Investing? PPT

It Is Not Too Late to Buy into the Trump Rally

After a moment’s hesitation the stock market started to rally after the election of Donald Trump. Many stocks have peaked but it is not too late to buy into the Trump rally. Why is that? Forbes suggests a dozen stocks that could double under Trump.

Goldman Sachs recently recommended over 80 stocks that are poised to jump during President Trump’s administration.

That’s a lot of stocks. Not all of them are dividend payers, and many of them have already jumped dramatically in the last few weeks, bringing them at or near their 52-week highs.

You might think this means it’s too late to buy into the Trump rally, but it isn’t.

Out of the Goldman Sachs 80 the writer in Forbes picks a dozen. The list is heavy in low priced dividend stocks and is entirely comprised of companies with long track records of good cash flow and reliable returns. Here is Forbes’ list.

  1. Aflac (AFL)
  2. Costco Wholesale (COST)
  3. D.R. Horton (DHI)
  4. Exxon Mobil (XOM)
  5. Lowe’s Companies (LOW)
  6. Marathon Petroleum Corp. (MPC)
  7. Paychex (PAYX)
  8. PNC Financial Services Group (PNC)
  9. Target (TGT)
  10. T. Rowe Price (TROW)
  11. US Bancorp (USB)
  12. Valero Energy (VLO)

The author notes that this is a list of stocks that won’t keep you up at night worrying and is likely to grow with the economy. What are other factors to consider in regard to where we are in the Trump rally?

Consumer Optimism

When US consumers are confident that things are getting better they start buying. Their purchases drive the economy and make things better, a self-fulfilling prophecy. Business Insider reports that consumer confidence is at its highest level in 12 years.

Consumer confidence has surged in the wake of the US election, as improved outlooks for growth and jobs have bolstered the index.

“Consumers expressed a higher level of confidence January than any other time in the last dozen years,” said Richard Curtin, the survey’s chief economist. “The post-election surge in confidence was driven by a more optimistic outlook for the economy and job growth during the year ahead as well as more favorable economic prospects over the next five years.”

The authors of the report caution that the current surge in consumer confidence will need to be rewarded by an actual improvement in jobs and income but for the time being consumers, especially those who voted for Trump are driving sales. And people are watching the Fed in expectation of higher interest rates.

According to Curtin, consumers are actually borrowing more in anticipation of interest rate hikes from the Federal Reserve. Increasing inflation expectations have led the Fed to raise their expectations for the number of interest rate hikes in 2017.

“Consumers have become more convinced that the stronger economy would finally prompt the Fed to increase interest rates at a quicker pace, which caused one-in-five consumers to favor borrowing-in-advance of anticipated increases in mortgage rates, the highest level in more than twenty years,” said Curtin in the release.

More people are borrowing in advance of anticipated higher interest rates and driving the economy. For now it is not too late to buy into the Trump rally!

It Is Not Too Late to Buy into the Trump Rally PPT

Which States Will Be Hurt by Scrapping NAFTA?

Trump supporters firmly believe that getting rid of or at least renegotiating NAFTA will result in more jobs in the USA. Is that true? Who gets helped and who gets hurt if trade with Mexico diminishes? Texas Public Radio says that Trump’s call to renegotiate or kill NAFTA will hurt Texas.

A new pickup truck comes off the line nearly once a minute at Toyota’s San Antonio factory.

The Japanese automaker set up in Texas more than a decade ago to be closer to truck-buyers-and to take advantage of cross-border trade.

“The fact that it’s close to the NAFTA corridor,” says Toyota Motor Manufacturing Texas spokesman Mario Lozoya “ I’m not saying that’s the only reason why it’s here, but it’s a factor.”

The North American Free Trade Agreement was signed in San Antonio 25 years ago, creating the largest free trade zone in the world linking Canada, the U.S. and Mexico. President-Elect Donald Trump has promised to renegotiate or scrap NAFTA, in an effort to bring back U.S. jobs. But the controversial trade agreement has increased economic activity in Texas.

The Toyota plant is part of a global supply chain that includes parts made in Mexico.

