Wharton's Professor Jeremy Siegel -- the voice of reason in the storm

Investment Analysis Clubs Macro Economic Trends and Risks
21

Yes, I was talking in the “eggs metaphor” sense, to include things like peppers, cantaloupe, bananas, and so on. These are all things which people consume immediately, but for which a quarter point drop in the Fed rate is meaningless.

22

That’s not going to do the job.

Yields will be much higher after the tax cut.

We are entering a great depression. When the chips are down most financial people including the professor are too limited.

23

They won’t.

They would be used to treat the symptoms of a recession but they don’t do a thing to help alleviate tariffs, and potentially make them worse in the short run - that is why the most likely direction of a rate change if tariffs don’t go away is up, not down.

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24

That does nothing to reduce the price of tariffed items - and on shoring can take years.

Additionally, it can actually create wage inflation in a tight labor market.

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25

This may be out of context, but it is a thought that has been rattling around in my head.

If GM auto sales drop by 20 percent due to tariffs, couldn’t the idle U.S. capacity be reused by moving the lines from Mexico back to the U.S.?

Someone said that these tariffs will act like a 20 percent sales tax on the American consumer. If they actually stick then everything that currently has value, goes up in value. My old clothes are worth patching, my old car os worth repairing, my chipped china is worth keeping and so on. So new sales of everything will drop off. If this is the case not only will there be idle capacity outside the country, there will be idle capacity inside the country.

So, we will not have to build new factories to bring manufacturing back to the U.S., just move some manufacturing lines back to the U.S. So while manufacturing will be more in country sourced, it will not mean new factories.(Nor new jobs or new wealth)

Cheers
Qazulight

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26

True. The Fed can only adjust short-term interest rates, but as you noted it can treat the symptoms of a recession (and speed its recovery).

DB2

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27

Short answer, no.

GM imports a lot of parts but let’s pick just one for this hypo example.

Electronic Control Modules (ECMs)

GM imports a lot of these (perhaps all of them). There doesn’t necessarily exist any capacity, idle or otherwise, that would allow them to simply move that production on shore without retooling and retraining - or more likely, outsourcing the production to some other existing supplier.

Those patches, from China. Car parts for your old car, Mexico. The ceramic glue for your chipped china, also from China.

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28

What recovery? The reason for the recession still exists. If I broke my leg, I can take pain reliever to treat the symptoms, the pain from the break, but pain reliever will not set the bone.

Lower rates only treat the symptoms, they will not cure the patient - to use the POTUS’ metaphor.

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29

Maybe, maybe not. It seems the adhesives industry in the US employs 30,000 people and has sales of $19 billion.

Directory of US Adhesive Companies
https://justuseglue.com/adhesive-companies/?__cf_chl_tk=KyxUPj8iUEGSznbRX.E5jmsdX6T2VkNuzBjOVKqm7wI-1744066596-1.0.1.1-t7abhJlqrmfRStY7bfHwGBakzeA9R7wE23JtkHHxbKc

DB2

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30

It is tricky. Tariffs make the dollar stronger, which make imports cheaper. But it also makes exports more expensive, which kills American jobs. It could be GM is better off just keeping their factories open in Mexico and laying off American workers instead.

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31

We have oodles of idle capacity in US auto plants now, especially among the big three. Ford Louisville Assembly is running at less than half capacity. GM Lordstown was sold to “Lordstown Motors”, which went BK. Apparently, Foxconn owns the plant now. It sits idle. Stellantis Belvidere Assembly sits idle. Stellantis Warren Truck runs one shift, when it runs at all. GM Poletown Assembly is running one shift. In Canada, both Stellantis Brampton Assembly and Ford Oakville Assembly are idle.

Steve

32

::shrug::

The top two selling ceramic glues on Amazon are from China (where I got my data of my reply). Perhaps those adhesives are for other products.

33

Shrug indeed. Some people assume there is little made in the US. These numbers for adhesives (and the others I posted for textiles) indicate that there is capacity and know-how here, which makes it easier to expand that core in the US.

DB2

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34

What would be required to spin up that idle capacity?

You need more than the factory and workers doing final assembly at the auto plants, I imagine. You probably need every one of your auto parts suppliers to have idle capacity as well. It would probably take some amount of time to get all of your supply chain partners to be able (and willing) to ramp up to start feeding all that idle capacity. Do you have a sense of how long that would take, and how feasible it is? And how costly it would be to the automakers if they had to unwind all that and idle the plants again?

That’s critical, because the tariffs that might make it economical to activate some of that idle capacity could disappear. Within the next 21 months, you could see the tariffs vanish if:

  1. The Administration cuts a deal to remove them; or
  2. The Administration removes them because the political pain is too bad; or
  3. The tariffs are held by a court to be illegal (because there is no national emergency or under non-delegation); or
  4. The GOP removes the tariff power back to Congress; or
  5. The Democrats win the House and they remove the tariff power back to Congress.

With all those possible outcomes, there’s a non-trivial chance that any idle capacity you reactivate now may have to be de-activated some time in the next two years - and possibly within the next two months. Can they really get all their suppliers and employees (and utility companies and transportation companies and everyone else) to re-commit to those facilities with that kind of uncertainty?

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35

Time and cost to move assembly of a model: Some years ago, FCA moved the non-grand Jeep Cherokee from Toledo to Belvidere. The first car rolled off the Belvidere line a year, and a couple weeks after the announcement. FCA said the move cost about $350M. If the company’s plant engineering has done it’s thing, and the equipment has been ordered from vendors, the actual tearout and reinstallation can be done in 8 weeks. 8 weeks is what it took Ford to gut and rebuild the inside of Rouge Assembly for the next gen F-150, a few years ago.

