US Retailers Warn Trade Wars Will Unleash "Unavoidable" Price Hikes Before Holidays

While it seems that trade disputes between the US, Mexico, and Canada are de-escalating, the trade conflict with China is not. President Trump ramped up the trade war on Monday as $200 billion in Chinese imports took effect. This is the third round of US tariffs on Chinese imports, a significant escalation of the conflict between the world's two largest economies.

And caught in the middle of the crossfire are US retailers, who have spent a great deal of time on investor conference calls warning about imminent price hikes during the upcoming holiday season, which could send shock waves through the wallets of American consumers.

The chief executives from Walmart, Target, Gap Inc. and Best Buy, among others, have been some of the most vocal companies warning about "unavoidable" price hikes.

According to a letter from Robert Lighthizer, the US Trade Representative, tariffs on some $200 billion worth of Chinese imports took effect Monday. There are several hundred items on the list, including electronics, kitchenware, tools, and food. The taxes are set around 10 percent but will jump to 25 percent at the beginning of 2019.

The resulting margin compression will force retailers to either eat the cost of the tariffs or pass it along to consumers, right before the critical holiday season: "The new tariffs are bad news for the retail sector, especially as the latest round seems to extend the tax to a vast array of consumer goods," GlobalData Retail Managing Director Neil Saunders said in comments emailed to Retail Dive.

"Many retailers will now be faced with a difficult choice of whether to pass the cost increases across to consumers or to take a hit on their margins. The exact response will vary from retailer to retailer but, both strategies are likely to be used."

In a late cycle economic environment, tariffs are especially dangerous for retailers because it could exacerbate the effects of other rising costs, "including more spending on technology, elevated logistics costs, higher gas prices, and rising labor expenses. In short, additional tariffs are the last thing the retail sector wants," according to Saunders.

The new duties are across a wide assortment of goods, from apparel to appliances, mainly covering consumer products. Retail Dive said some retailers are working with suppliers on how to respond to their impact, while others look to shift their manufacturing bases.

Reshifting supply chains takes time and are very costly. Some small and medium-sized companies could face financial hardship due to the disruptions.

"Of course, it’s also related to the ability of our vendors to observe the tariffs, and of course we are having negotiations, or over time, usually not in the short term but over time, to diversify the supply base," Best Buy CEO Hubert Joly told investors last month, according to a conference call transcript. "So, it’s a complex undertaking."

Before the holidays, low-margin consumer goods, price hikes are inevitable. "As we said many times, as a guest-focused retailer, we're concerned about tariffs because they would increase prices on everyday products for American families," Target CEO Brian Cornell said last month, according to a conference call transcript.

"In addition, a prolonged deterioration in global trade relationships could damage economic growth and vitality in the United States. Given these risks, we have been expressing our concerns to our leaders in Washington, both on our own and along with other retailers and trade association partners," Cornell said.

Last week, Walmart sent a letter to the Office of the United States Trade Representative, warning that the trade war impact will soon lead to price hikes.

The result of $200 billion in new tariffs "will be to raise prices on consumers and tax American business and manufacturers," Walmart said in the letter. "As the largest retailer in the United States and a major buyer of U.S. manufactured goods, we are very concerned about the impacts these tariffs would have on our business, our customers, our suppliers and the U.S. economy as a whole."

In an interview last Thursday, Gap Inc. CEO Art Peck told Bloomberg's Emily Chang, the company is watching the trade situation closely, but implications are not as great for Gap because apparel is not on the list. The company has spent years diversifying its manufacturing plants across many countries. But Peck said a jump in prices would eventually hit the consumer's wallet as a result of President Trump's trade wars.

So from now until the rest of the year, retailers will factor in about 10% tariffs. But when 2019 comes around, the tariffs are set to rise to 25%. "Should an agreement between China and the U.S. not be found before the New Year, retailers could well start 2019 on a gloomy note," Saunders warned.

An all-out trade war between the US and China is emerging as the most plausible scenario for 2019 and beyond, a risk that could severely impact US retailers and the American consumer.

Fonte: qui

Iran Sanctions Are Different This Time

The Trump administration is trying to replicate the Obama-era strategy of shutting in Iranian oil exports as a way to pressure the regime into making a series of concessions. But there are several reasons why Trump may not succeed.

It isn’t that Trump’s sanctions won’t be as effective, despite the refusal of the rest of the international coalition to go along with Washington’s isolation campaign. In fact, even though the EU, in particular, is hoping to shield Iran from the wrath of the U.S. Treasury, international companies are packing up and leaving Iran and refiners around the globe are starting to cut their oil imports from Iran. So, yes, there is every reason to believe that the sanctions will have real bite.

The main problem that could frustrate the Trump administration is the oil market, which is in a very different place than it was in 2012-2015. The oil market is tighter than it has been in years, which could ultimately force the U.S. to go easier on Iran than it would like.

