United States Steel Corporation (NYSE:X) and AK Steel Holding Corporation (NYSE:AKS) are up big on Monday — the latest beneficiaries of the Donald Trump Bump.
Trump was elected by the country’s vast middle, the people who create commodities like oil, wheat, corn, and manufacturing commodities like steel. These industries have been suffering as the nation’s trading edges have been prospering — a reversal from the pattern of the 1970s, when Gerald Ford fought to “Whip Inflation Now” with a button.
Trump’s solution is simpler. Build high trade barriers and run big deficits that increase inflation.
Some inflation would be welcome. The Federal Reserve has been unable to reach its 2% inflation target for years, thanks to the deflationary impact of Moore’s Law and the scaling of software. This has made it unable to raise interest rates, giving a lift to savers and banks.
But the markets are always wary of inflation, which can easily run out of control. Still, we live in the present, and if the President-elect says we’re going to have inflation, you might want to consider commodities.
Starting with steel.
Morgan Stanley Upgrades Steel Stocks
Steel stocks like U.S. Steel, AK Steel and Cliffs Natural Resources Inc. (NYSE:CLF) were all upgraded on Monday by Morgan Stanley. That led to the biggest runs on those stocks in many, many years. AKS stock was the standout on Monday, rising nearly 8% in early trade, but over the last five trading sessions, X stock has risen 37%.
Why steel? The new budgets have not yet been implemented, but Trump is already threatening a “trade war” with China, and China has said to be selling steel at less-than-cost, or “dumping” it, on the U.S. market for many years.
This sounds great to the European Union, which is now talking up anti-dumping tariffs on Chinese steel.
Despite this, the price of stocks in Chinese steel producers are also going up. What’s up with that?
It’s the second element of decisions by both Trump and China to spend heavily on infrastructure projects in the coming years. Infrastructure raises the demand for steel, whether that’s civilian or military infrastructure.
Bernstein Research estimates each trillion dollars in new infrastructure spending will raise steel demand 6.2%, and given the fact that new steel capacity is not coming online — the industry has been contracting — that means higher prices and higher profits for steel producers.
Industrial Commodities Rising
What is true for steel should eventually be true for other commodities. Inflation should send their prices rising.
While crude oil remains in the doldrums, prices for natural gas, especially future supplies, have been rising for some time. Natural gas that was worth $1.73 for each million cubic feet as recently as March is now being quoted at over $3/mcf on futures markets.
Most commodity markets have not yet caught on to this. Commodity markets are international in scope, trade barriers can reduce exports, the U.S. market is saturated, so prices for everything but cattle have been falling hard lately. But now there is action, and in some industrial economies, there have been serious gains in the last week.
Trump Sobriety Risk
Trump is new to the international stage, and is quickly learning that big statements, or even hints of big statements, can move markets in unpredictable ways.
Chinese Premier Xi Jinping reportedly tried to educate the president-elect in a phone call, saying cooperation and stability are essential to both economies, and if the message got through, steel traders could find themselves buying yet another false dawn.
Still, Trump has more tools than just a button with which to whip deflation. His backers are demanding that he do it. It would be foolish to expect him not to move policy mountains to try. After all, 2020 is less than four years away, and mid-term elections in 2018 are even closer.
Time flies when you’re running the show.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
