Cohn Quits, Investors Run Screaming

On Tuesday, the White House announced that top economic advisor Gary Cohn had quit. On Wednesday, investors ran for the hills.

A win for trade populists translated into a loss for investors. Stocks closed lower today in volatile trading. Trade war angst has deepened.

During the 2016 presidential campaign, Donald Trump railed against the “globalists” who exported jobs at the expense of average American workers. But once in power, Trump appointed many of those globalists to his administration. One such person was Gary Cohn, to become director of the National Economic Council and chief economic advisor to the president.

Before joining the White House in 2017, Cohn served as president and chief operating officer of investment bank Goldman Sachs (NYSE: GS). Trump’s protectionist coterie nicknamed him “Globalist Gary.”

Cohn is a free-trader who had been urging Trump not to impose steel and aluminum tariffs. Trump ignored him. Cohn resigned in protest. Investors promptly freaked out.

The Dow Jones Industrial Average and the S&P 500 closed in the red on Wednesday. Transnational industrial stocks fell the hardest. At its session low today, the Dow was down 349 points.

The tech-heavy Nasdaq edged higher, after spending most of the session in negative territory. Investors are betting that the index’s components are less vulnerable to a trade war.

Wall Street has viewed Cohn as the adult in the room in an administration that’s in turmoil. He was seen as the voice of reason amid the populist firebrands vying for Trump’s attention. Investors love Trump’s tax cuts. They fear his protectionism.

Trump’s proposed tariffs of 10% on aluminum and 25% on steel follow steep tariffs on imported solar panels and washing machines that were imposed in January. Cohn has opposed all of these measures. He has lost Trump’s ear. The protectionists now hold sway.

The issue of tariffs pits Trump against his own party. The president argues that countries, notably China, have used lower trade barriers to take advantage of the U.S. Most leaders in Congress and in corporate America counter that free trade has helped America forge the world’s strongest economy.

New data indicate that Trump’s “America First” protectionism is unlikely to make a significant dent in the trade deficit.

The Commerce Department reported on Wednesday that the U.S. trade deficit in January spiked 5% to $56.6 billion, exceeding estimates. That was the highest level since October 2008 and came in the wake of a $53.9 billion shortfall in December. Economists had expected the trade gap in January to widen to $55.1 billion.

The politically charged trade deficit with China soared 16.7% to $36 billion, the highest level since September 2015. The deficit with Canada was the highest in three years.

Trump has made lowering the U.S. trade deficit a priority. The government reported a $810 billion deficit in goods for 2017, but a total trade deficit of $566 billion that includes a trade surplus in services.

A year into the Trump presidency, the trade deficit continues to grow. Trump blames trade deals like the North American Free Trade Agreement (NAFTA), which is the subject of negotiations this week in Mexico City.

The panic over trade…

A trade deficit occurs when a country imports more than it exports. The consensus on Wall Street is that trade deficits really don’t matter and imposing trade barriers to address those deficits only adds to the cost of goods.

Boiled down to its essence, the prevailing argument in the financial community is that the economic gain to Americans from foreign trade is what the U.S. imports from countries like China and Mexico, and what we export is the cost of getting those imports.

By this reasoning, the appropriate objective of the U.S. should be to obtain as large a volume of imports as possible from other countries, for as small a volume of our exports as possible.

It’s also important to note that the U.S. is the preferred global safe-haven for capital flows. This dynamic boosts the value of the U.S. dollar, making it nearly impossible for the U.S. to avoid running a trade deficit. Viewed from the perspective of the greenback, America’s trade deficit has little to do with supposedly unfair trade practices and more with the dominant role of the dollar.

History has shown that trade barriers do not magically created new domestic jobs but merely raise the cost of the affected goods for manufacturers and consumers. Retaliatory measures from other countries raise costs even further. The trade war ensnares additional goods. A vicious cycle starts.

The trade wars of the 1930s proved ruinous. They worsened the Great Depression. The financial community is worried that history is about to repeat itself.

That’s what Goldman Sachs alumnus Gary Cohn understood. That’s why he exited the White House. And it’s why investors exited the stock market today.

Wednesday Market Wrap

  • DJIA: -0.33% or -82.76 to close at 24,801.36
  • S&P 500: -0.05% or -1.32 points to close at 2,726.80
  • Nasdaq: +0.33% or +24.64 points to close at 7,396.65

Wednesday’s Big Gainers

  • Medifast (NYSE: MED) +30.34%

Nutrition company’s earnings excel.

  • HCI Group (NYSE: HCI) +13.76%

Insurer beats on earnings.

  • Abercrombie & Fitch (NYSE: ANF) +11.99%

Retailer posts robust quarter.

Wednesday’s Big Decliners

  • B&G Foods (NYSE: BGS) -8.52%

Food distributor downgraded by major investment banks.

  • Quanex Building Products (NYSE: NX) -7.30%

Building products firm disappoints on earnings.

  • Kenon Holdings (NYSE: KEN) -5.67%

Analysts bearish on energy holding company.

Letters to the Editor

“Should I worry about 401(k) plan fees?” — Tom W.

Yes, indeed. According to a recent study, 401(k) fees were so high (compared with an index fund) in 16% of the plans that, for young employees, these fees consumed the tax benefit of investing in a 401(k) plan.

Most 401(k) plan participants aren’t even aware that they’re paying 401(k) fees. But many mutual fund providers charge more than 1% of your total assets in investment management fees.

To maximize your long-term wealth building strategy, you need to understand these fees and scrutinize your 401(k) plan packet for them.

Questions about your 401(k) plan? Drop me a line:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.