A cursory glance at oil prices for the period in which the Obama administration pushed sanctions on Iran shows elevated prices, which would lead one into thinking that the Obama administration also had to contend with a tight oil market. Brent crude routinely topped $100 per barrel during a time in which Iran saw around 1 million barrels per day of exports disrupted.

Brent is now significantly lower than that, so Trump should have no problem cutting Iranian supply off once again, right? Not so fast.

President Obama had the fortune of an exploding U.S. shale sector. It probably wasn’t obvious to the Obama administration what was unfolding in North Dakota and Texas when sanctions on Iran really started to hurt in 2012. U.S. oil production skyrocketed between 2012 and 2014, rising by over 3 mb/d, which more than compensated for the 1 mb/d of lost Iranian supply.

To be sure, the Trump administration is also presiding over a shale boom. U.S. production is up about 1.6 mb/d since Trump took office, and output in 2018 has increased by around 400,000 bpd year-to-date. However, the problem for Trump is that Permian bottlenecks  could mean that additional growth slows to a crawl, at least for the next year or so.

That means that as the U.S. begins to cut into Iranian supply, U.S. shale drillers will not be able to compensate for the losses.

(Click to enlarge)

It isn’t just about U.S. supply versus Iranian supply though. The broader market is trending in a much tighter direction than it was back then, despite the difference in prices. Outages in Venezuela, Libya and Angola have tightened the market much faster than expected. More importantly, at least in the case of Venezuela, the losses are set to deepen.

Then, of course, there is the decline of inventories, which has picked up pace this year. OPEC+ has spent a year and a half trying to get inventories back to the five-year average, an objective that was achieved earlier this year. But now, because the current supply/demand balance reflects a deficit, inventories are set to continue to decline.

“The previous sanctions episode was only possible, in our view, because U.S. shale production was growing at a very fast clip and Libyan output came back to the market to replace some of the missing Iran barrels,” Bank of America Merrill Lynch wrote in a research note.

“Plus, other OPEC members were still running with some spare capacity and global oil demand was rather sluggish. In contrast, we now project global oil supply and demand balances to remain in a structural deficit for most of the next six quarters.”

The upshot is that even though Obama slapped sanctions on Iran when oil prices were high, he had a series of tailwinds at his back that Trump will not enjoy. The oil market is tight and any effort to shut in Iranian supply will exacerbate the situation.

Moreover, the Obama administration took a careful and deliberate approach to sanctions, precisely because it wanted to avoid pushing up prices. U.S. politicians are always highly concerned about the political damage of high gasoline prices, which is a big reason why the Obama administration offered some pretty reasonable waivers to multiple countries that bought Iranian oil. The rule of thumb was that if a country cut imports from Iran by 20 percent, that was pretty good, and they received leniency from Washington on the rest.

The Trump administration instead has vowed some sort of “zero tolerance” policy, hoping to shut in as much Iranian supply as possible. The U.S. State Department said it would not be inclined to grant any waivers. Those comments alone sent oil prices shooting up in June.

But, the Trump administration might be forced into backing down if prices spike too high. Bank of America Merrill Lynch says that “a complete cutoff of Iran exports would be very hard to manage and likely result in an oil price spike above $120/bbl.”

John Kemp of Reuters summed it up earlier this month: “The White House can drive Iran’s oil exports to zero, or it can have moderate U.S. gasoline prices, but it probably cannot have both.”

Authored by Nick Cunningham via OilPrice.com

Paul Craig Roberts: How Long Can The Fed Hold Off The Inevitable?

“those who understood it was a Ponzi scheme but did not realize the corruption that has beset the Federal Reserve and the central bank’s…”

by Paul Craig Roberts via PaulCraigRoberts.org

How Long Can The Federal Reserve Stave Off the Inevitable?

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them. The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China.

Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US corporations because of much lower labor and compliance costs. Profits, executive bonuses, and shareholders’ capital gains receive a large boost from offshoring. The costs of these benefits for a few fall on the many—the former American employees who formerly had a middle class income and expectations for their children.

In my book, I cited evidence that during the first decade of the 21st century “the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent. These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures” (p. 100).

In other words, to put it in the most simple and clear terms, millions of Americans lost their middle class jobs not because China played unfairly, but because American corporations betrayed the American people and exported their jobs. “Making America great again” means dealing with these corporations, not with China. When Trump learns this, assuming anyone will tell him, will he back off China and take on the American global corporations?

The loss of middle class jobs has had a dire effect on the hopes and expectations of Americans, on the American economy, on the finances of cities and states and, thereby, on their ability to meet pension obligations and provide public services, and on the tax base for Social Security and Medicare, thus threatening these important elements of the American consensus. In short, the greedy corporate elite have benefitted themselves at enormous cost to the American people and to the economic and social stability of the United States.

