As regular readers know, we don’t generally comment on company-specific (i.e., individual-stock-level) issues.
In addition to not being our wheelhouse, it’s not why people frequent this site and it’s not part of our raison d’être, which revolves around documenting the interplay between geopolitics and finance, an increasingly important nexus in a world where conceptualizing of economics and markets in a vacuum is a wholly untenable endeavor.
Implicit in the above is the notion that when a single stock becomes synonymous with the macro narrative thanks in part to political considerations (e.g., Apple’s trials and tribulations), we’ll spend some time on it.
So, yeah: Boeing.
One thing you might not know about me is that I don’t fly. One thing you do know about me is that I live in almost complete isolation, which means I don’t generally care about anyone other than my readers and myself. When you put those two things together (me not flying and me being indifferent to the plight of others), you can understand why planes inexplicably falling out of the sky is generally irrelevant from my perspective. Yes, it’s a tragedy when scores of people perish in a horrible aviation accident, but scores of people are killed in war zones everyday, people are starving to death in impoverished countries, etc. Senseless death and suffering is everywhere and always a tragedy, and it doesn’t make much sense to pretend like one person’s fatal plunge from 30,000 feet is any more tragic than another person being incinerated by a wayward drone missile.
Given that, chasing clicks and baiting readers with the latest headlines surrounding the Boeing 737 boondoggle isn’t something we were particularly interested in doing.
But after yesterday, it seems clear that the rest of the world is using this tragedy as an excuse to hit back at the US over Donald Trump’s aggressive trade stance and that, folks, has broader market implications and speaks further to the unintended consequences of this administration’s policies.
To be clear, we’re not suggesting it is “right” or “just” for other countries to blackball the 737 Max in the absence of evidence to support the contention that the two recent crashes are related. In fact, it may be the opposite of “right” and/or “just”.
That said, it is obvious that the coordinated global backlash against Boeing has political overtones and it is equally obvious that those political overtones are directly related to US trade policy. I cannot imagine we’re the only portal to have suggested that over the past 48 hours. Just look at who was first up to bat when it came to grounding the aircraft: China. That isn’t a coincidence. And then came Europe. And on Wednesday, Turkey.
Obviously, those aren’t the only countries to have piled, and not every locale involved in this ongoing soap opera is embroiled in a bitter trade spat with Washington. But it’s exceedingly hard to believe that regulators, ministries and all the various safety-control bodies involved in these decisions are acting purely out of an abundance of caution. In fact, that idea is not just “hard to believe” – it’s far-fetched in the extreme. Consider this, from SCMP:
To some Chinese analysts, Beijing’s quick decision may boost China’s kudos and raise the profile of the country’s first indigenous long-haul airliner, the Comac C919.
The snap decision by China’s aviation authority on Monday, a step ahead of Europe, UK, Hong Kong and other countries, “will certainly elevate China’s influence and voice power in aircraft safety”, said Lu Zhou, an analyst with Dongxing Securities, a Chinese brokerage, who follows China’s defense and aircraft industry.
Beijing demonstrated to the world its extremely low tolerance of aircraft safety risks by being the first government to ground the Boeing, Lu said. This, in turn, may help China to sell the C919.
That’s debatable (the bit about boosting sales) but the suggestion that Beijing has economic considerations in mind is spot on.
As SCMP goes on to say, “China’s ‘Made in China 2025’ plan [originally] expected home-made commercial aircraft to supply more than 10% of the domestic market by 2025, while Chinese-made regional jetliners should take a share of about 10 to 20% of the global market by 2025.” Trump has targeted Made in China 2025 on a number of occasions and indeed, that initiative is a pet project of Xi’s and a focal point of the trade dispute.
You probably already know this, but just to drive the point home, Bloomberg reminds you that “the 737 is the aviation industry’s best-selling model and Boeing’s top earner [with] the re-engined Max version racking up more than 5,000 orders worth in excess of $600 billion.” Apparently, airlines are now reconsidering orders worth in excess of $55 billion.
This is shaping up to be one of the worst weeks for Boeing’s shares since the crisis and the loss in market cap terms is pretty remarkable (some $35 billion).
Trump’s knee-jerk reaction on Tuesday was the same as his knee-jerk reaction to everything: He opened his Twitter app and made a fool of himself.
