Shades Of 1929

Almost 100 years after the start of The Great Depression there is still a lot of debate about what caused it and why it lasted so long. But it’s almost certain that The Smoot-Hawley Tariffs and bad monetary policy played a significant role. With Trump’s announcement of the new reciprocal tariff rates this afternoon, I know I’m not the only one that sees the resemblance to 1929.

The tariff rate on goods imported from China will be 54%. It’s hard to overstate how devastating that levy will be for the global economy. That’s because over the last few decades China has become the world’s manufacturing hub. So much of the stuff that Americans buy is “Made In China”. So many American companies have manufacturing operations there. Look at what’s happening to Apple (AAPL) stock in the after hours.

Now, all of a sudden, the price of those goods will increase by 54%. That will stretch consumers budgets; they will have to cut back on something. That will increase the attractiveness of substitutes, putting pressure on companies with manufacturing operations there. It will force corporate executives to make hard decisions about their supply chains. It will throw millions of Chinese workers out of work. These are just some of the many implications of the tariffs.

The odds of recession were already increasing. These tariffs are almost certain to throw the global economy into recession.

Ordinarily the Fed would be able to cushion the economy by cutting rates. But they have been on pause because of sticky inflation. And the tariffs will be inflationary! Tariffs by definition increase the price of imported goods – and these levies are not low. According to Evercore ISI (via Greg Ip), the weighted average tariff will be higher than Smoot-Hawley.

Another parallel with 1929 is a prior long bull market that resulted in a very expensive market leading up to the crash.

I understand what President Trump is trying to do. The American middle class has been hollowed out over the last few decades as jobs have been outsourced to Asia. The damage has gone far beyond economics, hollowing out the soul of the heartland as Vice President Vance documented in his memoir Hillbilly Elegy. Trump is trying to bring these jobs back to “Make America Great Again”.

I certainly sympathize with his intentions. But I don’t think this is the right way to do it. The radical nature of the tariffs – their size and how quickly they take effect (April 9) – will likely throw a monkey wrench into the global economy, throwing it into a nasty tailspin.

In addition to the short term havoc, they may not even work longer term because of the uncertainty of if they will still be in place in a few years. It takes time to build the factories President Trump wants so corporate executives will face huge uncertainty about whether to shift their operations back to the US. A more gradual and conservative approach would be better in my opinion.