The Threat of Protectionism

by: Roger Nusbaum
The picture is of WC Hawley and Reed Smoot. Yeah, that Smoot and Hawley. The Smoot and Hawley whose legislation called for an increase on tariffs that was signed into law in 1930.

You have probably heard that the stimulus plan is going to have strong incentives for steel and other materials used in all of the infrastructure projects that are supposed to happen to come from US companies.

Oh, boy.

I'm not going to worry about this until it actually happens, if it happens. If it does happen, then, depending on the details, it stands to be something of a game changer and would be a reason to get a little more defensive fairly quickly and maybe more so shortly thereafter. As I write this now, I'm not sure if that means selling stock, buying the double short ETF or doing both, but probably I'd do both. Again, depending on the details

In terms of managing money, whether you do it for other people or just yourself, the right and wrong of this doesn't matter. Where the portfolio is concerned, your job is not to solve the world's problems, it is to let the assets grow when that is appropriate and protect them when that is appropriate. This applies to things you perceive as being threats to equity prices. I perceive this sort of protectionism as being a threat to equity prices. I would not make a bunch of trades all at once because I could be wrong but I would take some action very quickly.

I suppose that my thought of a very large bear market rally coming could still pan out but the adoption of this mandate would greatly diminish my confidence of a huge rally occurring.

For now this looms as a problem. What matters is recognition of the threat and the willingness to think about a plan of some sort and then the ability to execute the plan if needed. I've recognized the problem, I'm figuring out what to do if necessary, and then I just need to stick to it if circumstances dictate.