Tariffs May Cause Pricing Premiums For US-Made Steel: Dudas

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well, we may hear more from President Trump this week about those aluminum and steel tariffs that he was talking about, which could end up being uh the maximum that any of his advisers recommended tariff on steel imports. Here to kind of look at what the possible implications of this are is Mike dudas partner and Medals and Mining analysts for Vertical Research Partners. He joins us here in eleven

three oh studios today, so we're very happy to see you. Mike. Just walk us through what a twent tariff on steel

and a ten percent tariff on aluminum would do. So I think when you think of the big picture, it will increase steel prices and aluminum prices, but you'll also see dynamics where there may be an oversupply of steel or aluminum saying the Pacific where a lot of the excess production of steel aluminum occur, and a shortage in the you know, this part of the market, the US, you know, North America, South American market, which could lead to higher premiums for users of US and aluminium steel

as opposed to um you know, and and maybe a lower premium overseas. But generally it's going to raise prices, could even raise more for customers of US medals. But could you just explain what you're talking about? In other words, it'll be uh more expensive for people in the US to buy steel and aluminum. It certainly could be. So most of the excess steel is produced outside the United States,

primarily in Asia. So as tariffs of of steel and limits of steel coming into this country, that's gonna lead probably for less steel to come in here from Asia. It's gonna be more supply less demand in Asia and will be more demand less supply, say here in US North America, which could lead to uh some pricing dynamics as well if timber cent numbers are what's going to

be recommended and go through. So so if you are and there was this interesting story about this because of course there are many steel companies that have operations in Ohio, but there are also many companies in Ohio that, as

you say, use steel and aluminum as an input. And because the price is set globally rather than locally, is saying that if you're a fabricator for the aerospace, the automotive, or another industry that's similar, you're gonna end up having to pay higher prices for the very products that you then make in the United States. Correct Now, some products are more intense or less intense than a certain steel

or aluminum or all the different contents. Even automobiles have been moving away from steel in their bodies towards aluminum. But that's that's gonna be. That's a fair observation, especially with the economy. Even before these tariff and the discussions were announced, and President Trump mentioned that a couple of days ago, you know, prices were starting to improve, expectations, demands, supply was looking pretty good. So this gives a boost

for that. But yes, there's a lot more consumers of steel and other products and other products that are going to be impacted by right, because I think that's like one there's estimates, I think one million workers around across the United States work in industries that make products from steel and aluminum, and there are about eighty thousand workers

at steel plants. So that has been an argument used for decades about you know, free trade and and you know, relative it's fair or free trade, and certainly from a political aspect, and what President Trump got helped elected in that part of the country, and his Commerce Secretary will Burross, who was intimately well known in the steel and the coal industries. I don't think it's that surprising to get this type of announcement, but maybe the number was a

bit shocking. But he is a dealmaker, So maybe you start here and work your way to something a little bit more ameliorative to everyone else. Just real quick, how much good prices increase. So depending on products, you could see you flat roll rebar to this point, you could see pops in certain areas. Now there could be other aspects around the world where kind of ameliorates, but you're gonna you could see some, you know, some pretty decent

pricing pops going forward. One other area that I didn't want to hit with you was gold because there's been a big question about whether this is truly acting as an inflation hedge. What what is gold right now and why is it underperformed with some people thought it's not bitcoin. Okay, if you make it smaller and just call it gold did go very good. Yeah, I'm surprised that hasn't even put on exchange yet. So um, yeah, I think it's interesting.

Gold has been relatively holding its value over the past several months. It's been in a kind of a narrow trading range. I think it's starting to sniff a little bit of inflation expectations rising. I think we've seen that in the bond market. I think we've seen that from some of the policies that we're seeing, and that is

starting to creep into I think support for gold. So I think from the supply demand balance, there's definitely much better demand for gold elsewhere like in China and India, and supplies coming off because we've had such lack of capital spending the last five years. But I do think that gold starting to with a little bit of inflation and starting to support a support prices here, and I

think you'll see that going forward as well. If you're an investor and you're thinking about these kinds of metals as an investment, would you be looking to a company that that doesn't do gold exclusively, and I'm thinking, for example, of Freeport Macmuran. In other words, you get copper, but you awsome mind Goal rather than gold Court for example.

