The picture is of WC Hawley and Reed Smoot. Yeah, that Smoot and Hawley. The Smoot and Hawley whose legislation called for an increase on tariffs that was signed into law in 1930.You have probably heard that the stimulus plan is going to have strong incentives for steel and other materials used in all of the infrastructure projects that are supposed to happen to come from US companies.
Oh, boy.
I'm not going to worry about this until it actually happens, if it happens. If it does happen then, depending on the details, it stands to be something of a game changer and would be a reason to get a little more defensive fairly quickly and maybe more so shortly thereafter. As I write this now I'm not sure if that means selling stock, buying the double short ETF or doing both but probably I'd do both. Again, depending on the details
In terms of managing money, whether you do it for other people or just yourself, the right and wrong of this doesn't matter. Where the portfolio is concerned your job is not to solve the world's problems it is to let the assets grow when that is appropriate and protect them when that is appropriate. This applies to things you perceive as being threats to equity prices. I perceive this sort of protectionism as being a threat to equity prices. I would not make a bunch of trades all at once because I could be wrong but I would take some action very quickly.
I suppose that my thought of a very large bear market rally coming could still pan out but the adoption of this mandate would greatly diminish my confidence of a huge rally occurring.
For now this looms as a problem. What matters is recognition of the threat and the willingness to think about a plan of some sort and then the ability to execute the plan if needed. I've recognized the problem, figuring out what to do if necessary and then just need to stick to it if circumstances dictate.
13 comments:
Curmudgeon here.
If you are thinking this Roger, haven't the big boys who make the steel markets already thought this through? Would it not already be reflected in the current prices? Could it by that any price change is due to some other factor you have not recognized or from information you are not privy to and you would be confusing luck with skill? Efficient markets and all that?
Agree with the assessment that Smoot Hawley prolonged the misery during the great depression. I would consider this to be common knowledge. Doesn't history repeat itself?
I think you are over reacting. You are correct this is not good.
But infrastructure projects already have strong incentives to use domestic sources even though they may be inferior. I am making a fair chunk of change right now explaining to people the foreign made widgets being used are not a problem.
You will be correct if they take it a step further and make individual purchases forced or coerced to buy domestic items. Just government infrastructure is not something to sell equities over no matter how stupid and and detrimental it is to world trade.
I reserve the right to change my mind if foreign countries over react and impose trade barriers of some type, but I would not give up on equities unless it continues to get worse.
Hey, Roger,
thanks for the blogpost, as always a thought-provoker.
Was half-listening to CNN night before last, when I heard Lou Dobbs calling some reporter an idiot for pointing out the parallels between protectionist pieces in currently pending legislation and 1930's Smoot-Hawley. According to Dobbs, the S-H gets way more blame than it deserves; that tightening money and raising taxes were the two big policy blows of the day that sent the economy over the cliff. The caustic nature of his criticism was surprising. My admittedly thin attention to history tends to place S-H in the same category that your post seems to: a disastrous policy in a time of multiple disastrous policies. I've thought that was the conventional wisdom. But now Dobbs makes me wonder. Is there any real debate on whether S-H was a major contributor to the implosion?
And on a completely separate subject, I was surprised to not see a post by you re: the collapse of Iceland's government. Did I miss it?
Geez, I'm about to shoot myself in the foot again. I'm thinking that this "bad bank" idea might actually help fix the banking crisis and I should start getting long. I should have been an octopus.
Thanks for your clear-eyed post, Roger.
I dunno what to do, maybe laugh or something, if it takes Obama all of 30 days to start getting protectionist. Sigh.
Agree with Anon 6:40, this aspect of the stimulus plan is not good but hasn't risen to the level of Smoot-Hawley and much depends on how international trading partners react; e.g., will they add some more regional bias to their own stimulus plans (something they are already doing) or will they become retaliatory. Regardless, always good to have a plan (which was the point of Roger's post natch).
As to Lou Dobbs, maybe a silly question (but this is an investing blog after all): Has anyone ever made any money following his advice/opinion?
Won't supplier countries have their own stimulus packages to supply? If the emerging countries have a surplus and need infrastructure improvements then they can still send cheap clothes over.
roger,
your post certainly appears to suggest that you now think that the probability is notably greater than zero that we may be on the edge of a 30s-style depression (i don't mean this to be any type of criticism, i just don't recall you having said anything quite so explicitly on your site although others have made such dire comments). i, by the way, believe the probability of a 30s style depression is fairly significant.
as far as thinking about a depression might be concerned, we all need to consider a very important "statistical" notion. the united states has faced a very very limited number of similar events. certainly the events in 1837, 1873, 1893, and the 1930s would give us a few precedents. we can also look at japan over the past 20 years although the lack of any impact on other countries makes me think that the japan experience really should be considered highly differently. in any event, since we have so few events in the sample, i don't think that anyone (including bernanke, roubini, geithner, larry summers, henry paulson, you, or me) can really knowingly cite how much such factors as tight money, fiscal spending, protectionism, etc contributed to the depression in the 30s or how much any of these will mitigate or contribute to getting us through the current situation. i believe that we we have more factors than data points, therefore, we can not really draw any solid conclusions about depression periods. milton friedman believed that monetary policy explained almost all of the depression--if he was correct, then the "buy america" provisions of the infrastructure spending might be moot (and i might add that it doesn't sound like the govt will raise prices on foreign goods to consumers--just to govt projects); on the other hand, maybe friedman was wrong and monetary tightness accounted for only 2% or less. with only four or five "data points", we really cannot tell. we are in uncharted territory and anyone who tells you otherwise virtually has to be making an educated guess, at best. this is why so many have become "keynesians" now that we seem involved in such an event.
the ultimate gist of your post, however, is not whether you are right or wrong about the impact of the "buy america" provisions. your advice to readers to prepare to take action if this event is meaningful to them has been, is now, and will always be the correct advice for any investor.
--gjg49
i specifically try not label things, i use the terms bull and bear market for economy of words. going down a protectionist path simply poses a meaningful threat to equity prices that had not existed earlier in this bear market. i don't know about 600 or any other level. if i perceive a greater risk, then i feel the need to address that one way or another in the portfolio.
This (and smilar actions) are to be expected from Team Obama. I had to laugh today at the "business support" group touting the Obama plan in D.C. from the likes of IBM, Google, etc.
Reminds the historian in me of Krupps, Bayer, I.G Farben, etc. supporting Herr Hitler in 1935 at a similar event touting a massive government bailout program in Germany.
Political survival against a socialist missive?
I understand the arguments as presented but it is also ironic. I just lost my job due to a layoff. I'm hoping for this package to get passed so I can hopefully go back to work in my trade. But all others are worried about themselves and how much they will make or lose. The purpose of the plan is to reduce the up and coming 10%+ unemployment.
Interesting article with Niall Ferguson. Makes you want to go long TBT and GLD...
http://www.vanityfair.com/online/politics/2009/01/niall-ferguson-america-needs-to-cancel-its-debt.html
Could it be that the markets are no longer investable and are just for speculation?
Most would probably not agree. This, in itself, tells me that this theory may be correct.
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