The Federal Reserve Bank of Dallas says Texas exports to Mexico and Canada grew by 13 percent per year since NAFTA started.

The fact of the matter is that many rust belt jobs did not go to Mexico or China but went to southern states like Texas.

Statistical vs Economic Territory

The UN Trade Statistics page on economic territory and statistical territory is informative.

The statistical territory of a country or area is “the territory with respect to which data are being collected” [1], that is, goods which enter or leave the statistical territory are to be recorded in the external trade statistics.

The economic territory of a country consists “of the geographic territory administered by a government within which persons, goods and capital circulate freely”

This mouthful means that statistically the USA is the territory that you see on a map. But in the case of the USA and Mexico there is an economic area referred to as Tex-Mex. This are included Northern Mexico and the South Western USA from Texas to California. A substantial amount of cross border trade occurs in this area and will be adversely affected by scrapping NAFTA.

Mexico First

There may be more than economic problems for Border States if relations continue to sour between the USA and Mexico. CNN reports that a Mexican delegation is bringing a Mexico First message to Washington.

“We say Mexico first,” a senior Mexican diplomat told CNN on the eve of the two-day visit. “If they want to re-visit the relationship, then we say, yes. Let’s see what they want, what they bring to the table and how it can better benefit us.”

Another Mexican diplomat said, “We are coming to defend 25 years of unprecedented levels of cooperation. There is a lot of anger that we have become this punching bag and because of the lack of context in portraying Mexicans through one negative lens.”

The USA and especially Border States benefit form Mexican help in deporting Central American immigrants before they even reach the US-Mexican border. The governments work on fighting drug cartels. If Mexico does not see it in their interest to cooperate with the USA the damage to US Border States will be more than the 5 million jobs that will be lost if TEX-MEX cross border trade dries up.

Which States Will Be Hurt by Scrapping NAFTA? PPT

Is This the Start of the Trump Stock Slump?

When it became clear that Trump would be the next president the market panicked. Then the market rose on expectation that Trump might replicate Reagan years supply side economics and prosperity. This was the Trump bump that lasted until Trump reality set in. NBC News writes how stocks hit a three week low after the inauguration and Trump’s protectionist speech. Is this the start of the Trump stock slump?

European stocks and bond yields dropped on Monday and the dollar hit a six-week low after President Donald Trump began his term in office with a protectionist speech that pushed a nervous market into safe-haven assets.
World stocks hit multi-year highs earlier this month on expectations Trump would boost growth and inflation with extraordinary fiscal spending measures. However, his inaugural address on Friday saw investors retreat to the safety of higher-rated government bonds as the new president signaled an isolationist stance on trade and other issues.

Investors who bid up the market in expectation of fiscal stimulus measures are concerned about protectionist rhetoric and lack of focus on measures to stimulate the economy and add jobs. Uncertainty has been the order of the day for the last month. Every trading day the market opens with a substantial gap up or down. Will the new president pursue rational policies to build the economy or will he focus on the grievances of the folks who voted for him and tear up trade deals and start deporting a substantial portion of the work force? We wrote recently about the extraordinary uncertainty of Trump and how this may affect the market.

Lawrence Summers, former Harvard Prof. and Secretary of the Treasury during the Clinton years, believes that markets are underestimating risks associated with a Trump presidency. Bloomberg reports.

“This is probably the largest transition ideologically and in terms of substantive policy that we’ve seen in the U.S. in the last three quarters of a century,” Summers told Tom Keene in a Bloomberg Television interview Tuesday. “Those kinds of transitions have to be – given the central role of the U.S. in the global system – matters of enormous uncertainty. I don’t think that’s fully recognized by markets.”

This concern is compounded by the people Trump has advising him. Peter Navarro (head of the White House National Trade Council) and Wilbur Ross (Secretary of Commerce) have written a report that Mr. Summers calls beyond voodoo economics and the economic equivalent of creationism because it is so far from responsible economic thinking. Summers does not believe that repatriated corporate cash will create new jobs.