Excellent question because some of the pure gold names have not performed as well as some of the diverse mind mires like a Glencore or the Freeport for example, which certainly has the impact of what's going on in Indonesia. So in a broad based economic metal commodity recovery, which we are anticipating in metals like Goal, copper, zinc, lead, aluminum, some of the verse fine miners might be a good place to be in and one of our recommended names

is Freeport. On that basis, did you happen to have any thoughts about the report last week that Apple is looking to to UH access cobalt directly in order to have that supply for their their iPhones and their their devices, for their batteries and so on. So over cycles, we remember companies want to access some of the rare earth minerals, remember that several years ago and trying to get direct um the auto companies, remember still water mining back in

the day palladium in Montana. Let's go correct direct contract, so it's not unprecedented. And if an electric battery electric vehicle world, as I'm sure you're quite aware of, cold book would be very very important. So I can see a company like Apple wanting to do that. Now, how you do that and what countries you deal with and how you access that's for another discussion. Uh. Just before you go, I wish to get your thoughts on the dollar and how much you're really paying attention to it

with respect to commodity prices. So you have to pay attention to it if you're trying to, UM, get a sense of where many of these commodities, especially the metals, are going. The dollar has Everybody has been calling for a bullish moving a dollar in two thousand eighteen, they called for a bullish moving seventeen. It really hasn't occurred, and that's been very supportive I think across the board for many of the commodities has been supported for oil

as well. Um, you're I think you could see maybe a little bit of us if the bond market starts to you know, sell off and you get a little bit higher rates, that couldn't get a bid to the dollar, but relative to the euro weal to yeah, and Lada has not acted as well. So I do think the path of leafs resistance right now continues to be lower, but we could see some strength if the bomb market starts to get funky on us. All right, well, we're gonna leave it there, but thanks very much for coming

in and spending time with us. Mike Dodas is the partner and medals and mining analysts for Vertical Research Partners. Companies are buying back their shares at the fastest pace in the credit cycle. That is according to fourth quarter data compiled by Brian Reynolds, who is an asset class strategist focusing on US cash equities for Kindeord Genuity Corporation in New York. Brian joins us, now, thank you so much for being with us. I just want to start

with the actual data. What are you finding, uh and why were you looking at this particular data so closely? Well throughout this boom market, by backs have been the main source of higher stock prices. Investors collectively have done nothing during this bull market. Some people put money into et f s, but big investors like pensions have been selling stocks so that's why I focus on the bio backs.

What I look at is on Bloomberg, I add up the share count data of companies in the SMP five hundred and I've tried to use that data to figure out how much stock they've taken out. And it may be that the fourth quarters are a record for this cycle in buy backs, and that partly explains why stock

prices were so strong at the end of the year. Alright, so the data that you have out there, you're boosting your forecast for the fourth quarter share buybacks to a hundred and sixty five billion dollars that would exceed the one hundred and sixty one billion dollar high set for this cycle in the first quarter of twenty sixteen. Is this a bad thing? It depends on what's I frame. We're essentially leveraging up our economy to fund share buy backs to push stock prices up. So while this bull

market goes on, it's a good thing. It results in higher stock prices. But eventually credit cycles end, and they always end badly. I don't think this one ends for another three to five years, but when they end, you get disasters like you start in two thousand eight and three thousand. Hey, Brian, just a little bit about the sort of nature of of stock buy backs, because you know, you shrink the float. We got that that that typically is one of the things that you know the company

is looking to increase its earnings. It's great to shrink the float because that way, uh, it looks like they're making more money. But over time is are there specific rules that investors can follow that they could use that stock buy back perspective in order to make money. Well, I think the important thing to remember is that this list the overall level of stock prices, so like the S and P five hundred, but in terms of individual

sectors or companies, it can be random. For example, g and IBM both brought back a lot of stock and they've under perform as investors took that money and reallocated it towards growth. So it's an overall guide, but not a very specific one. Okay, So then should you should you combine it perhaps with something like growing free cash flow? And I tipped my hat to Charlie Biederman of trim

