The Trump administration’s planned tariffs against China and the beginning of that country’s retaliation are certainly to blame for the stock market malaise.

Still, some traders say that the market was ripe for a retest of the February lows, as it was rebounding on weak volume, so it would have found any excuse to sell off. The Dow Jones Industrial Average DJIA, +0.51% and the S&P 500 Index SPX, +1.05% are on track to produce a monthly and quarterly loss.

If it weren’t China tariffs, it would have been the Federal Reserve raising interest rates — or prime-time TV interviews with a Playboy Playmate or an adult-film actress and her brilliant attorney discussing their (alleged) relationships with President Trump.

The latest developments certainly seem to be quite a bit more colorful than the Monica Lewinsky affair and are relevant for investors as they can manage to derail the president’s agenda, so they should be carefully monitored, not just for amusement.

The tariffs also pressured the Chinese stock market as China has more to lose from a trade war than the U.S. does (see chart). The U.S.-China trade deficit hit a record $375.2 billion in 2017, up from $347 billion in 2016. As of last month, the deficit was expanding at a record pace. It is not surprising that the president is taking action right along the lines of his election-campaign promises.

Trump has been remarkably consistent with his policies, when comparing them to his election rhetoric, but because of his chaotic style of management this consistency has been lost on many political observers. How badly this trade situation is going to get is actually difficult to say because the threat of tariffs is not the same as implementing those tariffs. The president does have a habit of making a lot of threats to put himself in a better negotiating position.

Read:Trade war watch: These are the U.S. companies with the most at stake in China

Economic repercussions

I am not quite sure that trying to run national trade policy the same way he tended to negotiate with Trump Organization lenders is that great of an idea, but we will discover the economic repercussions of his trade frictions soon enough. Also, it does not make sense to start a trade war with China right before the talks with North Korea, as they are an important stakeholder in the region. One could argue China is more important than South Korea, as they are the North’s biggest economic supporter.

In some respects, we seem to have elected the real-life reincarnation of Gordon Gekko as president. I can imagine that he is not just trying to save a company or two, but saving “that other malfunctioning corporation called the USA.” Gekko’s speech in front of Teldar Paper’s Board of Directors sounds just like what Trump would say:

“I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentlemen, that greed — for lack of a better word — is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind. And greed — you mark my words — will not only save Teldar Paper, but that other malfunctioning corporation called the USA.”

1930s redux

I also heard somewhat premature discussions last week that compared Trump’s actions to the Smoot-Hawley Tariff Act of 1930. Pay attention to the full title of this disastrous legislation, which is credited with being a major factor turning a bad recession into the Great Depression: “An Act to provide revenue, to regulate commerce with foreign countries, to encourage the industries of the United States, to protect American labor, and for other purposes.” That sure sounds like the long version of the “Make America Great” slogan, as that single 1930 bill contains virtually all of the president’s election promises!

The Smoot-Hawley Act comparison is premature, for the time being, as it eventually collapsed global trade, while in the end President Trump’s actions may end up being a bark instead of a bite. But one surely needs to follow closely how this situation is developing. If we get into rounds of tariffs and retaliations, I do not believe that the February lows in the U.S. stock market will hold.

The Chinese have already suggested that they may slow their purchases of U.S. Treasury debt, which would add further pressure on U.S. interest rates at a time when the Federal Reserve is trying to unwind its balance sheet. It is not far-fetched to think that if we get a real trade war combined with a spike in interest rates, we could end this mature economic expansion and the only person to blame would be Trump.

The Smoot-Hawley Act, which was signed by Republican President Herbert Hoover, became a major issue in the 1932 presidential election. Ultimately, poor economic performance resulting from collapsing global trade cost Hoover the election and put FDR in the White House, which ended up with the trade act being dismantled by the Democratic Congressional majority.

Trump is not much of a reader (per his own admission), but I would like to remind him of words attributed to Mark Twain: “History doesn’t repeat itself but it often rhymes.” While there is no evidence that Twain actually said this, it sure sounds like something he would say.

Did the yen predict the global stock sell-off?

As I have noted previously, I have been viewing the appreciation of risk assets combined with Japanese yen appreciation with suspicion due to the tendency for the yen to be used as a funding currency in global carry trades after two decades of super-low interest rates.

Based on the performance of the Japanese yen, which is appreciating at a time when the Bank of Japan is running quantitative-easing policies that are three times as aggressive as the Federal Reserve’s ever were, adjusted for the size of the two economies, every economic textbook says that the yen needs to be in free fall. Yet, it is rallying. (On this chart, a rising yen translates to fewer yen per dollar, hence a declining blue line.)

We have a rather significant carry trade unwinding by institutional investors, which is causing them to reverse what are in essence synthetic short positions in the Japanese yen. I am not sure they could have foreseen the trade-war friction by the chaotic White House in early January, but it is my experience that smart money tends to sell into strength and the record inflows into the U.S. stock market in January gave them the perfect selling opportunity. Let’s hope that what started as an overdue correction in the U.S. stock market does not get turned on its head by a reincarnation of the Smoot-Hawley act by Trump.

Ivan Martchev is an investment strategist with institutional money manager Navellier and Associates. The opinions expressed are his own.