Two out of five on the decline [NYT]
Since the Eurozone Debt Crisis (2010-2012), Germany has gained the global reputation of “bank” to the European Union. Once a powerhouse, the German Economy is flat since 2022, with annual growth rates of -0.2 and -0.1 percent for each of the last four quarters. On November 23rd the New York Times called it a “Crisis.” As of September 2024, there are six Euro Area countries with shrinking economies and seven with growing economies.
Takeaways: First, economic contagion risk. Two of the five largest economies in the world are stagnant. This only makes it more difficult for everyone else in their neighborhoods, along with the US, to continue a healthy economic expansion. The more direct impact to financial markets is perhaps harder to determine. It essentially depends on what is already “priced in.”
Suppose the investors who would pull their money from Europe and shift it to other markets on a shrinking economy had not yet done so. Then, if economic conditions do worsen, the shift of investment from Europe to the US - the “flight to safety” trade - should boost US asset prices.
But if those investors have already pulled money from Europe because of existing or anticipated economic weakness, then the boost to US asset prices has already taken place. The only remaining change for US markets would eventually be negative, as investors may reallocate back to Europe with an economic recovery (assuming there is one).
Related Tickers: SPY (SPDR S&P 500 ETF), VGK (Vanguard FTSE Europe ETF), EWH (IShares MSCI Hong Kong ETF)
Goldman Took a $900mn hit on its EV Battery Investment [FT]
In yet another example of how narrative-driven investing can lead to disaster, Goldman Sachs, along with other banks and pension funds (the “smart” money) have collectively lost tens of billions on Electric Vehicle Battery Maker Northvolt.
The decline began in July when one important customer - BMW - pulled a contract worth 2 billion Euros to source batteries for its EVs. That’s not the only automaker has downsized its investment in the Electric Vehicle Revolution this year. Volkswagen, Ford, and GM have downsized their EV expansion plans due to the simple fact of weak consumer demand for electric cars.
Takeaways: I personally do not invest on themes, but some investors and managers do, and some achieve success. For investors who do (or wish to) pursue that type of strategy, it’s important to focus on themes that are driven by organic market demand, as opposed to themes that are driven by policy. The EV revolution is/was an example of the latter. EVs are not going to fall off the face of the earth. A lot of (upper middle class) Americans and Europeans love their luxury electric cars. But it’s been almost four years since President Biden signed his executive order mandating that all new cars be electric by 2035, and since then, the median consumer is cold.
Related Tickers: TSLA (Tesla), TSLL (2x leveraged Tesla ETF), GS (Goldman Sachs), IDRV (iShares EV and self driving ETF)
TJMAXX Says it will thrive on Trump’s Tariff ‘Chaos’
I do not think of the first Trump presidency as particularly transformative, but he did let the protectionism cat out of the bag. That was something of an economic regime change that will probably escalate for many more years before it reverses. President Joe Biden campaigned against that policy in the Democratic Primary, but it was scarcely mentioned in the general election. Fast forward a few years and in September, CNN reported that Biden finalized increases to Trump’s China tariffs. Electric Vehicles, 100%; solar cells, 50%; EV batteries and base materials, 25%.
Two presidents in a row, virtually no widespread public resistance, millions of public supporters… protectionism is now a trend. There is plenty of historical evidence showing that protectionist policies don’t enrich the society that levies them, but that doesn’t matter, we will get them anyway. Though a net loss, protectionism results in both winners and losers. Rather than focus on the “goodness” or “badness” of the coming policies, investors will benefit from understanding what factors are responsible for sorting companies and industries into those two categories.
Example: TJ Maxx. “The ‘chaos’ Trump’s tariffs may bring to the retail industry plays right into its business model,” according to CNN paraphrasing TJX. TJX imports a much smaller percentage of its merchandise than most of its competition; they “buy designer brands’ excess merchandise straight from the brands, much of it after it’s already been imported, and then sell it to customers 20% to 60% below regular prices.” Their buying strategy allows TJX to benefit from supply chain disruptions and overproduction. CEO Ernie Herrman speculated that manufacturers may respond to new tariffs by “bringing in goods early,” which would “create even additional availability of goods at advantageous prices.” (I think this take is a bit short-sighted, but it gives us a starting point from which to think about how companies can benefit from bad trade policies).
Takeaways: Protectionism is back and will be a net drag on the economy as a whole. But for investors whose strategies allow them to pick individual names and sectors, there’s an opportunity to benefit. If the protectionism train stays on its track, companies that require few foreign-made materials as inputs, or are many steps removed from importation, stand to benefit over their competition. (This is not a recommendation to go buy TJX). I also feel obligated to note that the coming tariffs did not deter me from buying Walmart last week, in anticipation that its strong uptrend of the last six months will continue.
Related Symbols: EWH (iShares Hong Kong ETF), TJX (TJ Maxx), WMT (Walmart), XLY (SPDR Consumer Discretionary Sector ETF)