Let me address the elephant in the room. As I wrote back in April 2018, the market volatility is due in large part to burgeoning signs of an all-out trade war. On March 9, 2018, in an effort to restore an American industry to its previous luster, President Trump garishly imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports.
Mid-June this year, in addition to pledging further investment restrictions, the Trump administration announced tariffs on $50 billion in Chinese imports. Beijing responded quickly escalating the dispute. China intends to impose tariffs with “equal scale, equal intensity” on imports from the U.S., and all of the country’s earlier trade commitments are now off the table, the Commerce Ministry said in a statement on its website late June 15, according to Yahoo Finance.
Let me explain
A tariff is a duty or tax placed on particular goods by the government. The design is to make foreign goods more costly, giving an advantage to domestic manufacturers of the same products who don’t have to pay the tax.
The tariffs may be a shot in the arm for steel and aluminum companies in the U.S.A, but in the event of increased demand here, it may not be that American manufacturers have the capacity to meet a gigantic swell. There are a couple of things that give my friend, Charles Sizemore, CFA, Dent Research and me pause. First, when we hear talk of “winning a trade war,” it is our opinion that there are no winners in that war. Just losers, as the tax is ultimately passed on to the consumer. It is not unusual for President Trump to make blustering pronouncements one day followed by complete silence the next. In the meantime, do not be surprised to see China use Trump’s new tariffs to its advantage. You know markets are not fond of uncertainty. You won’t be surprised to watch Wall Street move lower on President Trump ’s rising trade tensions. No one knows how things may turn out, but we can see how such moves have turned out in our history.
“It’s like deja-vu all over again!” – Yogi Berra
My second genuine concern, suppose the noise of a trade war becomes real news. Sizemore puts it in historical perspective. “The Great Depression didn’t start out as ‘great’. It was a deep but not necessarily extraordinary recession. That is until Senator Reed Smoot and Representative Will Hawley pushed through the Smoot-Hawley Tariff in 1930, one of the highest and broadest tariffs in U.S. history.” Of course, the intent should sound very familiar, in this case, to breathe new life into the American farming industry that has been struggling for some time. We are not in a trade war yet. So far we’ve seen a war of words. But if the tit-for-tat escalates, all bets are off. It’s ‘a tariffically bad idea,’ according to The Economist, March 8, 2018.
What we can learn
Sizemore says he does not “expect a repeat of the 1930’s here.” I say, it’s not about the prediction, it’s all about the preparation. If no one saw the Great Depression coming down the pike, who do you expect you can count on to be your canary in the coal mine in the event Great Depression II is baked into the cake? Please do recognize the DOW lost -89% in 24 months from 1929-32 according to Yahoo Finance. That means what was $1M in 1929 became about $108k in 1932. What’s more, assuming investors did not sell or spend any money, it took about 20 years for the account to recover fully. Do also keep in mind, if you were born 1900 your life expectancy was about 57 years, which means you may not have had the luxury of time to get back to even before death. Regret is like guilt. They are two gifts that keep on giving.
Be like Cuban, hedge baby, hedge
I believe success leaves clues. Billionaire Mark Cuban said, on the one hand, he sees stock market swings as a buying opportunity. On the other hand, he said he “decided to hedge” his moves after seeing investors get wiped out, on CNBC, February 13, 2018. Cuban is a busy man with a net worth of $3.7B, according to Forbes, April 3, 2018. But, if Cuban isn’t too preoccupied with life to put his hedging strategies in place on his life savings before the grits hit the pan, you and I can make keeping our assets intact the priority it deserves too.
Some really good news
“More American millionaires were created during the Great Depression than in any other period,” declared Jonathan Jones at evancarmichael.com. To the extent you keep your assets intact, you can take advantage of opportunities that are probably impossible to foresee. A severe downturn may not be much different than a frigid winter. Some creatures and plants slow down and die in the winter. At the same time, severe cold brings dramatic change which helps others get stronger and survive. While winter can get uncomfortable, only the strong survive. Therefore, if you’ve prepared, change is good.
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