Opinions on President Trump vary, to put it mildly.
Some think he is a transformative president who is “draining the swamp.” Others believe he is doing great damage to the country and the office he holds.
I’m not about to jump into the middle of that fray.
However, every equity investor should be interested in how Washington’s policies – including executive orders – affect the market.
For instance, I’ve given Trump credit for his deregulatory policies. Anything that makes it easier for corporations and entrepreneurs to start a new business – or expand an existing one – is good for the economy, employment, wages and corporate profits.
I’ve also given him credit for signing last year’s tax reform bill into law.
We had the world’s highest corporate tax rate. Now we have one of the world’s most competitive.
That has incentivized U.S. multinationals to repatriate tens of billions in overseas profits. It will also attract foreign investment and give businesses the capital they need to invest in technology, factories, equipment, employees, and research and development.
Unfortunately – as I have emphasized repeatedly in this space over the past few weeks – Trump’s tariffs are both wrongheaded and counterproductive.
You can read the market’s own dim opinion in Monday’s 700-plus point plunge in the Dow after China announced countermeasures.
That put the Dow, the Nasdaq and the S&P 500 all back in correction territory.
Why? Trump’s protectionist policies provide an insightful timeline.
The value of the Wilshire 5000 Total Market Index peaked on January 26 at $8.7 trillion. After he announced his 25% tariffs on aluminum and steel on March 8, it fell to $7.2 trillion. When he announced $60 billion in tariffs on China on March 22, it dropped to $6.1 trillion. And when China retaliated with its own tariffs, it plunged to $5.3 trillion on April 2.
I don’t know whether Trump is a chess player or not, but it doesn’t appear that he would be a particularly strong one.
A chess player looks at the board, takes stock of his own strengths and weaknesses – as well as those of his opponent – and thinks several moves ahead.
With that in mind, let’s re-examine Trump’s boast a few weeks ago that “… trade wars are good, and easy to win.”
He didn’t provide examples. Perhaps because there aren’t any.
However, we can look at plenty of earlier “games” and see how quickly they went awry.
On June 17, 1930, for example, the U.S. government enacted the infamous Smoot-Hawley Tariff Act. It raised U.S. tariffs to record levels on more than 20,000 imported goods.
This populist legislation sounded appealing at the time, but it helped create and worsen the Great Depression.
Foreign governments retaliated by shutting out U.S. exports. International trade ground to a halt. The world economy contracted by 25%. And a quarter of Americans were thrown out of work… and onto bread lines.
This is not something we want to emulate.
Yet look how Trump’s gambit is already playing out. We slapped billions in tariffs on China. China slapped billions in tariffs on us.
If we escalate further, China will escalate further.
Nobody wants to look like a patsy. Neither side can afford to lose face. No one wants to appear weak.
But here’s a news flash for Trump: China is not a democracy.
If local business owners or consumers are unhappy, they can just stew in their own juices because the communist government doesn’t have to do a thing to appease them.
Contrast that with our poll-sensitive democracy… and this year’s looming midterms.
U.S. exporters – and their employees and investors – will not like the way Trump’s tariffs changed their business fortunes for the worse. Nor will consumers like the higher prices they’ll ultimately pay on imported goods.
Yet so far, Trump’s poll numbers have pushed only higher. And that may only embolden him.
After all, it’s early. Farmers and business people haven’t felt the impact… yet. Consumers haven’t had to fork over more money… yet.
Most people don’t recognize how Trump has backed himself into a corner. They know only that he is thinking of “America first.”
(Apparently, domestic companies and their employees that cater to the 95.6% of the world’s population who aren’t U.S. citizens aren’t real Americans.)
It’s naive in the extreme to believe another country will respond to arbitrary, punitive tariffs by apologizing and rolling over.
Where does this leave us?
With a great deal of uncertainty – the one thing markets hate.
A face-saving compromise is possible, of course. But things could easily get worse before they get better.
Because – contrary to President Trump’s claim – in a trade war, both sides lose.
Thoughts on this article? Leave a comment below.