Today's Google News reported three interesting stories that all reflect on this mythology of Trumpism and Trick Down Economics:
In the first story, Ford announces a ten percent reduction in its global work force, around 20,000 mostly salaried workers out of a 200,000 work force. The reason for the reduction, according to Ford Executive Chairman Bill Ford, is dissatisfaction with Ford's share price. The Ford family only owns two percent of the common stock, but they own 40 percent of a special class of stock that gives them effective control over the company.
So, in the world of Trumponomics, what's going on here? Ford is cutting middle management (read: salaried) positions, which increases the percentage of hourly wave workers, to shore up the company's bottom line, enabling it to increase dividends to share holders that in turn will increase the attractiveness of the stock to investors. Ford was losing money in 2009, when they refused the government's bailout offer that saved GM and Chrysler. By 2010, one year later, the Ford family's personal holdings increased in value from $133 million to $1.2 billion on the strength of a two percent increase in market share.
Now, however, the Ford Family wants more, and so do their shareholders. Stock values rise and fall on the basis of supply and demand, and the supply and demand ratio for a given stock depends on dividends. During that critical year in the auto industry, Ford's share price increased from $1.59 in February of 2009 to $16.50 per share, according to a report in Forbes in December of 2010.
Now that the worm has turned again, and Ford's stock price has retreated to $11 per share, Bill Ford and the rest of the family are feeling the pinch again but, instead of increasing production, reducing the labor force more gradually through automation, cutting prices, or doing any of the other tried and true methods for increasing shareholder value, they are cutting jobs. Of course, when you cut jobs, you reduce the number of people who can afford to buy your products. That may be why they are laying off middle management. Middle management tends to purchase more expensive foreign cars
What this means in terms of Trumponomics: Trump, along with the rest of the Republican party, are steadfastly clinging to the failed theory of trickle down economics, a theory that George H.W. Bush once rightly called voodoo economics. In point of fact, however, when you give back tax money to a corporation, that money will not go into creating new jobs. It will go into increasing the share price by giving back much of those ill-gotten gains to their shareholders. Their shareholders, in turn, are also consumers, so there is a chance that some of that money will help to strengthen the retail economy, but it won't create new jobs. The only thing that encourages capitalists to hire workers is the necessity for increasing production to meet increased demand. When industries are at their saturation points - and the auto industry is well beyond its saturation point - increased demand doesn't translate into increased sales because the competition spreads the increased demand around to the point where no one competitor reaches a flexion point at which significant new hires become necessary.
Ford's action simply proves the rule. Corporations are driven to increase share price in order to increase value, share price is driven by demand, demand is driven by dividends, dividends are driven by profits and profits are driven by sales. You will note that increased production is only incidental to this formula because increased production requires capital investments for physical plants and equipment., which erodes the value of the profits gleaned from expensive production increases.
In the second story, we see an example of billionaire hubris.
Sears CEO Eddie Lampert just shot himself in the foot by launching a lawsuit against One World Technologies, the Chinese company that manufactures the venerable Sears Craftsman line of power and hand tools on which Sears reputation is based.
One World Technologies is apparently attempting to weasel out of its contract to manufacture tools under the Craftsman label. This happens quite frequently when manufacturing operations are outsourced to China. The Chinese company gains the expertise it needs to manufacture products to American standards and then attempts to take that expertise with them when they set up shop under their own label, marketing the same products under their own brand. (It happened with the IBM notebook computer line, which was produced in China by the company that now markets the same line of products under their own Lenovo brand name. Lenovo now manufactures most of the computer products formerly manufactured by IBM.)
Lampert has invested somewhere between $500 million and $900 million of his own money in an attempt to save the moribund Sears Holding Corporation . Sears Holding was established in 2005 when the Kmart Corporation, then in bankruptcy, bought out Sears and combined the two companies under one management.
The acquisition was a mistake for both companies. Sears, already hard pressed by big box retailers, got saddled with the weakest member of the discount department store group, and Kmat joined forces with a company whose reputation was based on the iconic Craftsman line of power and hand tools. Sears remains unique among full service department stores because of its tool department, which none of the other major full spectrum retailers offer.
