A surprise result of the election of Donald Trump is that shipping stocks are up. This is the guy who promises a trade war with China and Mexico if not everyone else. Forbes writes about the Donald Trump shipping stock boom.
Euroseas is a tiny Greek shipping company with a fleet of 12 vessels and a penny stock traded on Nasdaq. On Tuesday, Euroseas’ shares rose by 100%. Since Donald Trump was elected president, Euroseas’ stock has nearly quadrupled. Seanergy Maritime, another small dry bulk shipping company that moves grain and coal, saw its shares soar by 75% on Tuesday. Shares of DryShips, a Greek shipping company that recently looked like it could be headed for bankruptcy, have climbed by 1,400% since Election Day.
What is going on here? It would appear that people are expecting an economic boom in the USA. We recently asked how the market would respond to a Trump victory.
Trump is essentially proposing another round of supply side economics in which taxes are cut, especially for the wealthy, with the intent that subsequent investment generates more jobs and wealth.
There is talk that he will also cut a deal to reduce taxes on money repatriated from offshore accounts by US corporations. Why shipping stocks are up is because traders believe that tax cuts, repatriated money and infrastructure spending will drive the American economy higher. That means more imported raw materials and, perhaps, more sales overseas. That latter part, however, is problematic. Supply side programs often lead to inflation and we questioned if how the market would respond to inflation.
To the extent that inflation is moderate the Fed can raise rates and help to control it. To the extent that it becomes a run-way phenomenon like forty years ago it will wreck the stock market and the Trump presidency.
A faster rate of economic growth will benefit many, not just those who get jobs in the infrastructure improvements. However, there is an issue with trade and treaties. Trump may believe that he can bring jobs in manufacturing back to the USA. The problem is that the consumer market is driven by people buying things. The Chinese have learned this to their dismay. You cannot just borrow, invest and manufacture. You need consumers and until the consumer market recovers that will not work.
Shipping stocks are up in expectation of boom times in the USA. These stocks were generally depressed due to the Great Recession and a very slow and partial economic recovery. But, what goes up can come down. What happens to these shippers if Trump picks a trade war with China?
Trump’s China Trade War
Bloomberg looks at how a trade war with China would work out.
As a candidate, Trump pledged to label China a currency manipulator, bring cases against China for “unfair subsidy behavior” and use “every lawful presidential power to remedy trade disputes,” including the application of tariffs. He once broached a tax of 45 percent on imports from China, then denied bringing it up.
The problem for Trump is that his argument is at least a decade out of date. China is fighting to raise the value of its currency and not working to drive it down. It has a huge problem with capital flight and is trying as hard as it can to raise the value of the Yuan.
Trump can levy temporary import surcharges on Chinese goods or go with more permanent measures. For China this would be a disaster that would remove hundreds of billions of dollars of trade from its economy. Estimates are that the sort of 45% tariffs suggested by Trump would reduce Chinese exports to the USA by 87%. In return China can buy its airplanes from Airbus instead of Boeing and buy its soybeans and corn from Argentina and Brazil thus hurting the two biggest US exporters, the airplane and agricultural industries. The up side for China is that Trump wants to kill the Trans Pacific Partnership so that China would have its own way in developing an Asia-Pacific trade group that excludes the USA.