The job loss from offshoring also has had a huge and dire impact on Federal Reserve policy. With the decline in income growth, the US economy stalled. The Federal Reserve under Alan Greenspan substituted an expansion in consumer credit for the missing growth in consumer income in order to maintain aggregate consumer demand. Instead of wage increases, Greenspan relied on an increase in consumer debt to fuel the economy.

The credit expansion and consequent rise in real estate prices, together with the deregulation of the banking system, especially the repeal of the Glass-Steagall Act, produced the real estate bubble and the fraud and mortgage-backed derivatives that gave us the 2007-08 financial crash.

The Federal Reserve responded to the crash not by bailing out consumer debt but by bailing out the debt of its only constituency—the big banks. The Federal Reserve let little banks fail and be bought up by the big ones, thus further increasing financial concentration. The multi-trillion dollar increase in the Federal Reserve’s balance sheet was entirely for the benefit of a handful of large banks. Never before in history had an agency of the US government acted so decisively in behalf only of the ownership class.

The way the Federal Reserve saved the irresponsible large banks, which should have failed and have been broken up, was to raise the prices of troubled assets on the banks’ books by lowering interest rates. To be clear, interest rates and bond prices move in opposite directions. When interest rates are lowered by the Federal Reserve, which it achieves by purchasing debt instruments, the prices of bonds rise. As the various debt risks move together, lower interest rates raise the prices of all debt instruments, even troubled ones. Raising the prices of debt instruments produced solvent balance sheets for the big banks.

To achieve its aim, the Federal Reserve had to lower the interest rates to zero, which even the low reported inflation reduced to negative interest rates. These low rates had disastrous consequences. On the one hand low interest rates caused all sorts of speculations. On the other low interest rates deprived retirees of interest income on their retirement savings, forcing them to draw down capital, thus reducing accumulated wealth among the 90 percent. The under-reported inflation rate also denied retirees Social Security cost-of-living adjustments, forcing them to spend retirement capital.

The low interest rates also encouraged corporate boards to borrow money in order to buy back the corporation’s stock, thus raising its price and, thereby, the bonuses and stock options of executives and board members and the capital gains of shareholders. In other words, corporations indebted themselves for the short-term benefit of executives and owners. Companies that refused to participate in this scam were threatened by Wall Street with takeovers.

Consequently today the combination of offshoring and Federal Reserve policy has left us a situation in which every aspect of the economy is indebted—consumers, government at all levels, and businesses. A recent Federal Reserve study concluded that Americans are so indebted and so poor that 41 percent of the American population cannot raise $400 without borrowing from family and friends or selling personal possessions.

A country whose population is this indebted has no consumer market. Without a consumer market there is no economic growth, other than the false orchestrated figures produced by the US government by under counting the inflation rate and the unemployment rate.

Without economic growth, consumers, businesses, state, local, and federal governments cannot service their debts and meet their obligations.

The Federal Reserve has learned that it can keep afloat the Ponzi scheme that is the US economy by printing money with which to support financial asset prices. The alleged rises in interest rates by the Federal Reserve are not real interest rates rises. Even the under-reported inflation rate is higher than the interest rate increases, with the result that the real interest rate falls. If the stock market tries to sell off, before much damage can be done the Federal Reserve steps in and purchases S&P futures, thus driving up stock prices.

Normally so much money creation by the Federal Reserve, especially in conjunction with such a high debt level of the US government and also state and local governments, consumers, and businesses, would cause a falling US dollar exchange rate. Why hasn’t this happened?

For three reasons. One is that the central banks of the other three reserve currencies—the Japanese central bank, the European central bank, and the Bank of England—also print money. Their Quantitative Easing, which still continues, offsets the dollars created by the Federal Reserve and keeps the US dollar from depreciating.

A second reason is that when suspicion of the dollar’s worth sends up the gold price, the Federal Reserve or its bullion banks short gold futures with naked contracts. This drives down the gold price. There are numerous columns on my website by myself and Dave Kranzler proving this to be the case. There is no doubt about it.

The third reason is that money managers, individuals, pension funds, everyone and all the rest had rather make money than not. Therefore, they go along with the Ponzi scheme. The people who did not benefit from the Ponzi scheme of the past decade are those who understood it was a Ponzi scheme but did not realize the corruption that has beset the Federal Reserve and the central bank’s ability and willingness to continue to feed the Ponzi scheme.

As I have explained previously, the Ponzi scheme falls apart when it becomes impossible to continue to support the dollar as burdened as the dollar is by debt levels and abundance of dollars that could be dumped on the exchange markets.

This is why Washington is determined to retain its hegemony. It is Washington’s hegemony over Japan, Europe, and the UK that protects the American Ponzi scheme. The moment one of these central banks ceases to support the dollar, the others would follow, and the Ponzi scheme would unravel. If the prices of US debt and stocks were reduced to their real values, the United States would no longer have a place in the ranks of world powers.

The implication is that war, and not economic reform, is America’s most likely future.

In a subsequent column I hope to explain why neither US political party has the awareness and capability to deal with real problems.