Trump, Protectionism, Triumph or Truculence?

Author: David R. Kotok, Post Date: March 2, 2018

“16 US steel stocks market cap up $1B as a result of tariff announcement today. Rest of S&P 500 down $400B. “Making Americans Poor Again.” (H/T Smails)”.
– Doug Kass, March 2, 2018

Readers are invited to research the following words: protectionism, tariffs, quotas, trade barriers, Smoot, Hawley, history, learning from history, lessons of the past.

Following that research, readers are invited to forward a summary of their inquiry to the White House.

Address the envelope to the committee that gave poor advice to President Donald Trump and therefore managed to temporarily undo all the benefits of deregulation and all the benefits of the tax code revisions. Readers are invited to send copies to their Senators and to their Members of Congress regardless of political party.

Also send copies of the research to the District Federal Reserve Bank in which you reside and to the Board of Governors of the Federal Reserve in Washington. The Fed now has to add protectionism effects to its forecast path; this is a nearly impossible task for a central bank.

Now consider that we have a gradual and thoughtful Fed policy of tightening while we also have what was a predictable and measurable path of fiscal easing. All the benefits of tighter monetary and looser fiscal policy have been threatened by the actions of a president who seems oblivious to the potential outcome of the blunder he has made. His braggadocio about his effect on the stock market has been undercut by events of his own doing. He is losing his staff. He is isolated and beleaguered. And in the midst of crisis he tosses an ill-thought-out bomb called protectionism that punches out the best of our allies and friends while it strengthens our nation’s adversaries.

What the Congress does remains to be seen. What the markets will do now is difficult to determine. What Trump will do is impossible to predict.

But we do know from history that protectionism results in higher inflation and slower growth over time. It doesn’t happen all at once. The rise in steel and aluminum prices won’t show up for a while. The cutback in Chinese buying of soybeans will take time. And what our closer trading partners like Mexico and Canada will do is uncertain.

What we do know is that this Trump protectionist policy can lead only to trouble if it is pursued. The other side of this argument is that Trump is a master negotiator and is using this tactic to renegotiate trade deals. There is no way to know if that is true.

For now, the more predictable forces of tax policy, fiscal policy, and monetary policy are overshadowed by the incendiary news flow and protectionist rhetoric. That is either setting up a massive buying opportunity in US stocks – which is what we believe – or it is setting up an economy that will be forced into recession by protectionism (which we do not believe).

Either outcome has become less predictable. Trump has raised risk premia in all markets. Stay tuned.

David R. Kotok
Chairman and Chief Investment Officer
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