Issue #9, Volume #2
What To Expect, And How To Protect Yourself
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| Porter points out the continuing absurdity of tariffs… in 1922, how farmers helped derail the American economy… the Trump team looks to repeat the mistake the U.S. made 100 years ago… the importance of comparative advantage… Plus, the long-term outlook on inflation: it’s up… A sluggish housing market stays sluggish… |
Here’s a simple tariff test.
Do you know which tariff set in motion the economic forces that led directly to the Great Depression?
I’ll give you three guesses. And no, it wasn’t Smoot-Hawley, like your ignoramus teachers probably taught you. (Read on to learn the answer.)
In 1921, following the end of the first World War, American farmers were reeling from a decline in agricultural exports. Up to that point, U.S. farmers had had their best years ever from 1914 through 1919. But a global pandemic, the end of the war, and the restart of Europe’s farms had, understandably, reduced demand for American agricultural products. Gross U.S. farm income fell from an all-time high of $18 billion in 1919 to about $10 billion by 1921.
A mild recession in 1921-1922 made things worse. But nothing was going to stop the U.S. economy from growing – thanks to the ongoing miracle of the auto industry. Sales of passenger cars in the U.S. grew from 181,000 in 1910 to over 4.5 million in 1929. And with all these cars came enormous numbers of new jobs building roads, making spare parts, and servicing the vehicles.
The U.S. advantage in manufacturing in the 1920s is hard to imagine today. The war had wrecked Europe’s manufacturing base, and it took a long time to recover. Germany, where the car was invented, made a total of just 18,000 cars in 1928. We made 4.3 million. Russia? LOL. Communism isn’t great for making anything: Russia wasn’t producing even 1,000 cars a year by 1928.
The only thing our government needed to do in 1922 was simply get out of the way.
But what about the poor farmer? Yeah, what about him? There were all kinds of things that the American farmer could have done (and would eventually have to do anyways) to improve productivity. In 1920, only 2% of farms had a truck and 4% had a tractor.
Instead of letting farmers figure out how to increase productivity and compete in the world’s markets, Republicans had a “better” idea: let’s make our agricultural trading partners pay our taxes! Sound familiar?
Congress held hearings to determine (and this isn’t a joke) how to create a “scientific tariff” to equalize the production costs among countries for agricultural products. No country should be allowed to undercut prices charged by American companies, they said. Trust the science, they said – yes, they really did say that!
This led to the Fordney-McCumber Tariff of 1922, which put up to a 50% tariff on virtually every item imported into the United States. As President Donald Trump would have said, “We’re going to make our trading partners pay their fair share.”
And so, 100 years ago, all of these same political promises that we’re hearing today were being made to the same uneducated, poor people (blue-collar workers and farmers), by the same group of people who are smart enough to know better (rich Republicans) – and not a single journalist anywhere even notices.
Simple question: how did the Fordney-McCumber Tariff work out for everyone? (And isn’t this something that the Wall Street Journal, the New York Times, CBS News, etc. might have wanted to ask someone?)
Well, the first thing that happened was our trading partners (most notably Germany) all began to default on their war loans. By 1923, Germany was experiencing hyperinflation. Thus, Fordney-McCumber was one of the main causes of Nazism and World War II. For our closest allies (England and France), we began lending to them heavily to prevent their defaults. Thus, a global credit bubble began to build… and build… and build. And you know what happened next, don’t you?
But what about the poor farmers! Something had to be done. Well, something was done. They got what they deserved, as they always do, good and hard.
All of our trading partners raised their tariffs on our goods in retaliation – some to as high as 100%. American farmers, who had been net exporters, now had to fight against the weather and every other country’s taxing authority. According to the American Farm Bureau, U.S. farmers lost more than $300 million (about a 12% decline) annually in export revenue as a direct result of this tariff.
And they asked for it!
But even that wasn’t the worst outcome.
Global free trade is incredibly important to supply chains. If you haven’t yet, read “I, Pencil.” In explaining the complex division of labor that goes into making a simple pencil, this powerful 1950s story makes clear that interfering with the free market’s invisible hand stifles progress.
When governments begin imposing tariffs on leading industries and export goods, they end up impacting virtually every kind of production all around the world in ways that are impossible to predict, due to the enormous complexity of the world’s supply chains.
Friends, the single most important concept in free-market economics is comparative advantage. The reason I’m better at financial research and economic history is because I’ve been doing it all day, every day, for 30 years. But this is all I am any good at. For everything else, I’m going to need someone who has been doing what they do for 30 years. And it’s the free market – aka, trade – that enables me to focus on what I do, and allows them to focus on what they do.
Free trade allows intensive specialization of labor and capital. Every step in a supply chain has an industry somewhere that’s based on maximizing the production of just that one thing. Free trade enables everyone in the world to benefit from this extreme specialization.
But tariffs wreck the whole system in part because they simply increase prices, and also because they are applied capriciously, which creates tremendous uncertainty – which completely stops investment.
By 1926, basic farming supplies (harnesses, plows, wagons, etc.) had all doubled in price. The Department of Labor found prices had increased substantially in all 32 major American cities.
And, of course, costs for consumers went up – for everything except farm products. So farming fell into an even deeper and worse depression.
How could it have been otherwise? Taxes are never good for any industry. And no, my dear Trumper, it doesn’t matter whether you call them tariffs or not. They add enormous costs, which drives down demand.
Just because the Fordney-McCumber Tariff didn’t work to protect farmers (or anyone else) didn’t seem to matter. Soon every industry in America began clamoring for even higher tariffs. And an entire new kind of political patronage was in play. Washington could now extort any industry it wanted.
