“Obama’s Radicalism Is Killing the Dow.” That was the headline of a Wall Street Journal opinion piece by conservative Hoover Institution scholar Michael Boskin on March 6, 2009.
With stocks on a downward trend, Boskin concluded that Obama’s policies were the culprit. The Boskin piece is evidence of how members of the right not infrequently respond to troubled equity market stretches under Democrats. And to be fair, that’s how Democrats would and do react to difficult market stretches under Republicans, including Donald Trump in terms 1 and 2.
Just the same, stop and imagine what the Republican reaction would be after two days of losses like the ones we just had if Kamala Harris were occupying the White House. That there would be countless headlines like those of Boskin’s goes without saying. It’s politics, which is no insight. But policy matters, which is similarly no insight.
Considering Trump, while the view here is that the bigger risk he’s taking is with the devaluation of the dollar, how to explain the sudden collapse of stocks? Figure that before Thursday and Friday's carnage, the dollar’s decline had already been priced as had Trump’s deep belief in “beautiful” tariffs. Yet equities still corrected substantially.
What surprised investors? Exactly because markets are relentlessly pricing all of the knowns all of the time, any substantial movement in stocks up or down is a signal that something new has revealed itself that is causing information pregnant markets to reprice the future in negative or positive fashion. So what was the negative news?
The easy and frequently correct answer is that no one knows. Market prices are an effect of infinite decisions made every millisecond based on knowns and unknowns.
Assuming the correction is tariff-related, why? This isn’t to excuse mindless tariffs for even a second, but it is to say that Trump’s views on tariffs were once again already known.
The difference seems to be that while Trump had initially “only” talked of tariffs on Canadian, Chinese, and Mexican goods, he’s now talking tariffs on every country. The difference is large on its face, but it grows larger when it’s remembered that tariffs and embargoes have historically been easier to work around via simple re-routing of exports. Getting more specific, when the U.S. embargoed Germany during WWI, American exports to Scandinavian countries soared. And when Trump placed tariffs on Chinese goods during his first term, it was said that Chinese exports to Vietnam increased. Get it?
The problem is how to do this when every country is allegedly “cheating” us? And what will all the “cheaters” do about their own taxes on U.S. products and services in response? Questions like these would not unreasonably push equity prices down as investors are forced to price probabilities.
So would speculations about reduced global productivity (think growth) be a market negative. As we know from the pin factory Adam Smith reported on in the 18th century, the more that work is divided across hands and machines, the more production there is. Will a globalized division of labor be compromised by rising tariffs worldwide? Probabilities once again have to be priced.
That’s the bad news, but also the good news. Looking back to Boskin’s column about Obama, the market bottomed three days later. The Dow subsequently rose something like 370 percent over the rest of Obama's presidency during which his radicalism was reined in by the loss of the House of Representatives in 2010, and the Senate in 2014. Assuming Boskin was right about Obama’s lefty lurch, gridlock limited its impact to the delight of investors.
What was true for Obama should be true for President Trump. It’s not just that he craves the validation that comes from booming equity markets, it’s that excesses of any kind are invariably reined in by the electorate in the form of gridlock. Which is a not-so-insightful comment that this too will pass. Trump’s radically wrong views about tariffs ensure it.
