Surviving A Trade War

© Can Stock Photo / gina_sanders

 The interlocking international trade agreements crafted over the past several decades have all been threatened by recent abrupt changes in U.S. trade policy. Many countries seem to be in the business of threatening retaliatory tariffs, in the name of ‘fair trade.’ When countries engage in rounds of tariff-raising, it is called a trade war.

The human tendency is to expect current conditions to continue. We believe we must strive to think objectively about how things may change, assess possibilities, and be proactive in our decisions and actions.

We can seek to understand the impact of a tariff by examining the case of pickup trucks. The U.S. assesses a 25% tariff on imports of these vehicles1. In practice, this tax collects no money—it simply stops the import of pickup trucks.

Have you noticed how expensive trucks are, relative to cars? This benefits U.S. manufacturers at the expense of consumers, farmers, and businesses small and large which use trucks.

So generally the tariff has the effect of increasing consumer costs and reducing consumer choice, while making profits for a very few companies higher and reducing profits at all truck-using companies by a little bit.

Imagine if other countries retaliated by increasing tariffs on things made by Deere and Caterpillar and Boeing. This would be great for Airbus and Kubota and Claas, which would have less competition in the rest of the world. Foreign consumers, both individuals and companies, would pay more and have less choice. And workers employed in the U.S. by Deere, Caterpillar and Boeing would lose their jobs.

Forget for a moment which countries are charging how much in tariffs on which goods. Any increase, either by other countries or the U.S., increases costs on balance for consumers everywhere and reduces employment overall, in every country.

Typically, in a trade war the economy is depressed because consumers face higher prices so buy fewer goods. Production decreases to match reduced demand. Incomes are lower, jobs are fewer, and profits are slashed. This is why the stock market reacts to potential trade disruptions.

We believe the best approach to investing is to seek the best bargains and avoid stampedes in the market, with a very long time horizon. Chaos produces bargains and opportunities and stampedes; taking the long view may be the best hope for coming out on the far side in better shape.

Diversification may help, but will not eliminate volatility. It is not good fun to see portfolio values go down in the short run—but it is inevitable from time to time. Clients, if you would like to discuss this or anything else, please email us or call.

1Wikipedia, https://en.wikipedia.org/wiki/Chicken_tax. Accessed March 2018.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Political Risk Rising

© Can Stock Photo / razihusin

Long time readers know we are fairly neutral about the impact of politics on investing. Our American system of checks and balances has served us well through the decades. The worst fears of those who let politics govern their investments may have not come about.

At the root, however, politics can affect policy that has an impact on the economy and markets. We prefer public policy that enables the greatest number of people to engage in the greatest amount of productive endeavor and enjoy prosperity. This is not always what we get.

There are two things being talked about in Washington that are problematic, in our view. Checks and balances may see us through, or we may end up with policies that hurt our economy.

In theory, trade lets us get more for things we produce and pay less for things we use. America and the rest of the world are potentially better off for it. But there is a political desire to put tariffs in place against major trading partners, we believe primarily for the sake of putting tariffs in place. A narrow slice of people and companies might benefit, but the economy may be hurt overall.

If trade volumes are materially restricted, average family incomes and corporate earnings are likely to decline, and the economy and the stock market may not do as well as they could.

Another thing: if you have ancestors that came from Germany, Ireland, England, Italy, Poland, France, India, Scotland, Norway, or anywhere else, some people that were already here were opposed to those immigrant ancestors of yours. But we believe that America is more prosperous today, with higher average incomes, because of the legacy your ancestors and others left.

But on top of the desire to fix our immigration laws so they make sense and are enforced, there is a desire to cut the volume of legal immigration, possibly up to one half from recent levels1. In our mind there is little doubt that our future wealth, prosperity, and standing in the world will be impaired if this comes to pass. We’ve been enriched by the immigrant scientists, doctors, entrepreneurs and others who have come to America in accordance with immigration rules.

You can etch this in stone: we are firmly against cutting our nose off to spite our face. Those who advocate for less trade and less legal immigration are doing just that, in our opinion. We are optimistic that sooner or later, we will end up with good policy—we always have. But there could be some unnecessary turmoil before we get there.

We aren’t suggesting that big changes need to be made in portfolios to reflect the political threats. But we are looking for opportunities that are less sensitive to how these policies work out. Clients, if you would like to discuss these or any other pertinent issues, please email us or call.

1New York Times, https://www.nytimes.com/2017/08/02/us/politics/trump-immigration.html

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

All investing involves risk, including possible loss of principal.

No strategy assures success or protects against loss.