In 1928, Republican presidential candidate (and eventual president) Herbert Hoover pledged to expand America’s tariffs and make them permanent. And that’s what led to the Smoot-Hawley Tariff Act of 1930 and the destruction of the entire global economy.
It was the dumb, leading the dumber, directly into oblivion. And cheering for it!
U.S. imports from Europe declined from a high of $1.3 billion to just $390 million by 1932. U.S. exports to Europe fell from $2.3 billion to $784 million by 1932. Overall, world trade declined by 66% between 1929 and 1934. And because the dollar was the reserve currency used to settle foreign trade, the collapse of the trading system led to bank failures – first in Europe and then, of course, in the rest of the world.
America has an incredible economy. We have as big an advantage today in computing and technology as we had in manufacturing in the 1920s. There are all kinds of things our manufacturers and our farmers can do to drive productivity and beat the rest of the world, like automation and robotics.
What our government needs to do is simple: we must reform our entitlement system because it’s bankrupting us. We need to cut $2 trillion from spending and freeze the federal budget until the government is less than 15% of our economy (compared to 36% now). That’s the only solution that will lead to a higher standard of living and a thriving economy.
Trying to foist these costs on the rest of the world won’t work. It will put the entire global financial system at risk. And it will delay us making the important cuts to our government that must be made to ensure our continuing prosperity.
But… if Trump does go forward with these plans… there’s a simple road map to protecting yourself. Own bonds, because corporate earnings will get destroyed. And hedge against the collapse of the dollar by owning gold and Bitcoin. As shown in the graph below, gold was one of the best ways to preserve value back during the Fordney-McCumber era… and it probably will be again in coming years.
Three Things You Need to Know Before We Go…
1. Inflation fears are rising. The latest data from the University of Michigan’s Consumer Survey showed inflation expectations are rising… again. Consumers now see prices rising 3.3% over the next year, well above the Fed’s 2% target and the first significant increase in this measure in nearly a year. More worrisome, consumers increasingly expect inflation to remain “sticky,” with prices continuing to rise at a 3.2% annualized rate five years from now, the highest such reading since 2008.
2. Trump to the world: Drop dead! On Thursday, President Donald Trump told (via video) those gathered at the World Economic Forum in Davos, Switzerland, that if they want to sell products to Americans, they would need to either make those products in the U.S. – or pay a big, fat tariff to bring them in. Well, be careful what you wish for, Mr. President. There are many things Americans either aren’t good at making or don’t want to make because they are money losers. And slapping a tax (I mean, tariff) on them if made elsewhere will only make them more expensive.
3. U.S. housing sales end 2024 with a whimper. December data for U.S. existing home sales, released today, brought 2024’s total to just 4.1 million – the lowest number since 1995, when America’s population was 20% smaller. This is the result of record-high home prices and multi-decade high mortgage rates. As the chart below shows, home-buying sentiment has fallen to the lowest level in 65 years.
And one more thing… Another dust bowl could further boost inflation
For the first time since the 1930s Dust Bowl, four major drought cycles are aligning as global weather patterns shift from warming to cooling, according to agriculture commodities research firm Hackett Financial Advisors. The Atlantic Ocean’s 40-year warming phase, a key driver of rising global temperatures, will reverse in 2025, Hackett reports, ushering in a 40-year cooling phase. Similar to the last cooling shift in 1965, this change is expected to bring weather volatility, longer winters, and shorter growing seasons. If history repeats, synchronized cycles could lead to plummeting food supplies and soaring prices, turbocharging inflation (food makes up 15% of the U.S. inflation basket).
Today’s Poll…
In Case You Missed It…
In Thursday’s Big Secret on Wall Street, “Never, Ever Sell A Great Business,” we used some of our own past mistakes to demonstrate how selling shares too soon can be worse than buying poor-performing shares. Great businesses tend to do well over the long run.
In Distressed Investing this week, Marty Fridson ran the numbers to show that the return of the average distressed bond in 2024 beat the S&P 500 Index’s return. But, he warns, with many big losers (and big winners) in that average, picking the right bonds is essential with distressed investing.
And in Wednesday’s Daily Journal, we calculated the losses that insurance companies are going to be saddled with as a result of the L.A. wildfires and determined that it’s not so bad – making us love investing in property & casualty insurance companies even more.
Let me know what you think by sending comments to [email protected]
Good investing,
Porter Stansberry
Stevenson, MD
P.S. It’s a new world for crypto investing in America.
President Donald Trump has made it clear that he plans to exercise a much lighter regulatory touch on cryptocurrencies, to facilitate their growth..
And he showed what’s on his mind with the launch of his own memecoin last week… followed not long thereafter by the Melania coin. $TRUMP mushroomed from nothing to a short-term peak of $75 billion… in less than 36 hours.
Not every gain in cryptos will be quite so straightforward, though.
And investing in cryptos, and technology generally, is all about getting in front of the next big trend… understanding what’s coming next.
There’s no one better at figuring out what’s next than Jeff Brown.
Jeff is a bona-fide prophet when it comes to understanding what’s next in cryptocurrencies – and, more broadly, in tech.
For example… he got his subscribers into Bitcoin in 2015… Nvidia in 2016… and AMD in 2017. The results… Bitcoin is up 26,613%… Nvidia, 10,422%… AMD, 1,229%.
Jeff has been saying for a while that newly inaugurated President Trump could trigger the biggest crypto boom ever. And we’ve already seen evidence of that.
Jeff has long been at the bleeding edge of technology – and cryptos in particular. And he has opinions – potentially extremely profitable ones – about the cryptos that are best positioned to benefit from a pro-crypto White House.
To learn more about what Jeff thinks is coming next for cryptos, see here.
