Return From Exile On Main Street

by: Eric Parnell, CFA


Color me incredulous.

The Carrier deal has received its share of media scorn.

Are you kidding me?

"We'll be watching out for trouble, yeah.
All down the line.

And we'd better keep the motor running, yeah.
All down the line.

Well, you can't say yes and you can't say no,
Just be right there when the whistle blows."

-- All Down The Line, Exile On Main St, The Rolling Stones, 1972

Color me incredulous. United Technologies recently revealed in a highly publicized announcement that it would keep roughly 1,000 jobs at Carrier manufacturing facility in Indianapolis that it had previously planned on shipping to Mexico. The deal to keep these jobs in Indiana was orchestrated by President-elect Trump and Vice President-elect Mike Pence, who of course is also currently the governor of Indiana. But since the announcement, many in the financial and mainstream media have decried the deal as misguided at best and pure crony capitalism at worst. My short response to all of the media criticism and bluster about the deal is the following: Are you kidding me?

I Believe In Free Market Capitalism

Don't get me wrong. I'm a believer in free market capitalism and open economies. I believe in the merits of free trade and the need for countries to focus their resources on where they enjoy a comparative advantage and specialize while casting off the remaining activities to others so that trade deals may be negotiated leaving both sides better off.

But I also recognize that proper trade deals must be constructed in order to actually realize these benefits. I also know that what works neatly in theory and on a chalkboard may have flaws in execution including the fact that the winners from the resulting international trade may not be the same as the losers whose domestic production was sacrificed in the process. And I also understand through the circular flow diagram that when labor goes to the markets for factors of production, that a firm needs to be there waiting to provide labor with wages so that they can use this income to spend at the market of goods and services. It is in this regard that our normative policy makers have been falling short of what the theoretical economists have laid out for them.

So while I fully understand the criticism of the United Technologies (NYSE:UTX) deal in theory and understand the concerns about the deal and the way that it was carried out in practice, particularly given the businessman personality that is about to become the leader of the free world. But some bigger points are at work here that are getting completely overlooked by the media cacophony about the deal.

So This Is What The Media Decides To Get Worked Up About?

Let me get this straight. The President-elect of the United States heads toward coming into office and is already making good on his mandate to protect domestic manufacturing jobs. Yet so many in the media are howling about the bully tactics applied by Mr. Trump to iron out the deal. He is picking winners and losers, so many have declared, and precious fiscal resources have been squandered for so few jobs saved. And in the process, a quid pro quo expectation has now been set with United Technologies for a future quo to repay this recent quid. And what of the other corporate CEOs that will now have to fear retribution if they make a step with their business that the President does not like.

Don't get me wrong. These are all understandable concerns. But the last I checked, corporate CEOs are not usually wilting flowers that are left cowering under the pressure of tough business decisions. OK, so a new business risk has been introduced that they need to think about. Don't worry, they will soon figure out how to work effectively with our next President in short order. As for Mr. Trump's bluster, he is and always has been in a sense the anti-Teddy Roosevelt in this regard. Instead of "speak softly and carry a big stick", Mr. Trump pursues the approach of "speak loudly but with an open hand". Don't get me wrong, this is not a man that is beyond drawing the big stick when necessary. But it is his last move, not his first. And just as Ronald Reagan was "The Great Communicator", Mr. Trump is quickly establishing himself as "The Great Marketer", for as proven during the election, he can sell like no other (even if the facts are sometimes tortured in the process). And to head off any potential comments, I am not comparing Mr. Trump to Roosevelt or Reagan. Make no mistake, Mr. Trump will go down in history as a unique force when its all said and done.

It should also be noted before going any further that I was not a Trump supporter during the election (I am repeatedly on record for stating that I did not like any of the candidates and I frankly did not know who I was going to vote for when I drove to the polls on November 8) - so the expression of my views here is not any demonstration of support or refutation against the President-elect.

Where Have You Been?

But let's start getting to the bigger point. I simply cannot believe that after so much time that this is what the media decides to get all frothed up about when it comes to crony capitalism, the government picking winners and losers, and the outright waste of precious governmental resources in an effort to generate and support sustained economic growth in the U.S. economy.

Where after all, have all of these critics been for the last eight years?

Where were they with their denunciations since 2008 when the U.S. Federal Reserve began actively picking winners from losers and making losers out of winners by not allowing the losers to fail so that the winners could thrive?

And where were they with their uproar when the U.S. Federal Reserve was steadily pumping nearly $4 trillion - that's trillion with a big old chunky capital "T" - of liquidity into the U.S. financial system to make winners out of the financial elite and the top 1% of income earners that have been able to bask in the wealth that this generosity was able to generate at the expense of the vast majority of Americans including retirees and those living on a fixed income that were left with effectively 0% interest rates on their hard earned savings as a result?

And where were they with their scorn when regulators were breaking and bending so many rules so that major financial institutions could not only survive but subsequently thrive and eventually concentrate themselves even further, ultimately increasing the systemic risk to the global financial system at the expense of their traditional banking customers that have found it harder than ever to get a loan despite the fact that these same bank institutions were able to accumulate mountains of cash in the form of excess reserves along the way?