Tabs Investment Research, who helped pioneer this idea. If you can find companies where they're increasing free cash flow and buying back their stock. Would that be a good combo. Well, our, that's that's one idea our chief strategist Tony Dwyer, who you all know, he's a favor of more economically sensitive names at this point, more growthier names, especially in the small midcamp area. That's probably where the money is going to be reallocated within the next three or four months,

and then after that we'll talk about another reallocation. So, Brian, I think it also matters where companies get the money to finance share buybacks. A lot of it is financed with debt. But could it be that in the fourth quarter there was just more business confidence, much more cash coming in through the door that companies were looking to deploy. Well,

profitability was up, so that helps a little bit. But most of the profits go to plant equipment spending, which, as Tony Dwyer also points out, is beginning to accelerate, so the cash flow from business tends to get reinvested in business. Most of the buy backs are funded with debt, although now we've got a kicker in the form of repatriation from the tax code, so there's likely going to

be more buy backs ahead. In fact, announced by backs, in other words, upcoming ones maybe setting a record this quarter. But the buy backs that have done with debt, will those be limited because the value of issuing debt is going to go down because the deductibility rules have been changed. The demand for corporate bonds is unchanged by tax reform.

That's our nation's public pensions and insurance companies putting money to work, so their appetite for credit is as a ravenous as Ever, what this doesn't cut the supply of credit. Companies want to issue fewer debt, fewer amounts of debt, and that means there's more shadow banking that's going to fill that void. And shadow banking, the more of it you have, the higher the stock prices go until it

gets thrown into reverse two years after the Yel curving birds. So, Brian, can you give us take us back in history before the two thousand and eight financial crisis. What was the cycle of shared buy backs then and kind of serve as a guide for what we're seeing now. It looks very similar to this cycle, except that cycle was shorter.

It was only four years because the Yel curve inverted quickly in two thousand five, bringing on the crisis in two thousand seven, but it was much the same with companies buying back stock using borrowed money, while investors kind of sat on their hands until the last two years of the bull market. So in other words, I guess what I'm trying to wonder is are we going to look back and say that companies bar owed money to buy their shares at the highest possible valuations, which was

basically throwing it away. Well, the highest possible evaluation that we did was in the nineteen nineties, which was throwing it away. The last time was less of a higher valuation than we're at a lower valuation now. But essentially, yes, we are leveraging up our economy to push up stock prices,

just none of the high valuations yet. And Brian, just quickly, I mean, could this be changed, Let's say, if there were new rules in the county, because right now, you know, spending money on research and development doesn't necessarily benefit the way you look at the balance sheet. Well, this is driven by our public pensions who really aren't impacted by rules and regulations. They haven't need to make seven and a half percent, and they're gonna lend money to anybody

that wants it. So maybe if the margins and rules and regulations could be changed. But unless we find a way to regulate public pensions and they think their sovereigns, so there really isn't. This cycle is probably going to go on again. All Right, We're gonna leave it there. Brian an Old's asset class strategist US Cash Equities for it can accord a genuity. Saturday was the day that we received Warren Buffett's annual letter, but this time around

it was shorter than usual. It didn't have a ton of huge ideas, but if you dig beneath the surface, it said quite a bit. Katherine Chilinski joins US now. She's US finance reporter for Bloomberg News who spent her entire weekend eating pizza in the office while covering this letter. Thank you so much for being here. So, uh, what stood out to me? And then I want to ask if if this sort of was your big takeaway was that Berkshire Hathaway his company really can't find a good

acquisition target. They called it at a drought. I mean, last year was in a great year for them finding deals that they liked. Buffett clarified that like a lot of it was prices that prices for businesses we're reaching all time highs and um, the availability of cheap debt has made it just even more hard to actually find what they've been looking for. Let's talk about the company Berkshire Hathway. It is an insurance business as much as

anything else. Correct now it's actually tilted a lot towards UM kind of non insurance operators manufacturing, but insurance is a good chunk of it. And we saw in this reason earning. Sometimes when insurance goes bad, like with the hurricanes, UM, it can, it can really hurt your earnings of it. So if they're shifting their attention to what industrial companies with the purchase previously of Burlington Northern Santa fe uh,

the Precision cast Parts was a huge one he struck recently. UM. He praised that CEO Mark Donegan in the letter, which is I think that's always sort of telling you wanna you know. UM, a couple of managers often get a heaping of praise over in the letter, and Mark Donnegan was a huge one. So he also has a record cash bile of a hundred and sixteen billion dollars right now largely held in T bills. This is burning a hole in their pocket. They want to put it to work.

