Seeing the Forest and the Trees on Trade

Tuesday, in a rare act of bipartisanship, the US Senate easily passed a protectionist measure to slap tariffs on goods imported from countries whose currencies are deemed artificially and materially undervalued—a veiled shot at China. Not a good idea, in our view. But just a day later, in an even more unusual display of solidarity, the House followed the Senate in passing three long-stalled free trade agreements with Colombia, South Korea and Panama. Which we believe is a resounding positive.

Seems like a strange dichotomy—buoying misguided protectionism on one hand and passing free trade agreements on the other. But that these two bills moved in virtual lockstep is no coincidence in our view. The media largely missed the irony of the events, focusing instead on the two issues as if they were separate and distinct. In reality, the Senate’s actions on China’s currency undervaluation likely amount to mere political misdirection, shifting focus from the passage of the free trade agreements. The Democrat-controlled Senate passed the protectionist measure knowing full well the Republican-held House’s leadership had already said it likely wouldn’t bring a vote on the issue. And the Obama Administration was even less helpful—keeping relatively mum, save for a few passing remarks. That gave the Senate a free ticket to pass the protectionist legislation appealing, to some of its primary base of supporters, while allowing Senators to seem “balanced” on trade ahead of next year’s elections. Sometimes you can have your cake and eat it too. Thus, those Senators can make the claim, “Look! I did something to protect American jobs.” (Cue the campaign cash.)

Internationally too, politicians politick and grandstand. And all too often, many in the media largely miss the real story. For example, many headlines reported Slovakia’s initial failure to pass an EFSF extension Tuesday was due to the small country’s unwillingness to bail out the larger and more rich Greeks. What’d they miss here? The first vote was tied to a confidence vote on Slovakia’s ruling coalition. The opposition, rather predictably, had much to gain from opposing the confidence vote. So they ensured the bill failed. Politicking! Grandstanding! After that failure, the government was reshuffled and a new vote held. Result? The EFSF expansion easily passed, with solid support across the four major parties.

None of this is truly new. By nature, the media tends to have an extreme focus on the events of that day—and each reporter on his or her individual topic. And most reporters aren’t tasked with connecting the dots between seemingly unrelated events. But for investors, seeing the broader picture (the forest) and not getting confused staring at one individual component (a tree) is critical. And with the ubiquity of headlines across the internet, newspapers, TV and more, it’s likely only getting more difficult. Honing the skill to separate talk and headline fodder from meaty facts—seeing the forest and the trees—is paramount to successful investing.