President Franklin Roosevelt is famous for the statement, “The only thing we have to fear is fear itself.” It is one of the most repeated presidential quotes. It basically suggests that decisions born of fear often turn out bad, sometimes even disastrous.
What brings this quote to mind is the burgeoning trade war brought on by the current administration. Fear of the fruits of globalization and a misunderstanding of trade deficits has led to this trend toward protectionism.
Most financial professionals detest tariffs. They point to examples from the past —Smoot-Hawley — as evidence of how disastrous this rode can be. “Free markets for free men,” has been a constant theme of the trading world. Artificial barriers to trade are seen as an inefficiency that distorts markets.
With a great deal of debate regarding what proposed tariffs will mean for the economy, we present contributions from two authors that take a different view of a potential trade war in this issue.
It does not really debate the merits of tariffs — which is probably OK by our readers — but see them as a symptom of something greater going on. The interesting thing is that while Walter Zimmerman (see “Protectionism, Tariffs & Trading a Trade War”) and Alan Bush (see “Trade Wars, Stock Index Futures & Interest Rates”) both see a trade war as a symptom, their market outlooks are diametrically opposite.
Zimmerman believes that a potential trade war is born from fear in the markets that have yet to be realized, while Bush sees a potential trade war as just another bearish stumbling block for our current bull market to overcome. Bush argues that the basis for this bull market is the historically low-interest rates that have persisted since before the 2008 credit crisis. Since, on a relative basis, interest rates are still historically low, a trade war or threat of a trade war should be easily overcome.
Zimmerman, on the other hand, produces some disturbing historical precedents. The main one being a comparison to the period pre-Great Depression when the U.S. Government inexplicably cut taxes, particularly for top earners and businesses, despite a thriving economy. Sound familiar?
We are not in the prediction business, but the historical background provided here is always good to understand.
We also address the return of volatility in this issue. And in “Target Volatility: Equity Hedge Funds’ Real Source of Alpha,” Michael Rulle presents compelling research indicating that target volatility strategies are the key to active investment outperformance.
Finally, the tariff debate continues to evolve. As I write this, the exemption to proposed steel and aluminum tariffs for Canada, Mexico and the EU is no longer valid. Whether that will still be the case when you see this is a question. Regardless, the chance of a trade war in various iterations will persist and is still dangerous for markets.