May 2018 Commentary

  • The Trump & Kim Summit: For the first time in history, a sitting U.S. president and a North Korean leader have met face-to-face to begin peace talks. This summit between Donald Trump and Kim Jong-un took place beginning at 9:00 A.M. Singapore time on June 12th at the Capella Hotel on the resort island of Sentosa where the two met one-on- one (with translators present), participated in an bilateral meeting with advisors present, shared a working lunch, signed a joint statement, and met with the press separately. Following this landmark event, the prevailing consensus of the summit from analysts and academics is that though we are now further away from a potential military conflict (either strategically or accidentally) than we were last fall, the meeting lacked substance and concluded more favorably for North Korea.

    • Our Takeaways: We sought substance and follow-through, but walked away with pleasantries and pageantry. The key purpose of this summit from the U.S.’s perspective was to secure a clear path to denuclearization, however, the language contained is far too vague, does not contain a set timeline, and does not mention any method of enforcement. Sure, North Korea has moved forward with destroying one of their (unusable) test facilities as a sign of good faith, but in the long-run, this was a symbolic gesture since nuclear weapons have already been fully developed. As far as how each country involved in the summit fared, both North Korea and China scored a win with the U.S. cancelling joint military exercises with South Korea (a surprise to South Korean officials), Japan scored a loss since there was no mention of the release of Japanese abductees being held in North Korea (a crucial issue that Japanese Prime Minister Shinzo Abe has been advocating to resolve), and South Korea at the very least was given credit after President Moon Jae-in assisted in organizing the summit. Overall, North Korea gained the credibility Kim wanted and the U.S. conceded more than what was necessary at this time.

  • G7 Summit: From June 8th to June 9th, the 44th G7 summit was held in La Malbaie, Quebec, Canada, where the leaders of Germany, France, Italy, Canada, Japan, U.K., and U.S. met to discuss and coordinate economic policies. This particular summit turned out to be unusually tense since the Trump administration has enacted steel and aluminum tariffs against these ally nations and may also soon impose tariffs on automotive imports. Despite a brief glimmer of a potential agreement, the dialogue quickly heated back up between Trump and the other six members of the G7 (particularly Canadian Prime Minister Justin Trudeau) resulting with Trump instructing U.S. Reps not to endorse the communique. As it currently stands, it would appear that the U.S. will not be part of the joint communique that the other G7 members have agreed upon. Additionally, during a recent interview on CNN, Chief Economic Adviser Larry Kudlow conceded that Trump's decision not to sign the G7 summit's joint communique was intended to be a display of strength on the eve of his summit with Kim Jong-un. Kudlow’s direct quote was that the “POTUS is not going to let a Canadian prime minister...push him around on the eve of this. He is not going to permit any show of weakness on the trip to negotiate with North Korea.”

    • Our Takeaways: In what was supposed to be a fairly straight forward meeting among seven of the world’s wealthiest nations to discuss economic policy, the need to display strength clouded the judgement of each member and their respective advisors, resulting in unnecessary tension with allies and a botched trade agreement. While Trump is imposing the steel and aluminum tariffs as an attempt to bring jobs back to the U.S., increase national security, and level the playing field abroad, these tariffs could likely have adverse side effects on companies, workers, and consumers. More specifically, any companies within manufacturing sectors dependent on steel and aluminum could soon be paying higher material costs that they will, in turn, try to pass on to consumers. We have seen a similar instance under the Bush administration where, in 2002, steel tariffs were imposed in order to protect the industry from foreign competitors, but the concept had the opposite effect after domestic steel producers simply raised prices to match the tariff and employment did not budge. The steel and aluminum tariffs might be well intentioned as an effort to protect U.S. jobs, but the desired result is not likely to come to fruition and is chiefly unnecessary since approximately 70% of steel used within the U.S. is already produced domestically. Overall, this current spat with our own allies is an unwarranted distraction and missed opportunity arising from over displays of strength.

  • Mueller Investigation: After more than a year since Deputy Attorney General Rod Rosenstein appointed Robert Mueller as special counsel for the Russia probe and expanded the investigation to include Trump for possible obstruction of justice, many are beginning to speculate whether or not we could see a conclusion to the investigation this year. Comparatively, the independent counsel investigation of President Bill Clinton by Ken Starr lasted for four years and has received varying criticism for not only the duration but also the amount of leaking that occurred with Starr’s team as well as the lack of focus (the initial investigation sifted through Clinton’s real estate investments, but later shifted to his extramarital affairs).

    • Our Takeaways: Given that this year is gearing up to be a highly aggressive and pivotal midterm election year since the GOP could lose seats to democrats who could move forward with articles of impeachment, we believe that Mueller will likely conclude his investigation by mid to late August at the latest in order to avoid similar scrutiny that Starr was under after Starr continued his investigation through the November 1998 elections. Furthermore, and as a more recent example, Mueller will want to avoid being blamed for potentially influencing an election just as Former Director of the FBI, James Comey, has been blamed for after Comey announced a renewed Hillary Clinton email probe on October 28, 2016, less than two weeks before the November 8th presidential election. However, regardless of when Mueller releases his report, he will at some point need to show his hand and that is where we can likely expect the next major market movement to transpire. Overall, we are expecting , our team will be researching two separate sets of potential investment opportunities based off of what Mueller’s final report could entail for the executive branch.

  • Net Neutrality: As you may recall from our December Investor Letter, net neutrality is the idea that all internet traffic should be treated equally by internet service providers regardless of the source, allowing information to flow freely. Yet, the Federal Communications Commission voted in December of 2017 to repeal these protections instituted under the Obama administration and allowed those protections to expire as of early June 2018. While the main concepts behind net neutrality have been debated since the internet began to take shape in the 1980s, the situation has become immensely more complicated since the tech and telecom industries have come to rely heavily on each other to fulfill customer demands, since the internet has exponentially evolved into a far more integrated system of devices with higher data processing demands, and since internet services could be classified a “utility” and therefore be subject to governmental regulations. Even though, federally, these protections are coming to an end, individual states (notably New York, Montana, Oregon, Washington, and California) have taken steps to institute rules that ban internet service providers from blocking and throttling content.

    • Our Takeaways: Our original position on this matter from 6 months ago stands - the move to repeal Net Neutrality would likely stunt innovation due to the fact that service providers have a financial incentive to interfere/control web traffic and due to the fact that startups/small businesses would have more significant barriers of entry into the market. However, given the backlash that the FCC’s repeal has received from tech industries, millennial voters, and state governments, any efforts to block or throttle content could be quickly subdued or prevented altogether. Essentially, this will be a highly politicized issue in the upcoming elections, but will have less of an impact that what most might fear.


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