By David R. Kotok
Currently in the U.S., all bond yields are still positive. The barbell strategy goes heavy on short-term securities, with some exposure to the long-end. How you blend this duration determines your risk, but absolutely avoid intermediate-term bonds (which is why “laddered” bond portfolio is the worst thing to have right now).
Shadows of the 1930s
I’ve been in the investment business for a half-century and cannot recall anything like the present time. History books have few references , though one that is increasingly prominent is the Smoot-Hawley Tariff Act and its role in bringing about the Great Depression. In an article titled “The Smoot-Hawley Tariff and the Great Depression,” authors Theodore Phalan, Deema Yazigi, and Thomas Rustici assess the impact of this infamous U.S. trade-policy decision:
“In 1930, a large majority of economists believed the Smoot-Hawley Tariff Act would exacerbate the U.S. recession into a worldwide depression. On May 5 of that year, 1,028 members of the American Economic Association released a signed statement that vigorously opposed the Act.”
“The protest included five basic points. First, the tariff would raise the cost of living by ‘compelling the consumer to subsidize waste and inefficiency in [domestic] industry.’ Second, the farm sector would not be helped since ‘cotton, pork, lard, and wheat are export crops and sold in the world market’ and the price of farm equipment would rise. Third, ‘our export trade in general would suffer. Countries cannot buy from us unless they are permitted to sell to us.’ Fourth, the tariff would ‘inevitably provoke other countries to pay us back in kind against our goods.’ Finally, Americans with investments abroad would suffer since the tariff would make it ‘more difficult for their foreign debtors to pay them interest due them.’ Likewise, most of the empirical discussions of the downturn in world economic activity taking place in 1929–1933 put Smoot-Hawley at or near center stage.”
The late economist Allan Meltzer noted in his “A History of the Federal Reserve Volume 1: 1913-1951” that “Research suggesting a small effect [i.e., from tariffs] ignores the pronounced effect on farm exports, distress, bankruptcies, and bank failures in farm states.” Now check the rising bankruptcy statistics in U.S. farm states in 2019.
Responsibility for the U.S. economic slowdown and the financial volatility lands squarely in the lap of the president and his advisers.
The correlation between the Trump trade war and Americans’ rising financial distress is extremely high. In 2019, nearly every economist disagrees with the Navarro-advised Trump tariff policy. At our recent annual “Camp Kotok” gathering in Maine, for example, we polled the visiting group of economists, wealth managers and other investment industry veterans, who collectively represent about $2 trillion in assets under management. (Reflecting the investments of thousands of households, many hundreds of thousands of beneficiaries of retirement plans, and millions of investors and savers in the U.S.) Asked about Navarro, one supported him, 36 were opposed, and three were unsure. Asked about the Trump trade policy, about 75% of our group opposed it and saw it damaging the U.S.
No matter what Navarro says and whom Trump blames , the truth is that the responsibility for the U.S. economic slowdown and the financial volatility lands squarely in the lap of the president and his advisers. But Trump does not have the courage to admit an error. He avoids any self-blame. Instead, he constantly bashes the Fed since it (and Chairman Powell) is a convenient and distracting target.
There is a fitting adage here attributed to humorist Will Rogers: “If you find yourself in a hole, stop digging.”
Trump and Navarro are digging a deeper and deeper hole, for the U.S. and the world. Stop digging.
David R. Kotok is chairman and chief investment officer of Cumberland Advisors, a Sarasota, Fla.-based investment management firm.