Now, it gets interesting. Senator Moreno, of Ohio, gave a layout of how the auto tariffs would work. Moreno used to own several car dealerships, so he may be competent in this area.

Now, lets consider the case of the Ford Escape.final assembled in Louisville. 36% US/Canadian, 27% Mexican. I would suspect the rest of the content is from supply chains in other countries where the Escape is built, and thus subject to tariff: China (ouch!), and the EU. Due to the distance, there would be some lag time in ramping up supply. The Louisville plant itself has plenty of extra capacity, as nameplate capacity is 380,000, and Ford is only selling 150k, or so, Escapes per year.

Now, it gets interesting: The Bronco Sport is on the same platform as the Escape, but it is final assembled in Hermosillo. 23% US/Canadian, 64% Mexican. As I read the Senator’s breakdown of how the tariffs work, because the Bronco Sport is final assembled in Mexico, only the US portion of that 23% of content would come back to the US tariff-free.

Being on the same platform as the Escape, I suspect it would expedite adding the Bronco Sport to Louisville’s production slate. Again, if the Senator’s description is accurate, and I am understanding what he says correctly, if Ford moved Bronco Sport production to Louisville, then, because it would be final assembled in the US, then that 64% Mexican content become tariff-free. No upset in the supply chain at all. Vendors simply ship to Louisville, instead of to Hermosillo.

The Chevy Equinox is also final assembled in Mexico, in two different plants. Very high Mexican content. Again, if I understand correctly, moving Equinox final assembly to, Lordstown, for instance, would make the final assembly, and it’s overwhelmingly Mexican content, tariff free. The Lordstown plant was heavily retooled to produce the Lordstown Motors EV, so that move would be a substantial undertaking: first negotiate the repurchase/lease of the plant form Foxconn, plus plant engineering working out the complete retooling. So the Equinox would not be coming out of Lordstown for a year. GM still owns Poletown, but the plant has been heavily retooled for the Hummer EV truck.

Stellantis Belvidere has been idle for several years. One of the union’s demands, in the 2023 strike, was the company put a product in the plant. Last year, the union started barking because the company had released any plans to restart the plant. Now, supposedly, Stellantis will be building a compact pickup in there. Even if they pulled the trigger today, it would be a year before Belvidere is going again.

Steve

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36

Only temporarily. Eventually all of the foreign value of the auto parts will be subject to tariff - the USMCA compliant exemption only lasts until they revise the content-based valuation system methodology, which is expected to happen quickly. Because the goal isn’t just to force the auto assembly back to the U.S., but the auto parts as well.

It sounds like you’re looking at a minimum of 60 days to get the plant expanded/repurposed. Presumably you could do some of the work in rehiring workers, reorienting all your supply lines to deliver to the U.S. rather than Hermilloso, firing all your Mexican workers and mothballing the plant down there, handling all the legal, etc…all of that has to be reworked starting from jump. It doesn’t seem like you could do that in less than 120 days.

If you’re FCA, can you possibly be confident that tariffs will last that long? Or that if they do, you’ll get enough production time out of the new location to have your tariff savings offset: i) the higher cost of production in the U.S.; ii) the cost of retooling the plant; iii) the cost of tariffs when you export to other countries out of the U.S. now; and iv) the costs when you have to move everything back to Mexico when the tariffs eventually go back to “normal,” including trying to rehire your Mexican workers and the cost of firing all the U.S. workers again.

I don’t know. We’ll see, I guess.

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37

These seem unlikely if prez vetoes. Would need 2/3 vote in both House and Senate to override.

38

Which might happen, if the politics leading into the midterms or after the midterms is bad enough. Or if the politics is bad enough, the President might not choose to veto even a stand-alone tariff bill - if the impact of the tariffs on the economy is really bad, and the GOP either panics before or gets wiped out in the midterms, he might be willing to not veto just to save face.

But the more likely scenario is they stick it into a must-pass item that the President won’t veto, as a practical matter.

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39

And/or provide any opportunity to still “declare victory.” I believe this is the default scenario for every “deal” that we are winning in the golden age.

A recent (today-ish) wsj editorial had a good take on our leadership’s mindset.

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40

Yes, the USMCA is up for renegotiation next year. Yes, that carve out for Mexican parts may be reduced, or eliminated. The thing is the manufacturers have some time to adjust. My whole complaint has not been the tariffs, but the precipitate way they are being implemented.

As for the Mexican assembly plants, Mexico has a free trade agreement with the EU. I expect the plants owned by VW, Stellantis, Samsung, LG, Whirlpool, to pivot to exporting to the EU. As posted before, VW has already announced the next generation Golf, which has been built in Wolfsburg since the 70s, will be built in Puebla, and exported to the EU. The Audi plant in Mexico has been exporting Q5 SUVs to both the US and EU, since the plant was built. Ford could pivot Hermosillo to exporting to the EU, but Ford has pretty much run it’s EU division into the ground. Ford will probably do the same thing it did with it’s two plants it abandoned in Brazil: sell to other automakers.

FCA’s stranded product is pretty old. They may not bother moving anything. Simply tell the minivan shoppers to buy a Grand Cherokee instead. The Jeep Compass, built on Toluca, is already obsolete. Production of it’s replacement is about to start in Italy. The existing Compass is also built in India and Brazil. Stellantis would probably pivot Toluca to building an EU model, so they can lay off higher priced German, French, and Italian autoworkers.

As noted elsewhere, the auto tariffs are sufficiently thought through and nuanced, rather than the sledgehammer taken to everything else, that I think they are intended to stick.

Steve

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