The fact that they did say there was this dearth of opportunities, does that indicate something bigger about the markets and kind of perhaps that Warren Buffett sees things as vastly overvalued. I mean, I think you can sort of deduce that. Yeah, it means things aren't great. I mean, Buffett does tend to play best when things are are faltering, and he can kind of step in with his UM investing knowledge and provide some lifelines. I think he did say you know that he wants to make one or

more huge acquisitions. It's also a thing of he really needs large acquisitions to really bolster earnings because Berkshire has gotten so huge, although some of those attempts have gotten stymied in the past. Right last year it was kind of it was it was rough. Kraft Heinz tried to approach you know, Lever and that sort of fell apart. They didn't want to do a hostile takeover Berkshire's UM

pretty um, they don't like those in general. And then um they also bid for an energy company and that they were bested in that attempt and it was a rough gear. Talk about healthcare for just a moment, because of course, UH, JP Morgan Chase, as well as Amazon and Berkshire Hathway have all spoken about and as yet

unspecified healthcare initiative. Todd Combs, who is uh one of the top people at Berkshire Hathaway, is also on the board of JP Morgan and UM, one if you offer, is there any idea of what it is they're going to be talking about? Buffett talked about it a little this morning, and I think it's interesting. I mean, Todd Combs, he's one of his Buffett's investing deputies, but he's gotten a lot of power with this healthcare adventure. I mean he's been, um, you know, part of the one of

the people tasked was sort of helping create it. And um, even Buffett himself said today that, you know, um, Buffett agrees that this is a huge cost problem that they need to tackle, but even Todd was working really hard at kind of figuring out ways they could do it. They still don't have a CEO for that venture, so I think that will be really interesting to sort of see who will actually sort of take charge. Well, it was interesting to actually hear what warm Buffett had to

say on this. He said, uh, that there certainly is pricing power when you're this big, but that was just a little bit of it. That this healthcare venture would go much further. What does that mean? I thought it was interesting. I mean, he said, you know, yeah, it might be kind of easy to shave off three or four percent of costs in this in this thing because of their negotiating power, but they want to do more.

And I think that speaks to the the desire for Buffett and these two other large companies to really sort of do more of a systemic kind of overram. I mean, they said it will focus on their companies to begin with, but there's kind of an idea that this is going to spread much larger. To the extent of like how it will, we're not totally sure yet. Also, the company has been behind the shares of Apple while it's been selling the shares of IBM. It's kind of a whole

new world for a Buffet, right. He stood by IBM for a long time, even when people, I think we're starting to question why. Um, he noted today it was you know it wasn't a great idea, and yeah, Apple has continued to be kind of one of their favorite bets over the past year. Um It'll be interesting to see whether that kind of continues or if um or if they kind of go somewhere else with this new

sort of technology. Bent. Thank you so much for joining us and for following this, and I'm sure we'll be talking more about it in the days become Katherine Chilensky, US finance reporter for Bloomberg News who will be heading out to Omahash shortly. Thank you so much for being with us. And of course, Pim, I would be remiss and not mentioning at some point airlines since I know you receive airlines weekly and enjoy He likes airlines. He

does like airlines. Who do they make money? But to potentially buy one, potentially own one, uh interesting buff air buff air I think a lot of people would a diet coke and everything would be economy class if if that's that would be a luxury on the person. We will we will continue discussing offline what buffet airlines would look like. Jijing Ping's decision to step aside from China's typical presidential term limits is making it seem as though

he might just indefinitely be in charge of China. And here to tell us more about the Chinese political world and what it means for all of us is Mike McDonough. He is of Bloomberg Anonymous, and he joins us here in our eleven three oh studios. Mike, So, what about this idea that the Ping demonstrating a willingness to sidestep tradition when it comes to Chinese? Uh, you know, the

idea of who rules China and for how long? Well, this isn't a new idea of so to say, Um, there was the idea existed when they were having their last big meeting that there was going to be some signals that he would try to remain in power beyond five years. I think that actually many people had expected this. Uh. I think the timing of this particular announcement has surprised

a lot of people, Like why now? Uh? And I think that has more to do with the economic outlook than any any type any other reason really, And I'll elaborate on that. So you know, right now things are

relatively stable in China. The economy looks pretty good. She's I don't know if he really has an approval rating, but if he did, it would be rather high right now, So it seems like good time to put this kind of measure through because when you look ahead, um, you know, especially going into the economic the global economic environment could become a little bit more turbulent, so it might be more it's more difficult to make this sort of announcement