Specifically, he suggested that planes are too complicated and that pilots need to be dumber – or something to that effect. You’ve doubtlessly had a chance to review the president’s “assessment” and get your giggles in by now, but just in case, here is the dubious quote:
Airplanes are becoming far too complex to fly. Pilots are no longer needed, but rather computer scientists from MIT. I see it all the time in many products. Always seeking to go one unnecessary step further, when often old and simpler is far better. Split second decisions are…….needed, and the complexity creates danger. All of this for great cost yet very little gain. I don’t know about you, but I don’t want Albert Einstein to be my pilot. I want great flying professionals that are allowed to easily and quickly take control of a plane!
Everyone immediately seized on the opportunity to point out that Trump had yet again succeeded in blurring the line between caricature and reality. His tweets essentially represented a literal interpretation of the following semi-famous New Yorker cartoon which was itself a critique of populism and the world’s disturbing inclination to suggest that “experts” are no longer necessary:
But the irony here is that it may be just a matter of time before he (Trump) employs the opposite logic in the course of demanding that other countries lift what amounts to a global ban on the Max 8 in the interest of protecting a US company. Some two-thirds of the planes have been grounded across the globe in the past two days.
The FAA is sitting on its hands and insisting there isn’t a good reason to join the rest of the world in taking the planes out of the sky until we can “figure out what the hell is going on” (to quote from Trump’s original Muslim ban).
Trump spoke with Boeing CEO Dennis Muilenburg on Tuesday and the aerospace giant is no small fry when it comes to lobbying. “Its top government relations official is a veteran of the Clinton White House, and last year, the company employed more than a dozen lobbying firms to advocate for its interests and spent $15 million in total on lobbying, according to the Center for Responsive Politics”, The New York Times reminds you.
And, of course, it goes well beyond that. There’s all manner of regulatory capture going on here. Just read these excerpts from the same NYT piece:
For decades, the F.A.A. has used a network of outside experts, known as F.A.A. designees, to certify that aircraft meet safety standards. In 2005, the regulator shifted its approach for how it delegated authority outside the agency, creating a new program through which aircraft manufacturers like Boeing could choose their own employees to be the designees and help certify their planes.
The program is intended to help the F.A.A. stretch its limited resources, while also benefiting plane makers who are eager to avoid delays in the certification process.
The regulator maintains offices inside Boeing’s factories, including those in Renton, Wash., and in Charleston, S.C. “I’ve raised this concern in the past, about people who go to work at the Boeing plant who work for the F.A.A.,” said Representative Peter A. DeFazio, Democrat of Oregon and the chairman of the House transportation committee. “How much scrutiny are they applying, and could they be influenced?”
The F.A.A.’s top safety official, Ali Bahrami, has worked closely with Boeing during his career, directing the agency’s certification of the Boeing 787 Dreamliner and the 747-8 passenger and freighter models.
In other words, this is a joke. Boeing is its own regulator, which is hardly surprising, nor is it surprising that the company has made all manner of campaign donations to lawmakers both prominent and otherwise. On top of it all, Acting Defense Secretary Patrick Shanahan used to work for Boeing. A full list of the company’s political expenditures is embedded below this post, for reference.
Again, none of that is “news”, but the key point here is that between all of that influence and the fact that Boeing is intertwined in the trade saga, you’ve got to believe Trump will eventually decide to cite data from US experts and regulators (some of whom will be beholden to Boeing) in the course of suggesting that other countries are unjustifiably harming America’s economic interests by grounding the 737.
After all, it wasn’t even a week ago when Reuters detailed comments from Muilenburg who underscored the extent to which Boeing is wrapped up in the trade discussions. To wit, from a March 7 piece:
Purchases of U.S.-made Boeing Co aircraft by China could be part of a sweeping deal currently being negotiated to end the months-long trade war between Washington and Beijing, Boeing’s top executive said on Thursday.
A tit-for-tat trade war between the world’s two largest economic powers has slowed the global economy. It has also opened up new risks for Boeing, which calls itself America’s biggest exporter, in the world’s fastest growing aviation market. Boeing sells roughly a third of its top-selling U.S.-made 737 jetliners to customers in China.
Boeing Chief Executive Dennis Muilenburg told an aviation summit in Washington that he sensed U.S.-China trade talks were progressing “in a good way.”
“They are dealing with some of the tough framework issues around intellectual property and things like that,” Muilenburg said. “I do think they are making progress. And at the same time, I think there’s an economic opportunity here for airplanes to be part of the ultimate deal and help further close the trade deficit gap.”
You get the idea.
When you throw in the fact that Boeing’s stumbles are weighing on Trump’s favorite measure of presidential success (the Dow), he has an added incentive to turn this into an international political incident.
And guess what? Just as we finished penning this very post, Canada grounded the planes.