Trump Tariffs: Boom or Bust?

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Jason

Jason’s Random Words

It’s official. President Donald J. Trump has enacted 25% tariffs against imports from Canada and Mexico, and 10% tariffs on Chinese imports.

For those whose view is that the U.S. has been taken advantage of by our trading partners, these tariffs are a good thing. At worst, they may result in some short-term pain but in the long term will swing the balance of power in trade and domestic production back in favor of the U.S. In short, Trump is using the American consumer as the world’s biggest economic hammer.

The end goals are a little less clear. President Trump is using his authority for national security as part of the reasoning, including the flow of illegal drugs across the borders into the U.S.

(Gut)shot across the bow?

Make no bones about it: This is going to hit American families in the wallet. Whether it’s tomatoes or trucks, both Canada and Mexico are major producers — and exporters into the U.S. — of natural resources, agricultural products, and a significant portion of components for U.S.-assembled automobiles.

To put some numbers on it, according to the Wall Street Journal, more than 40% of produce imports come from our border neighbors to the north and south; expect to see a big increase in your grocery bill in coming weeks as a result of these tariffs. The two countries combine for about 55% of auto parts imports as well — parts that are mostly used in assembly plants in the U.S. in American-made cars, which contributes more than $800 billion to the U.S. economy per year, supporting more than 9 million American jobs.

And this is before we factor in the 10% tariff on Chinese goods. Things are going to get more expensive for the American consumer soon.

Paying the price for what?

The point is, whether it’s a tax, a tariff, or any other government-induced fee on a good or service, the consumer pays for it. It’s just how math works. Of course, the goal isn’t to make Americans — millions of whom vote for Trump — feel the squeeze on their budgets, but that’s the hard, cold reality of these sorts of measures. There are further implications, too; if consumers are already squeezed, they will choose cheaper goods or goods from other sources (domestic or otherwise), and cut back on purchases of these soon-to-be more expensive imported goods.

And that’s surely part of the Trump Administration’s calculus: American consumers will feel the pinch, but Canadian, Mexican, and Chinese producers will feel it more. And that will put pressure on elected (and otherwise) officials in those countries to come to the negotiating table. What the better deal for America looks like remains to be seen.

The upside? A strengthened U.S. economy, better trade deals, and more investment from our border-sharing neighbors to reduce the flow of illegal drugs into the country, reducing access and improving the lives of, and contribution to society, of those affected.

The downside? A protracted trade war that pulls the biggest players in the global economy into a zero-sum fight that leads to a worldwide recession.

Fitting this near-term uncertainty into our frameworks

Assuming a quick deal — which I expect the Trump administration is betting on — doesn’t happen, inflation is back on the table. And there’s nothing the Federal Reserve can do in this case since it’s not going to be a “hot” economy driving prices higher. Sure, some of the impact of the tariffs will be adsorbed by producers, but directionally this isn’t going to be good for the economy. And with stock markets near all-time highs, it certainly makes the likelihood of a downturn and bear market seem more favorable.

But isn’t uncertainty always a reality in the near-term? This is why stocks are considered risky investments: It’s essentially impossible to reliably predict what the market will do in a 1-2 year period. But when we stretch that out to five years, a decade, or longer, the risk of losses decreases with each additional year, and the odds of favorable returns improves.

In other words, this is an excellent opportunity to remember that a successful investing process is one that considers your financial needs across various time frames, and builds a framework that helps you manage to the risks and opportunities across those time frames.

Managing the most important part of our financial process

Managing ourselves is the most important part of investing success. We all know that owning stocks for decades is the best way to create wealth. But we also know plenty of things about how to succeed in sports and car racing and music and carpentry and painting and everything else that you have an interest in but not the skill to do well.

This is why I have prioritized a few “rules” and mostly frameworks that limit my capacity to do harm, while making it easier to do the — very few — things that I do well as an investor. A few examples of what works for me.

• I aim to carry 10% in unreserved cash I can use as “dry powder” for opportunistic buys and for my “market selloff” rules.

  • If we see a 10% drawdown from a recent high, I will deploy about 1/3 of that cash within a few days.

  • If we see a 10% drawdown, I will deploy another 1/3 within a couple of weeks.

  • If we see a continued downturn, I will deploy all of my remaining cash over coming months, and gradually rebuild my cash position as the market recovers.

• Aim to have any cash above 10% in cash-covered puts (l will be writing about this soon).

• Not act on any buy or sell decision for at 1-2 market days after reaching the decision.

Like most individual investors, the scent of near-term risk or opportunity is powerful, and can lead me down the path of wealth destruction. I’ve said many times that I basically always expect a recession in the next year; if I had invested that way, I would have missed out on one of the best 15-year bull runs in the past century, sitting in no-yield cash waiting for the next crash. And I can promise you that the Trump administration’s economic policies are a powerful bearish drug for someone with my mental wiring on near-term worries.

Hence my framework and rules. The things above keep my portfolio aligned with my medium- and long-term goals where it should be focused at my age and distance from my goals, while limiting my capacity for harm today.

Hope isn’t a good thesis, but it’s a great mindset

I don’t know what the next year or four years will bring. I know that Presidents get too much credit when things go well and too much blame when they don’t. I also know that trying to build a portfolio around what happens this year or the next is me giving the reins of my portfolio to my worst instincts.

But looking farther out, there’s always room for optimism and hope. And while building a hope-filled thesis around any individual company is a terrible idea, living a life and having an outlook filled with hope is pretty great. It will also make it easier to invest for the future you hope to see, and hold through periods of fear and uncertainty. Just be sure to build a framework and some rules to help guide you along the way, too.

You can do it,

Jason

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