And where were they with their protests when the cheap money flooding into the financial system was being directed by companies not toward job creating capital expenditures that would have enabled at least some of this liquidity to trickle down to the masses but instead toward financial engineering stock buybacks and shareholder dividend payments?

Where were they? They were behind their desks in the heart of their comfortable media centers in the major cities cheering what was implied by the rise of the U.S. stock market (NYSEARCA:SPY) and completely overlooking the fact that the rest of America where the grass grows green and the land stretches far and wide was left to rot. For only the media can continue to cheer the idea of higher oil prices (NYSEARCA:USO) and not recognize the fact that when oil prices rise about the only people who benefit are the relatively few shareholders of the major exploration and production companies at the expense of the many that need to stop at a gas station and fill up their car with fuel on a daily basis. This is how polls are rendered completely wrong and how outsiders like Donald Trump shock the world with major election victories.

Comparing Jackfruit And Wolffia

But let's go one step further and compare the Carrier deal versus all of the unproductive policy nonsense that has been going on over the last many years. The U.S. Federal Reserve expanded its balance sheet by nearly $4 trillion - once again trillion with a "T" - to rescue and support a handful of major financial institutions. Included in the distribution of this money was at many points the daily disbursement of as much as $5 billion per day if not more into the financial system. Now somebody in this Fed to bank chain was not doing their job in fixing things along the way, because last I checked the economy was still lousy enough eight years after the financial crisis that enough of the American public decided to elect someone that they believe will truly bring upside down table turning change to Washington. But regardless, this is a lot of money over a lot of years.

Now let's contrast this steadily blasting monetary fire hose with what was carried out in Indiana with Carrier. The Indiana state government committed $7 million over 10 years - that's million with a little tiny "m" and ten years instead of a single day like the Fed was doing in helping to pick winners and losers above - or $700,000 per year until the year 2027. I'm not saying $7 million isn't a lot of money, it is, but it is a mere 0.00018% of the amount that the Fed has flooded into the financial system over the past eight years. And at $700,000 per year, that's about enough to pay the salary and bonus of one run of the mill, mid-level manager on Wall Street. In short, I think both the Indiana and U.S. economy will be able to handle the cost.

But what about the fact that money from the Fed is printed while money from the Treasury and the state of Indiana's coffers is tax payer money. Sure, but the last I checked the Fed through their endless purchases of U.S. Treasury securities (NYSEARCA:TLT) of all shapes and sizes as well as a variety of other assets including mortgage backed securities and other detritus that had accumulated in the financial system along the way has been effectively printing money to subsidize this type of spending for years anyway. In fact, what we are seeing with the Carrier deal is a form of the fiscal policy, albeit crude, that the Fed has been supporting through their own actions and begging the executive and legislative branches to actually carry out during the post crisis period.

Missing The Bigger Point

But the more important outcome here for the U.S. economy is the broader message implied by the Carrier deal. It's not about Carrier. It's about the signal that it is sending to the broader U.S. business community. And it's also the message that is being sent to millions of people across the country that get up across the country each and every morning and drive off to their blue collar job in order to work hard and make a decent living in support of their families each and every day.

What it signals to the business community is not that the President is going to bully you if you don't do what you want him to do. This is a losing strategy, and if there is something that Mr. Trump does not like is losing. Instead, it is a signal that the U.S. government is open to negotiate a deal. This way, the next time a company is thinking about moving production to China (NYSEARCA:GXC), Mexico (NYSEARCA:EWO), India (NYSEARCA:EPI), Bangladesh, Vanuatu or anywhere else around the globe, they will not only be inclined but also motivated out of fear of getting called out to call Washington first to see if they might be able to work out an arrangement that makes staying in the U.S. a more attractive alternative from a future cash flow generation perspective.

And what it signals to the non-elite masses is that a move is finally - FINALLY - underway to take a decidedly different approach to curing what has ailed the U.S economy for so long. Instead of using monetary policy to heap money into the banks (NYSEARCA:KBE) just so they can essentially sit on it and pump up stock prices, the new administration is going to look to use fiscal policy and the art of persuasion instead to motivate capital expenditures here in the United States for the direct benefit of the many hard working employees that need to earn a wage so that they can take their income to the store and do their part in consuming to support GDP growth for the broader economy. And the notion that a factory job that a worker might be holding their breath is destined to go overseas might actually stay put may actually give them enough confidence to go out and spend more along the way. This might help explain why roughly 60% of voters including 40% of Democrats cheered the Carrier deal according to a recent Politco/Morning Consult despite lingering skepticism of Mr. Trump and the media vitriol about the deal.

The Bottom Line

There is no telling whether this new policy approach will work or not. And the concerns as it gets started are understandable. But what we do know is that the old policy approach did not work. The time has come for a new policy approach, and we are likely to see it unfold over time. And after years of lavishing benefits on Wall Street, it seems that Main Street is finally set to return from their long policy maker imposed exile to actually participate in the stimulative benefits being applied to the U.S. economy. That change of strategy alone is a very welcome development.

Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I am/we are long TLT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long selected individual stocks. I also hold a meaningful allocation to cash at the present time.

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