The problem with that business model is that it forces Sears into competition with hardware retailers like Home Depot and Lowe's, both of which offer a broad spectrum of tools from different manufacturers while Sears only carries the Craftsman line. It also puts them into competition with low-ball hardware sellers like Harbor Freight, who offer comparable products at much lower prices. Their business model also puts Sears into direct competition with big box appliance retailers like Best Buy.
CEO Eddie Lampert, an Ayn Rand fan, has put up approximately half of his net worth to bail out a company that has no foreseeable future against the array of competitors poised against them, and Kmart is equally overmatched by Walmart and Target.
Now, compounding his errors in judgment, he has filed suit against One World Technologies for attempting to renegotiate the terms of the agreement under which they are manufacturing Craftsman products. This is very strange, because Sears SOLD the Craftsman label to Stanley Black and Decker in January of 2017. So why is Lampert filing a lawsuit against One World because it is attempting to break a contract to manufacture a line of products that Sears no longer owns?
In another example of how blogs and twitter posts can come back to bite you, Lampert announced his intention to file a suit to head off a suit that he believed was coming from One World Technologies. The market responded by prompting selling off Sears stock, which lost 12 percent of its value in one day as investors flee from the product.
There is some speculation that Lampert was playing the long game by planning to sell off moribund Sears locations to other high end retailers at a substantial profit. He is doing this by selling off the dead stores to Seritage Growth Properties, a separate company that is also controlled by Eddie Lampert, playing both ends against the middle. If Sears had re-leased those locations directly, Sears would be reaping those profits instead of Seritage.
The Trumponomic takeaway from this cautionary tale is that loose lips sink corporate enterprises. By blogging about Sears troubles with its vendors, Lampert opened to door to further negative speculation about his tenure and possible demise as Sears CEO, a position he holds by virtue of the fact that his investment firm owns 58 percent of Sears. Translation: the only way he can lose this job is if Sears goes under because he owns a controlling share of the stock. This follows on the Trump model of a closely help corporation. What Lampert did with Sears was essentially to take the company private, which means that there are no effective controls over his behavior as CEO. That's why he could get away with a stock buy back program, which transferred much needed operating fund support to shareholders, including Lampert.
The third and final cautionary tale is the one that goes like this: "Sometimes, when you build it, they don't come."
That's the lesson that Trump has failed to learn over and over again with his various failed businesses. He invested much of his wealth in his Atlantic City Casino operation, where he was beating a dead horse because Atlantic City's time has come and gone again. No one WANTS to go to Atlantic City on vacation. Atlantic City is where you go when you can't go anywhere else.
It's not just Atlantic City. It is the entire gaming industry, which has spread from Las Vegas and Atlantic City to virtually every state in the nation, which now have casino gambling courtesy of the local Indian tribes, who has struck gold again with their exemption from local regulations that allow them to build casinos on their lands.
Part of Trump's failure in Atlantic City wasn't simply bad timing. It was ill-informed stupidity, because Native controlled casinos were beginning to pop up around the country well before Trump ever got into the casino business. He misread the market, and he misread the regulatory environment. The market - gamblers - will gamble wherever it is most convenient to gamble, and that means the closest destination. If you are going to travel long distances to gamble, why go to Atlantic City when you can go to Las Vegas for the same airfare.
Of course, Trump made similar errors with Trump Air. Trump Steaks, Trump Vodka, and a dozen other failed enterprises, but what in the world does this have to do with a sudden drop in housing starts?
People who build houses on speculation aren't idiots. They read the tea leaves very carefully before they start digging. The recent drop in new construction permits is the result of major builders reading the tea leaves and not liking what the see.
Housing starts in the first quarter of 2017 were bolstered by the euphoria around Trump's victory and the widespread conviction that this victory would lead to lower taxes, more job growth, and increased demand for housing. The permits executed in the first quarter were taken out between Election Day and Inauguration Day, which resulted in a strong first quarter. Some speculated that warmer than usual weather may have accelerated housing starts, but no one increases housing starts in warm weather in the same way that cold weather curtails housing starts. One is a vague opportunity, the other is a practical necessity.
The fact new housing permit requests have fallen significantly represents the belief among real estate developers that the Trump Surge is just not real. Trump's repeated failures to get his signature bills passed, his inability - so far - to jury rig the tax system, and increasing speculation about the length of his tenure in Washington have cast a gloom over the housing sector. Without the tax cuts, without growth incentives, the question becomes, "If you build it, who will buy it?"