Streetwise for Sunday, March 11, 2018
Returning from a peaceful two-week cruise to Caribbean, during which I delivered a series of lectures on the wiles of Wall Street, I had hoped to find a more placid investment environment that when I left. After all, economic growth was continuing its upward trajectory, inflation was well within an acceptable range and interest rates, while destined to increase, remained historically low and were certainly not going to upset the apple cart. Such naïve thinking.
Suddenly harsh tariffs on steel and aluminum are part of the economic landscape, becoming a possible preamble to trade wars among our major trading partners. As a free trade economist, I see tariffs as a measure designed to be more punitive than defensive with unintended consequences that in the end will serve only to raise the overall price level of goods. Trade deficits can be met with less drastic economic remedies.
Even Congressional Republicans have pushed back on the Administration’s plans to impose global tariffs on steel and aluminum calling the President’s tariff push economically dangerous. Add in the resignation of Gary Cohn, National Economic Council Director and one of the Administration’s key economic advisors who many believed to be a stabilizing influence within the White House, and Wall Street began to fray around the edges.
At the same time, with the blessings of Wall Street, the Administration’s efforts water down and/or eliminate key elements of Dodd-Frank rules is making moving ahead both on Capitol Hill and at the regulatory agencies. The Senate is working on a package that would reduce the list of banks considered “too big to fail” by two-thirds.
It would also increase the odds that taxpayers will be back on the hook to bail out a failed bank, according to a report released recently by the Congressional Budget Office. The bill’s proponents pitch it as primarily benefiting small and regional banks, though the CBO report also found it stands an even chance of easing capital requirements for JPMorgan Chase and Citigroup.
Meanwhile, Federal Reserve Vice Chairman Randal Quarles, the central bank’s regulatory chief, said regulators are working swiftly to trim the Volcker Rule. That Dodd-Frank provision, a bête noire of the big banks, that bans firms from making certain kinds of risky investments for their own gain.
Quarles, a Trump appointee, said the Fed and four other agencies with jurisdiction over the rule will “proceed with dispatch” in reworking it. As it stands, it’s too complex, he said.
However, all the above are merely parameters in the investment game about which you have no control. The real question is what you are going to do going forward in terms of your investment actions and objectives.
The 2008 financial crisis and subsequent Great Recession left its mark on the psyches of many, in part because it was unexpected, sudden and dramatic. Despite the steady recovery that we have seen over the past nine years, the financial crisis left scars that a few years of recovery will not erase.
The result being that many investors are now more risk-averse than ever before. The recent economic news has caused some to begin to rethink their investment strategy with an eye to exiting stage left. While such thoughts are understandable, they are wrong.
The field of behavioral finance has shown that in general everyone, not just investors, are more sensitive to losses than the excitement generated by potential gains. The recent volatility on Wall Street has investors focused sharply on how much they could lose in the short-term, rather than on how much they could gain if they stay invested for a longer period.
While market fluctuations are likely to be exaggerated by the Dodd-Frank and Tariff issues, not to mention the rotating door at the White House, it should not deter you from continuing a buy and hold investment philosophy.
Companies and the economy will adapt to changes in the regulatory environment. You must not let your short-term perception of the future influence your long-term investment strategy.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.