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“The most important thing in life is to stop saying 'I wish' and start saying 'I will.' Consider nothing impossible, then treat possibilities as probabilities.”
— Charles Dickens, David Copperfield


March 9, 2018

To our detriment, we too often forget history.  If you’re about our age and read the title above too quickly, you might have experienced a malapropism, so named for Mrs. Malaprop, a fictional character written by an up and coming Irish playwright and politician, Richard Sheridan, in 1775.  The title above does not refer to a small town near the Shady Rest Hotel, a site made popular by the 1960s television series, Petticoat Junction, but of another type of living quarter, Hoovervilles, created by the hundreds during the Great Depression.

Hoovervilles were shanty towns, home to hundreds of thousands of men, women and children during the 1930s.  If the “town” was fortunate enough to have unemployed construction workers, the houses may have been built with stone and even have a stove, but too often they were constructed of discarded cardboard, old tires and anything else that could be used for shelter.  

Demonstrating politics was no kinder to people in 1930 than they are today, Hoovervilles were named after President Herbert Hoover.  It didn’t stop there, old newspapers were referred to as Hoover blankets, while Hoover leather referred to cardboard used to cover holes from otherwise worn out shoes.

While the end of the Great Depression has been debated, it lasted at least ten years.  The Roaring Twenties, when wealth in the US doubled, came to a sudden stop with the stock market crash in October 1929.  Drought and declining prices hit farmers such they could not bring their crops to market.  Margin calls were made to reckless speculators, who had propelled stocks higher in classic greater fool theory fashion.  Unemployment surged, industrial production declined and banks failed.  

President Hoover, who previously was Secretary of Commerce, believed government should not directly intervene in an economy, but the severity of this growing financial plague forced his hand.  Less than eight months after the market crash, the Tariff Act of 1930, otherwise known as the Smoot-Hawley Tariff, was enacted.  This legislation, the second highest protectionist trade policy in 100 years, raised U.S. tariffs on over 20,000 imported goods.  It also fulfilled a 1928 campaign pledge to increase tariffs on agricultural products to help the still large farming industry.  Captains of industry, such as Henry Ford and Thomas Lamont, then CEO of JP Morgan, strongly petitioned the White House to veto the bill, but to no avail.  As our former partner, Bill Whitney, would say, history doesn’t repeat itself, but does rhyme.  

Citing a 60 percent decline is US exports over four years, some point to the Smoot-Hawley Tariff as one of the causes of the Great Depression.  Today, market pundits often choose to remember only one component, one cause, of the Great Depression; this is why we believe the stock market has seen elevated volatility and decline the past several weeks.  The talking heads forget, or perhaps simply don’t know,imports also decreased by a similar amount during that time.  Conservatives and liberals alike have long debated the effect of tariffs on the 1930s economy to no definitive conclusion.  Perhaps tariffs weren’t a cause of the Great Depression, but removing them, allowing bilateral trade agreements to replace them, created a global framework of greater cooperation and prosperity that has lasted about seventy years. 

If China wants to keep workers employed by subsidizing old economy steel mills, let them!  Far better for the US to build a semiconductor plant, or some other new economy facility, that keeps technology on our shores and workers earning higher wages.  We disagree with the President’s tariff decree and hope it is simply his first shock-effect salvo in discussing greater bilateral trade policies.  If not, we’ll remain diligent.

In the meantime, we continue to see small- and mid-sized companies outperform on down days.  We’re now also seeing them outperform when tariff rhetoric is the loudest, since they have greater economic ties to the US.  We continue to believe equity diversification is warranted.

As always, thank you for your business and trust.

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