Fisher Investments Editorial Staff
Market Risks, Media Hype/Myths, Trade, Globalization, Forecasting

Below the Radar

By, 06/20/2011

Story Highlights:

  • Widely known and frequently publicized media reports about potential negatives for stocks miss one thing—it’s the unexpected that moves markets most.
  • A pertinent and timely example is trade.
  • Protectionism, with its long history of hampering markets and trade, is a legitimate risk too many misunderstand and ignore.
  • An assessment of risks shouldn’t stop at what most folks see, but should also include things folks don’t commonly discuss.

At MarketMinder, we often write of highly publicized negatives in an attempt to strip away what we see as hype and focus on correctly interpreting facts. That’s not to say widely publicized risks (like those cited by the IMF in its report Friday projecting +4.3% 2011 global GDP growth) are categorically false, but frequently, widely known and well-publicized risks lose much of their surprise power—and thus, their ability to materially impact markets longer term. So while it’s fine to assess widely known risks, it’s equally important to follow things flying below the media’s radar—both positives and negatives (like we’ve done here, here and here).

A pertinent and timely example is global trade. Why talk trade? While free trade is good, its polar opposite—protectionism—is a legitimate potential risk to markets and the economy. Moreover, many folks blind themselves to this by viewing foreign trade in terms of surplus or deficit (surplus = good, deficit = eek!). Total trade is vastly more important.

Protectionism has a long history of negatively impacting markets and economies (and it generally doesn’t actually protect very much). Japan in recent decades is one example. But probably the single best example is the Tariff Act of 1930—otherwise known as Smoot-Hawley.

A product of Herbert Hoover’s 1928 presidential campaign, Smoot-Hawley was initially designed to “protect” American farmers from the scourge of imported goods—ignoring the fact US farmers’ plight then (to the extent there was one) had next to nothing to do with foreign competition. In 1929, the US exported over $400 million more agricultural goods than it imported—with the bulk of US imports being coffee, which wasn’t widely domestically produced[i]. But once the idea got into Congress’ hands (who then exclusively set tariff policy as opposed to today’s standard), the resulting bill was not only protectionist (bad), it had little to do with agriculture. Instead, politicians mostly sought to appease constituent industries. The result? A massive list of tariffs, industry by industry, product by product. This was not well received globally. Many nations, even Canada, responded in kind. Though Smoot-Hawley wasn’t solely responsible for the Great Depression, it was a major contributor—the spread of protectionism contributed to global trade’s collapse during the period. And while much of its teeth have since been removed, this blunder remains the law of the land.

Some might claim the current expansion is solely attributable to government actions (stimulus, monetary policy and more), but it’s more fair (though an oversimplification) to attribute it to government inaction on protectionism. That’s allowed trade with other countries, some with stronger growth and an earlier exit from recession, to aid US growth. But still, many folks—notably, some politicians of both parties—just don’t get it. Sitting in congressional committees today are bills seeking to amend Smoot-Hawley to hike tariffs on countries the bills’ sponsors argue aren’t playing fairly with the US (mostly tied to currency valuations). Thankfully, prior iterations of these bills never made it out of committee, and the current versions are far from becoming law. But the fact 156 out of the House’s 435 members (or, 434 to account for Anthony Weiner) are co-sponsors illustrates the passage of such measures isn’t impossible.

Thus far in 2011, protectionism seemingly isn’t on the rise globally. While this New York Times article correctly notes over 550 new tariffs have been enacted globally since 2008, it doesn’t weigh them against the many more that have fallen resulting from the wave of free-trade agreements signed the past few years. So, for now, free trade has the upper hand. But protectionism likely isn’t dead (unfortunately), and it’s worth watching trade-related decisions as they’re made to assess potential impact.

While most media (and, by extension, people) spend their time discussing highly publicized and dramatic events like the ongoing riots in Greece, what tend to affect markets most are unexpected, unlikely and large-scale events coming to fruition. Therefore, an assessment of risks shouldn’t stop at what most folks see, but should also include things folks don’t commonly discuss.



[i]Source: Douglas A. Irwin, Peddling Protectionism, Princeton University Press, Princeton, NJ, 2011.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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