Donald Trump is proposing really big tariffs, and the stock market doesn’t like it.
Most of us here understand intuitively that free trade is a good thing, but maybe can’t articulate why. Let me help, using the allegory of the sandwich.
Say you want to make a sandwich where trade is not allowed. A ham sandwich, with lettuce, tomato, and mustard.
But you don’t have the ingredients, and you’re forbidden from buying them at the store.
But you really want this sandwich. So you have to raise a pig for slaughter, butcher it, and cure the meat. You need to grow the lettuce and tomatoes. You need to grow wheat, I guess, mill it, turn it into flour, and bake it into bread. Lord knows how you make mustard.
After a few thousand hours of dealing with this, and a lot of physical labor, you have a sandwich. And it probably doesn’t taste very good.
Capitalism revolves around trade. We earn money for the things we create which we can exchange for things we want.
Now, Trump hasn’t put up barriers to trade, per se, but he is making it more expensive. You can have your sandwich, but it will cost more. And domestic makers of sandwich ingredients will have difficulty exporting them overseas.
So you get higher prices, and lower economic activity.
The argument for tariffs usually centers around this: other countries already place them on our goods, so we are just getting even.
Well, you know what they say about an eye for an eye leaving the whole world blind.
Tariffs Are Dollar Bullish
They are, because the US imports a lot more than it exports. For example, we import about $500 billion in goods from China and export to them only about $140 billion.
Think of it this way: the US has a lot of resources. We can make a sandwich on our own better than any country in the world. With difficulty—but we can do it. China (and pretty much everyone else) will have a much harder time making a sandwich.
So the dollar will probably rally for a while.
In March, I said “…in the grand scheme of market mispricings I’ve seen over the year, [EURUSD] is the biggest.”
And on April 24, I said: “I’m going to make a bold statement and say that we’ve made the turn in the dollar. Stronger dollar from here on out. That’s what the chart is telling you, and that’s what the bond market is telling you.”
I point this out because this particular example illustrates my entire philosophy of investing.
Long the dollar in March/April was the scariest trade on the board. It had just sold off for months, even with interest rate differentials between Europe and the US blowing out to record levels.
In the US, rates were going higher. Everywhere else in the world, monetary policy was getting softer. But the trade was too scary; Trump’s unpredictability was intentionally or unintentionally keeping the dollar weak. Treasury Secretary Mnuchin was explicitly calling for a weak USD.
It’s was a true contrarian call.
Maybe not too many of you trade FX directly, but your opinion on a move in USD might have informed your opinion on Emerging Markets, which would have been helpful.
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