Investment Management

Whirlpool Announces…

This commentary is not about Whirlpool, despite the title – but about tariffs. It is about how Whirlpool’s shareholders benefited from increased earnings because of tariffs and how American consumers paid higher prices for both washers and dryers (an unexpected consequence) because of those same tariffs.

New research from the Federal Reserve (by economist Aaron Flaaen) and the University of Chicago (by economists Ali Hortacsu and Felix Tintelnot) estimate that tariffs on washing machines brought approximately $82 million to the U.S. Treasury and raised U.S. consumer prices by $1.5 billion. Tariffs imposed on imported machines started at 20% and rose to 50% per imported washer. The tariffs were paid not by foreign exporters – but by some combination of American consumer, in the form of higher prices, and/or importer, willing to take a lower margin. Unexpectedly, but interestingly, not only did prices rise on tariffed washers, but also on non-tariffed dryers. This is because consumers like to buy washers and dryers together as a pair and as the market would allow it, sellers were able to raise prices on both items, not just the washer which was the object of the protective tariffs. So, washers and dryers, foreign and domestic, rose in price because tariffs imposed by Washington, D.C. provided a “price umbrella” and a logic for doing so. So why were the tariffs introduced? They were introduced to protect an industry in decline in America and to create jobs. Did the tariffs succeed? According to the researchers approximately 1800 jobs were created, which cost the American consumer a net of tariff $800,000 per job.

Whirlpool just announced that its Q1 profit increased due to higher prices for its machines, despite selling 7% fewer machines during the period as compared to Q1 2018. The company reported a first quarter profit of $471M vs. $94M last year. Obviously, tariffs helped Whirlpool and put a few more people to work in the industry. But American consumers lost “big time” due to “concocted” pricing of washers and dryers which did not reflect market conditions. We still do not understand how hurting the American consumer helps the American manufacturing worker.


OIL……

The Iranian sanctions are about to be back on. Remember these were put into place several months ago to punish Iran for its political misdeeds around the world. Remember also that some significant waivers were allowed (i.e. some countries like India and China could continue to buy Iranian crude for several months) and the price of oil crumbled. Consequently OPEC, with the help of Russia, tightened production and the price of oil rose. Now it is continuing to ascend due to the renewed sanctions. Venezuelan production is suspect. Libyan production is also. Add these conditions to diminished Iranian oil supplies and there is price support in the oil markets. The U.S., along with the Saudis, the Emirates and Russia claim that any gap in production will be filled by them. It should be doable – but supply lines will be drawn taught. Any unexpected disruption in supply will propel oil prices higher fast. These should be good times for oil companies, as long as the Iranian sanctions are in place. Perhaps this is why there is increased activity in the energy acquisition arena of late as evidenced by Chevron’s proposed purchase of Anadarko and Occidental’s higher bid. Perhaps there will be more.