April 4, 2018


“[T]he passage of the present bill [to enact tariffs] would not only increase the cost of living but would react unfavorably on our foreign trade and do much to counteract the good-will among nations which other departments of the government have striven for through diplomatic channels and peace conferences.”

 The New York Times


Dear Investor,

To loosely paraphrase George Santayana, those who do not learn from history (either through total ignorance or pigheaded populism) are doomed to repeat it. The quote above is not from 2018 but from 1930, when the President of the American Banker’s Association tried unsuccessfully to lobby against one of the worst economic misadventures in United States history: the Smoot-Hawley Tariffs. The article runs alongside ads for Wanamaker’s, radio consoles, and 90-cent dinners at the New Yorker Hotel.

Smoot-Hawley protectionism, as it scornfully came to be known, was the imposition of tariffs on foreign goods, which led quickly (of course) to other countries retaliating with tariffs on American goods. The result of this “beggar thy neighbor” economic idiocy was the exacerbation of the Great Depression. Although the Depression had begun in 1929, it was magnified by these onerous levies, which caused GDP to collapse by 1932. In 1934, when the full foolishness of the tariffs became clear, they were repealed.

That our President has embarked on the same calamitous policies as the ignorant civil servants in 1931 shows that he has never read a page of history—or, more likely, is selling this populist agenda in order to score cheap points to his ever-adoring base. At least the hapless Smoot and Hawley did not understand economic history enough to make a better decision. Trump has no such excuse.

The sad irony is that for every dent and ding this contemptible trade policy puts in the stock market, it causes a head-on collision for the economic prospects of lower middle class families that voted for him. These tariffs, countered as they inevitably will be by the Chinese, can only lead to more costly goods, higher unemployment, and an eventual recession. The destruction will be vast and deep. So as Trump talks tariffs on artificial teeth, flamethrowers, centrifuges and snowplows, he will learn that China too can make lists and check them twice.

If the essence of populism is to pose simplistic solutions to complex problems in the hopes of appealing to peoples’ baser emotions, Trump has accomplished his goal. Trump said that trade wars are “good” and “easy to win.” He will find out, on the contrary, that they are more like a Chinese finger trap: pulling the fingers out only tightens the vise.

As I wrote in my last update, I felt we were already in a bear market before this trade war fully erupted. So far, market declines look worse than a short-lived correction. The Dow is down nearly 3000 points, more than 10%. I would expect things to get worse before they get better. We are underweight US equities—and were, and have been, since before the start of the year. Rest assured that every account has the appropriate allocation for your time horizon and risk preferences. No doubt, this trade war will prolong the bear market. None of this should impact the long-term annualized return on stocks, which are likely to produce 7-10% per year on average in the future, just as they have during the past decade—a decade that was marked by the worst bear market since the Great Depression. But in the short-term: buckle up. Exposure to stocks during a bear market always means temporary losses, and no one will be immune.

Please feel free to call with any questions or concerns.