A recession is the only path to real change in the U.S.
President Trump gave corporate globalists tax cuts and then told CEOs to start building manufacturing plants here in the U.S. or face the negative results of tariffs against China and other countries. Instead of these pompous globalists listening to President Trump, they used the mainstream media to attack the President in an attempt to force him out of office.
What did Apple do when it was told by the President that it needed to build the iPhone in the U.S.? Apple joined Google in banning InfoWars from its internet sites as globalist CEOs see online websites like InfoWars as the reason President Trump beat Hillary Clinton.
President Trump will continue pushing tariffs against countries like China which will devastate Apple because Tim Cook didn’t do what the President asked him to do, build the iPhone here in the U.S.
This is what is happening to Apple and other globalist CEOs that have largely refused to reorganize their supply chains back to the U.S. at the request of President Trump after padding their bottom-line with his massive tax cuts.
The horizontal axis shows the quantity of iPhones imported from China and the vertical axis shows the price per iPhone. The white line is the demand curve while the blue line represents the supply curve without tariffs. With no tariff, supply and demand form an equilibrium at point A.
Suppose that a tariff is imposed by the government against China for most of the components that go into an iPhone in order to encourage domestic production of these components. This increases the price of each iPhone imported, moving the supply curve inward (left) to the red line. The tariff is paid by the producer (Apple), and a new equilibrium is established at point B. Fewer iPhones are imported from China and the tariff pushes the cost of the iPhone up (passed on to consumers) and so demand for iPhones drop.
You may have noticed from the supply and demand graph above that a tariff has the exact same impact on iPhones as would a tax. You are correct. This is why President Trump gave these corporate globalists a massive tax cut to offset the negative impacts of tariffs while they move their supply chains back to the United States. The problem is, many U.S. corporations that have things manufactured in China used the tax cuts not to re-route their supply chains back to the U.S., but instead to engage in massive share buybacks. For example, in 2018 Apple bought back $43.5 billion of its own stock during the first six months of 2018. The reason companies like Apple buyback their own shares is that CEO pay and bonuses are tied to the performance of their stock.
Let’s go a little deeper in our analysis of how tariffs impact iPhones.
So to recap, the supply curve shifts to the left by the amount of the tariff per unit which pushes up the price of the iPhone which lowers demand.
Consumer surplus is reduced from acp to agb. The portion gbhp of the old consumer surplus is transferred to the government in the form of tariffs (remember how President Trump said that billions are coming into government coffers from tariffs?)
The producer surplus is reduced from pce to fde. The portion phdf of the old producer surplus is transferred to the government in the form of tariffs.
The market is no longer able to reach equilibrium, and there is a loss of allocative efficiency resulting in the deadweight lost shown by the area bcd. This represents a loss of both consumer surplus bhc and the producer surplus hcd that is removed from the market. Some of the deadweight loss could be recovered by domestic producers of smartphones.
Overall, the deadweight loss means that consumers buy less smartphones because they cost more, and suppliers make less smartphones because their profit margin is squeezed by the increased cost to produce smartphones and by falling demand as they pass on the cost of the tariff to consumers. Economic activity between buyers of smartphones and producers of smartphones is reduced.
Now we just talked about smartphones but imagine this taking place on a much broader scale with the tens-of-thousands of goods produced in China. Clearly tariffs on that type of scale lead to reduced economic activity in the form of deadweight loss which in turn leads to a recession if that deadweight loss is not offset by domestic production.
Apple gave an early forecast warning a couple of weeks ago where they cited a slowdown in China. We know that Apple suppliers have also said that Apple has massively cut its demand for their products.
In reality, the tariffs are broad based and with the help of the Federal Reserve, deadweight loss is rippling through our economy and contracting economic activity between buyers and producers. You can really see this in the monthly version of the ECRI and by averaging the 4 weekly data points. It looks like it gives a 100% chance of a recession.
With corporate globalist CEOs choosing to use the mainstream media to fight President Trump’s efforts to reorganize their supply chains to the U.S. and instead resorting to tactics like Internet censorship, rogue special prosecutor investigations and harassment, and putting out fake news propaganda in an effort to make Trump a one-term President, it seems like a recession is in the cards and is the only way to force old Establishment types out of their positions.
China didn’t come to the table of negotiations with President Trump until their economy began to slowdown and contract. So too these corporate globalists will not move their supply chains away from China and back to the U.S. until their revenues plunge and many of them like Tim Cook are fired. Until then, they are holding on to fantasies that once President Trump is out of office, they can eliminate Trump’s tariffs and go back to producing everything in China again. While most CEOs still have that hope, nothing is going to get better. It’s going to take a recession to get them to listen to the American people.
What is a recession? We know the textbook definition that a recession is a temporary economic decline in activity between buyers and producers. However, isn’t a recession also a “changing of the guard” as money moves from one group of people to another? CEOs are often fired during recessions and new ones hired. Corporations are more inclined to go bankrupt and their parts scattered to other suitors. Establishment types are more likely to get voted out of office as new leaders emerge which bring greater scrutiny of cronyism and the Deep State.
President Trump’s goal of draining the swamp and getting rid of corruption and the abuse of power inside the U.S. government by logical necessity dictates that a recession has to occur. The goal of getting the rich and powerful globalists to move their supply chains back to the U.S. and hire U.S. workers to build their products can only be accomplished by prying the money from their greedy hands and the only thing that can do that is a recession as money is sucked away from one group of people and given to another.
Personally, I don’t want to see a recession as it’s always the most vulnerable in our society that suffers the most. My only point is that if you take President Trump’s agenda at his word, how would it even be possible to accomplish what he and his supporters want without having a recession? It’s not. I’m not bashing the Trump agenda. In fact, I mostly support it. My point is that we’ll know the President is succeeding when we do have a recession and things won’t get better until money and power is transferred from the old globalist guard to the new nationalist fighters. A recession is the only logical path to meaningful change and so as traders, we must be prepared.