On Monday, I wrote an article cautioning traders and investors to trust data over Presidential tweets this week. It envisioned the possibility of a flipflop of Trump’s declared intention to impose tariffs on steel and aluminum and pointed out that the expected trade balance and jobs numbers would be more reliable sources of information than whatever tweets came out of the White House. I was, it turns out, wrong on the first count, as two days later we have witnessed not one, but two reversals of “policy” and are back where we started.
Over the weekend and early on Monday it started to look like the saner, more traditional Republican voices in the administration and in Congress were having an influence. The more savvy among them had probably pointed out a couple of things to the President. First, although China was his personal choice for undercutting American steel workers, they were not the largest exporter of steel to America. They are in fact, fifth, with the U.S. allies Canada and Mexico leading the way, and therefore having most to lose from protectionist policies.
Those most adept at manipulation would also have pointed out that tariffs had been adopted by many of the past Presidents that Trump holds in such disdain, most recently Bill Clinton, George W. Bush and, most telling of all, by Barack Obama. Given Trump’s tendency to dismiss everything ever done by recent Presidents, it is likely that that was the thing that pushed the President towards more conciliatory tweets that acknowledged that and made it look as if the threat of tariffs was simply a negotiating tactic aimed at getting NAFTA redrawn. Then, yesterday, cane flipflop number two when economic advisor Gary Cohn resigned. That made it cleat that the protectionist faction of the administration was winning the argument.
The results of those past ventures into protectionist policies speak for themselves. Obama's tariff on tires, as well as W's on steel were clearly failures. Not only did they not help, but in both cases they negatively affected growth and caused net job losses in the U.S. That is hardly surprising, as data often shows that when the leaders of industries bleat about competition they are often looking to protect their own inefficiencies more than anything. This morning’s trade data makes that point.
The protectionists will no doubt point to a trade gap that widened even more than expected to $56.6 billion but dig a little deeper into those numbers and the real reason for it becomes clear. What we saw last month was that imports overall were flat even though the normally volatile oil imports rose. That rise was offset by declines elsewhere, however, and what moved the needle was falling exports. Given that exporters were given an advantage by a dollar that continues to fall, that looks less like dumping from evil foreigners and more like inefficient, uncompetitive U.S. producers.
Tariffs, by their nature, protect and enshrine inefficiencies, and that helps no one.
That is not to mention the possibility, or rather the certainty, of retaliation. As the EU’s immediate proposal for a response has shown, that retaliation can easily acknowledge the political nature of such policies and be formulated to do the maximum political damage. Retaliatory tariffs aimed at bourbon, jeans and Harleys are clearly aimed at hitting Trump back in his heartland and will no doubt be copied by other affected countries.
Getting into a trade war is therefore foolish and potentially damaging, both economically and politically. Right now, however, that looks to be where the U.S. is headed, so the question for investors is what should they do?
The first thing to stress is that they should not overreact. Tariffs are damaging, but they can be reversed just as quickly as they can be imposed, and this is not a President whose actions have been marked by their consistency. Assuming that Friday’s jobs report confirms the strong trend, the data points to an economy that is strong enough to ride this out for a while so wholesale changes are not advisable.
What you may want to consider, however, is taking out some insurance. Things like the Direxion 3x leveraged S&P 500 Bear ETF (SPXS) are not for the faint of heart and are designed as traders’ tools for intraday use. In circumstances like these, however, they can be used for a short time to do two things. If Trump is still in favor of tariffs when the carousel stops, and the market were to drop sharply in response SPXS would show a profit that would partially offset losses, but there is something more important than that.
Having something in your account that shows green when all is red stops you from making foolish decisions. The history of past failures when it comes to tariffs show that as misguided as the idea is the negative results can be quickly reversed when they become apparent. That makes selling stocks into the dip a bad idea. Offsetting some losses with a designed insurance policy makes riding out the disruption easier, so those qualified to use such ETFs should consider a small position in SPXS, if only as a hedge against yourself.