Summers’ concerns as well as those of other economists are focused on how well Trumps proposed stimulus measures will work. The concern about this being the start of the Trump stock slump is the focus on protectionist rhetoric and the danger of a global trade war.

Who Gets Hurt in a Trade War?

If a full blown trade war erupts between the USA and China everyone suffers. But specifically which companies are at risk in a U.S. China trade war? Bloomberg offers their opinion.

It’s still far from clear how plans will shape up under Trump, who on the campaign trail blasted trade deals with China that generated record U.S. deficits. What is clear: China will retaliate against any protectionist steps – not only are there reported contingency plans, but the historical example of measures against Japan when tensions flared in 2012.

Widespread boycotts of American products in China could hit brands including Nike Inc., General Motors Co., Ford Motor Co. and Tiffany & Co., while U.S. sanctions would put Chinese electronics exporters such as Lenovo Group Ltd. and ZTE Corp. under pressure, according to Credit Suisse Group AG. Domestic competitors stand to gain from diminished commerce.

Experts expect major drops in both Chinese and American stocks with companies that do business domestically being the least affected. However, if global trade shrinks precipitously think of the Great Depression and millions out of work, stocks down to small fraction of their previous value the rise of militarism with its associated risks.

Is This the Start of the Trump Stock Slump? PPT

Will Eisenhower Era Jawboning Work on Stocks Today?

Those who believe that Trump will “make America great again” are thinking of the 1950’s, the years when Ike (5 star general turned president Eisenhower) was in the oval office. During his time in office Ike was known to call the president of US Steel and “jawbone” him into not raising the price of steel because when steel prices went up so did the price of every item made with steel or by machines with steel parts. It was considered the first step in inflation. The same approach was used by President Lyndon Johnson during the 1960’s when the word came into more common use. Merriam Webster defines jawboning.

Definition of jawboning :  the use of public appeals (as by a president) to influence the actions especially of business and labor leaders; broadly :  the use of spoken persuasion

Today President Elect Trump is publicly taking companies to task for moving jobs offshore. Although he does this by way of his twitter account it is in effect jawboning of the sort that Eisenhower used. Will this approach be effective in this era? And how will Eisenhower era jawboning work on stocks today?

Good Politics and Bad Economics

The Washington Post looked at Trumps jawboning and is concerned. They think that his approach, while good politics, may not be good economics.

Jawboning is back in style, courtesy of Donald Trump. Those with long memories will recall that “jawboning” is a term that became fashionable in the 1960s. It signified an effort by the government, usually the president, to persuade companies – through intimidation, bullying or shaming – to do what the president asked in the “national interest” even if it wasn’t in the firms’ immediate self-interest.

In our mind’s eye, Trump is standing up for American blue-collar workers and redeeming his campaign promises to revive the industrial base. The reality is that his jawboning won’t create many new jobs and could actually lose U.S. jobs if American vehicle producers are saddled with uncompetitive costs. History suggests that Trump’s high-profile arm-twisting will disappoint.

While jawboning worked to a degree during the Eisenhower years it was not all that effective in the Johnson years as war and social program costs overwhelmed the budget and the economy. In the end bulling businesses failed.

Inflationary pressures – reflecting cheap credit and Vietnam War spending – overwhelmed the jawboning. Wages and prices were bid up. By 1969, consumer price inflation was 6 percent, up from just above 1 percent in 1960. The ’70s were spent trying to contain inflation, which reached an annual peak of 13 percent in 1979 and 1980.

In the end US manufacturers went overseas to cheaper labor or they went out of business as foreign competitors under sold them back in America. That is the situation we find ourselves in today. Manufacturers also relocate offshore because they sell to those growing markets as well. The money made in those markets also finds its way back home to researchers, engineers, designers and those at the home office. Threaten these companies and they have two choices. The first is to knuckle under so that Trump looks good and then slowly go out of business with their stocks sliding into oblivion. The second is to move more production and the majority of their business offshore so that they are not American companies anymore and don’t employ American workers. That is how Eisenhower/Johnson era jawboning could work out today.

Will Eisenhower Era Jawboning Work on Stocks Today? PPT

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