Is It Just About Tariffs?

A long discussion last weekend about tariffs triggered some thoughts. Is the stock market's bad behavior recently a reaction to the imposition of tariffs and the threat of further tariffs? Is the recent chatter about an impending recession spurred on by the belief that said recession will come because tariffs are being imposed on imported goods?

Warning: This will not be an exposition of detailed history or academic analysis put forth by an expert. It's more a cocktail mixed by an ordinary citizen, albeit spiked by some degree of study and experience from running a small business focused on financial matters. With that in hand, we proceed...

First thing to remember here: When we hear talk of tariffs, there's something bubbling under the surface: the Great Depression and the "Beggar Thy Neighbor" policies followed by the developed countries at that time. Simply put, they all (more or less) imposed severe tariffs on imported goods. It was a tit for tat, even more than that. As one country upped the ante, others followed. The theory is that all of this dampened economic activity to the extent that it exacerbated what would have been a recession into what we know as the Great Depression. Is that true? In any case, it's a view held by many.

But is there reason to believe that a similar "Beggar Thy Neighbor" downward spiral has been initiated and will pile-drive the world's economies into the ground - all because of tariffs. We await evidence that this is or will be so.

Setting this aside, this note: Many countries already do and have imposed tariffs on goods imported into their countries. There's nothing new here - or at least should not be anything new. But to read or listen to all those "pundits" in the financial and general media, you'd think the Big Orange Guy came up with some crazed plan to plunge the world into recession or worse. 

Another reason to exercise good judgment when subjecting ourselves to all that (mostly) nonsense offered up to us on a daily basis by all forms of media. Just sayin'

And let's not forget this: The U.S. used tariffs for decades to first, promote domestic industry after the War for Independence; then, to collect both protect certain domestic industries as well as raise sufficient taxes without undue burden on American citizens. (There was no income tax!). The policy seemed to work well. The 19th century saw the growth of the country advance with tariffs in place. We're not familiar with any analysis that shows that tariffs were detrimental to the economic growth of the country. Is there some specific reason we should believe that this will be the case now?

The only reason given seems to be the obvious prices will increase on all sorts of goods as tariffs are slapped on them. But what if some or even a great portion of said goods manufacturing shifts to the U.S.? And isn't that a part of the tariff strategy being proposed - the shifting of manufacture back onshore after being pushed overseas during the Gloablist Dream of Economic Nirvana (a just made up phrase). 

Of course, such a shift will take time. It won't/can't happen overnight. And if prices do rise on a lot of goods that people want, more importantly, need, then some degree of pain will likely make life difficult for some period of time. 

So if tariffs are maybe not the reason for the stock markets troubles lately, what is? Is it the Fed's waffling about interest rates? Is it the renewed rumors of Recession - something eschewed only months ago with the claim that there would be "no landing"? Do continued rising deficits make investors nervous that there's only so much debt a country can take on before consequences finally appear? Is it the weakening US dollar, the threat of expanding war, the...well, the list does get a bit long here.

Or is it simply that stocks, being overvalued for years now have finally begun to lose their appeal for sophisticated large investors who are taking every rise in stock prices as an opportunity to unload their positions before the you-know-what hits the fan? The game here is that these champs sell to less sophisticated investors who become the chumps. At that point, with the big guys out of the market, demand dries up. The chumps are stuck and when they panic, they sell into a vacuum - which creates a cascade of falling prices. 

Are we at that point now? There's no sure way to tell short of a sudden crash. But crashes aren't the only thing that triggers Bear Markets. Sometimes prices fall, recover a bit, fall, recover a bit, fall, etc., etc. Maybe that's what we're seeing.

Before singing off, one last thought, going back to the 1930s Beggar Thy Neighbor thing. While it's not a slam dunk that this is unfolding, it's not impossible. And while common sense tells us that the leaders of countries can't be that crazy to allow this to spin out of control, just recall that reason doesn't always prevail in the geopolitical world, much as our politicians would like us to see them as intelligent, reliable leaders who have our best interests always front and center.

We'll simply have to wait and see how things unfold.