It’s too early for this shit. I read this note by Goldman on tariffs and I felt like my brain was going to explode. Maybe one of you mathematicians out there can spell it out for me.
Goldman Sachs estimates that if the president imposes duties on the remaining $300 billion in goods not already targeted, it could lower earnings estimates for U.S. companies by up to 6%.
That impact is in a worst-case scenario, issued as the U.S. escalated tensions in the trade war by raising the tariff level to 25% from 10% on $200 billion worth of goods.
In reality, Goldman said the impact probably will be less as companies adjust prices to make up for increased costs that the tariffs generate. The firm expects companies in aggregate to have to increase consumer prices by 1% to make up for the tariff costs.
If profits will be hit by 6% off 25% tariffs, why would they only off-set the increased costs by 1%? Please explain.
In other confusing news.
Fed’s Bostic: Both Upside And Downside Economic Risks – CNBC
— LiveSquawk (@LiveSquawk) May 20, 2019
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It is hard to make sense of these disjointed numbers. The problem probably lies with the journalist rather than the Goldman analysis. Journalists were not the kids paying attention in high school math class. Many became journalists to avoid math.
Well, it goes like this:
https://www.youtube.com/watch?v=tN5KIUNfYGA
Goldman’s last sentence is the kicker: The firm expects companies —- in aggregate —– to have to increase consumer prices by 1% to make up for the tariff costs.
Goldman is spreading the pain of the tariffs as it goes through the supply chain and the US economy.
Company A buys steel from China at 25% markup, they’ll increase their price in kind.
Company B buys metal from Company A to make sheet metal pipe to push forced heat and cooling for homes. They’ll increase their price by 25% too.
Company C installs air conditioners, heat pumps and furnaces for homes. They have labor, furnace and other non-tariff costs that won’t go up. They’ll increase their metal pipe price to the homeowner by 25%, but the metal pipe is only really 5% of the total cost to the homeowner. Ergo, the homeowner won’t get a 25% increase to their price, just 4% maybe.
That’s what I’m thinking, but I also just saw Tom Daschle on CNBC talking being on the board of a medical cannabis company because he first met the CEO when the CEO was in high school. I’m flummoxed.
“profits will be hit by 6% off 25% tariffs”
see jacked rabbit’s explanation
“off-set the increased costs by 1% (consumer price increase)”
increase in costs from 25% tariffs = increase in revenue due to 1% increase sales price
Example:
1) Tariff-ralated costs: $100 to $125 (+$25, +25%)
2a) Revenue: $2500 to $2525 (+$25 , +1% price increase, same sales volume)
or
2b) Revenue: $5000 to $5025 (+$25, +1% price increase, -0.5% sales volume)
No price increase -> no change in revenue, 6% decrease in profit
Example:
Revenue = $2500, Profit = $25/0.06 = $417, Tariff-related costs = $100,
Non-tariff related costs = $2500-417-100 = $1983
->
Revenue = $2500, Profit = (0.94)*$417=$392, Tariff-related costs = $125,
Non-tariff related costs = $1983 (no change)
417 = 2500 – (1983+100)
392 = 2500 – (1983+125)