when things are um more volatile, maybe markets are selling off, maybe confidence isn't as high, whereas you could just do it right now. Well, but let's talk about the implications of this. Some people are saying that this gives Jejimping more power to deal with the US more harshly with trade negotiations. Others are saying he's taking a page from Vladimir Putin, President of Russia in consolidating his power. Uh, do you've used this as some sort of authoritarian move

that could end up creating bigger trade and other skirmishes. Well, I mean anytime somebody is is in office and reduces non produces, eliminates term limits that there's some indication there that there's some consolidation of power. It was also announced that he was going to be formalizing I think an anti gaff department, uh if I if I read the

release properly, uh so. But I don't think this increases his power per se, at least not in the near term, because you know, he already had his name put into the party constitution, so all of the things that he needed, he has all that. He already has all of the titles he needs. Uh. And he already has his name in the constitution, which is something that certainly gives him

the power he would need to have these kind of fights. Uh. And I think that when it comes to dealing with the US, I think it's going to be a kind of quid pro quo. Uh if we if we cross what they perceived to be aligned, then they'll come back and hit us with with something else. The question really that everybody has his where exactly is that line? And

that's what we don't know. Uh. The Chinese will probably be willing to accept some marginal protectionism, but not anything widespread like, uh, you know, thirty percent tariff against Chinese imports or something of that nature. Mike, when you talk about the politicals situation in China, does this then indicate that while he may have President Jumping may have more power. That also means more responsibility and responsibility for many things

that are not controllable by one person. And I'm thinking they're about the debt that Chinese companies have burdened. Sure, Sure, but I was alluding to when I said the long term outlook is less certain and there could be some volatility on the horizon. It's not just globally. What I meant by globally is you're gonna have a bunch of central banks, including the FED, shrinking their balance sheets, tightening e C, B, B o J, eventually the BOE. So

that's going to cause some global turmoil potentially. But within China, you do have the debt situation. The government's trying to de leverage while also rebalance the economy and sustained growth at a reasonable pace or what they believe to be a reasonable, reasonable path pace. And it's unlikely to be a linear, straight um move. You're gonna see a lot of altility. You're gonna have periods of time where people

are panicked. People are going to say China's headed towards another hard landing, And that's not really a great time to make this sort of announcement that probably won't be the case in China. Whenever you know, everybody looks at China and panic or euphoria, there's never any like kind of median view on China. So um, you are you are going to have those cases coming sometime over the next couple of years where people look at China in a panicked way. Uh. And you don't want to have

to be juggling this announcement while that happens. And he doesn't have he he does have more control than probably any other leader of any major large country just because China does have such a closed economy. But he doesn't have complete control. And we've seen that over the past two or three years when we have had these panics, you know, be a capital outflows, be it what happened in the equity market. Uh. So you know, it's it's going to be a tricky thing to manage for anyone, um,

including president over the next five to ten years. In China. You mentioned the anti graphic unit that he's pulling together, and I'm struck by the on Bog seizure and the potential asset sales and the h and A move that the Chinese government made. I'm just wondering if his consolidation of power and this sort of extension of his potential term uh in perpetuity, whether that gives him more power to go after specific companies that might otherwise have been

politically connected. I mean, it certainly helps increase his control over gain gain some power. But like when you look at um what these companies did and how the government reacted, you know, they have been identifying issues with these companies for quite some time. In fact, they redid the rules on outward investment by Chinese companies and citizens based on some of the mistakes they perceived these companies had made. Uh you know how long ago did they do that?

That was around September. I think it was the late summer that they announced that. So you you saw this big surge uh in Chinese companies buying US companies. I made this chart ages ago. I should find it. Um, you saw this big surge leading and all of a sudden, I guess it was late twenties sixteen, early seventeen, it just went to practically zero. And that was when the

government said, everyone stopped what you're doing. We're going to put out some new guidelines on what you can and cannot invest into like I think now you can't buy into casinos, for example, or sports teams. These have been banned. Uh and really the the things that you need to target or things that could long term benefit China's economy, you know, uh, raw material companies, technology companies, etcetera, not sports teams. So in other words, the stage has been

set for a while. This is yet another move at a long train of events that have consolidated his power. And certainly, I said, most people were expecting signs of this to have occurred earlier, late last year, earlier this year, and this is just verification of what a lot of people had anticipated. Mike mcdonog, Bloomberg Economist, Thank you so much for joy us in our eleven three oh studios. Thanks for listening to the Bloomberg P and L podcast.

You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio