Why Wall Street Was Bound To Hate Trump's Tariffs
It’s easy for Investment outsiders to underestimate the pressure to perform on Wall Street. From the largest Mutual or Hedge Fund Manager (with the greatest AUM) to the lowest regional Stock Broker, the demand to produce solid returns year after year is intense. It’s the reason many financial professionals hang up their careers prematurely.
Above all else, it’s performance that counts — it’s also why President Trump’s Tariffs drew such a violent reaction from the financial markets. One afternoon, Trump literally “threw over the tables of the money changers” to use a famous quote.
You see, Wall Street had pushed for half a century to develop a business plan that optimized profits while steadily reducing fixed expenses.
Our story began in 1964 in the bucolic town of Beaverton, Oregon. Two enterprising young entrepreneurs, Phil Knight and Bill Bowerman, opened a new company that would produce a masterful running shoe and change American manufacturing.
Bowerman was the former University of Oregon Track Coach, and Knight was one of his athletes. Bowerman developed the concept of a super-light track shoe that would eliminate the extra padding and support of older shoes. From the very beginning, athletes recognized the benefit of this lighter-than-air footwear. In the first year, Blue Ribbon Sports (the name Nike would come later) sold 8,000 pairs, which is not bad for a startup.
However, what made Nike stand out as a revolutionary business model was that, from the beginning, Nike produced its shoes overseas — initially using a Japanese manufacturer, later moving to China. It helped that Nike was located in the US Northwest, just a short flight from Asia.
Nike moved production to China shortly after President Nixon opened trade agreements with the Country, which made it the world’s “manufacturer.”
Just like that, Nixon created Wall Street’s ideal production model; Nike showed the world that they could “variablize” the “fixed” expenses of operating a factory and hiring workers. Nike moved all the costs of workers’ compensation, factory maintenance and development, insurance, safety liabilities, pollution control, and natural disasters offshore. Instead, Nike could concentrate on sales, marketing, and developing even better products.
At last, Wall Street had found the near-perfect retail business model—a company that produced a popular product with the lowest possible fixed expenses, a model well suited to the up-and-down retail environment. When times were terrible, Nike could quickly reduce their offshore orders while avoiding the troublesome issues of laying off workers or closing plants. And when times were good, they could ask their offshore manufacturer to put on an extra shift.
Although Nike was the first, Apple Computer would perfect the business model: a model that combined offshore production with American Marketing and Development. Most are familiar with Apple’s history, including how Steve Jobs and Steve Wozniak began the company in the family garage and how both founders initially left the company, with Jobs returning as CEO in 1997. In his second stint as company leader, Jobs fully adopted the Nike model by outsourcing Apple production to China.
From that time onward, Apple steadily climbed to the world’s most valuable company and, in the process, became a premier performer in the stock market. Apple finally achieved that coveted number one position, recently topping a market cap of $3 trillion.
That is, until Donald Trump came along with his “Liberation Day,” the day he revealed his global tariffs. While his tariffs were aimed chiefly at America’s trading partners, they hit Apple squarely in the Balance Sheet.
Apple’s current CEO, Tim Cook, anticipated that Trump would likely impose tariffs on Chinese production, so he moved some production to other Asian nations. But in the end, it didn’t matter, as Trump slapped tariffs on all the countries that produced Apple products.
In a 45-minute White House Rose Garden presentation, the President demolished Wall Street’s favorite production model, which Nike began over half a century earlier. Suddenly, the tremendous cost advantage of offshore production was declining. By making imported products more expensive, the president moved the nation closer to a “Made-In-America” marketplace.
While even Wall Street might agree with those sentiments, American manufacturing plants lie far in the future. As we said before, what counts on the Street is today’s performance: “What have you done lately?” is their mantra. A new quarter has just begun, and as noted, money managers will be judged on how well their portfolio performed this month, not sometime in the future.
From the Street’s perspective, Trump has just benched the market’s best performer (along with others in the Mag 7), limiting the nation’s best and most profitable business model. It should come as no surprise that Wall Street threw a hissy fit.
Only time will tell how long it takes for American Multinationals and Investors to adapt to this new way of doing business.