My mid-March column aged like milk souring as tariff news swelled from trickle to torrent. U.S. President Donald Trump’s tariffying April 2 “Liberation Day” announcement turned markets upside down and rocked investors worldwide. No one knows what comes next – even Mr. Trump, seemingly.
His tariff fixation was never secret. So, many people wonder why stock markets fell so suddenly. After all, don’t stocks preprice widely-known factors? Indeed! But all Mr. Trump’s previously threatened or proposed tariffs totalled just 0.75 per cent of U.S. gross domestic product – maximum. Negative, but too little to render recession, spur inflation or wreak the heavy havoc pundits feared. While the tariffs were a larger share of Canadian and Mexican GDP, the United-States-Mexico-Canada Agreement mitigated these somewhat. Otherwise, beyond China, his actual tariffs were non-catastrophic.
Tariff imposition stems from mercantilist thinking, dominant 300 years ago along with witch burning, blood leeching and chamber pots. History shows their imposition hurts the imposing country more than those imposed upon. The imposer is really just a poser – which is why U.S. stocks now lag the world’s, including Canada’s.
Enter wacky “Liberation Day” with bigger, broader and more foolishly fashioned tariffs than previously imaginable – underpinned by mind-numbing economic misperceptions and moronic math. While Mr. Trump’s new 10-per-cent universal levies and far steeper “reciprocal” tariffs skipped Canada, the S&P/TSX Composite Index still tumbled alongside global stocks as uncertainty skyrocketed.
Markets couldn’t possibly preprice such large nonsense born as a surprise. Take Mr. Trump’s misnamed and now-paused “reciprocal” tariffs. They weren’t tit-for-tatting other countries tariffing the United States. No. Note: The European Union’s average tariff is 2.7 per cent (per the World Trade Organization). Mr. Trump hit it with 20 per cent! Vietnam averages 5.1-per-cent tariffs. Mr. Trump slapped 46-per-cent duties there. Why?
Well, the levies weren’t about non-tariff barriers either – he didn’t even try tabulating those. No, his “reciprocal” tariffs derived purely from America’s trade deficit with each nation, presuming this shows another country is “cheating.” Illogical! And inconsistent, given Mr. Trump’s 10-per-cent universal tariffs also apply to nations Uncle Sam has a trade surplus with. You can’t make this stuff up.
Trade balances alone aren’t predictors of economic success. Ever! They are non-cash-flow accounting measures. Countries run deficits for many reasons – including faster relative economic growth and/or wealth, allowing those countries to buy more abroad than they export. Positives!
Consider Germany and France. Since 2008, Germany has run huge annual trade surpluses, while its GDP grew 0.8 per cent annualized. Neighbouring France, meanwhile, ran big trade deficits … yet its overall economic results were slightly better!
Russia continually runs big trade surpluses. America runs deficits almost forever. Which economy does better?
That doesn’t mean surpluses are inherently bad, just that trade balances, themselves, mean nothing to future growth or wealth. They’re not predictive or causal – centuries of history prove that.
Then, on April 9, surprise! Mr. Trump flip-flopped course and suspended “reciprocal” tariffs for 90 days for every country but China – which got higher rates. While China retaliated, Mr. Trump proudly proclaimed other nations want to strike deals, something he said he wouldn’t allow days earlier.
And now? Even if all his terrible tariffs return, the effect should prove smaller than feared. Which is bullish. Why? First: uncollectability! The sub-portion of U.S. Customs and Border Protection that collects tariffs is understaffed, with only 2,500 employees policing hundreds of locations. Training more of them takes ages. Its technology is outdated and never tested at the volumes it would encounter. Its processes are Swiss-cheese-like leaky.
Then come legal challenges. Mr. Trump’s universal tariffs are almost surely unconstitutional, violating the “national emergency” ground rules he used to impose them without the required previous Congressional legislation. Lawsuits are already filed (challenging the China tariffs, too).
Maybe we do get a flurry of deals that lower trade barriers significantly. That would be nice! Still, all this on-off-and-on, back-and-forthing is no way to run a railroad. Businesses hate uncertainty. Erratic steep tariffs with laughably arbitrary methodology do nothing but stir up uncertainty that causes corporate caution. How does a firm or person move forward when they can’t have confidence that whatever Mr. Trump establishes will endure? They don’t.
One clear lesson from April’s absurdity: Selling in and around panics is ultra-foolish. The market’s big down days couple typically with unpredictably soon big up days.
So, how should investors proceed? First, ask: What do you know about Mr. Trump and his tariff plans millions of others don’t? Given that markets preprice widely-known information, anything commonly discussed has little power. Every Trump wiggle and tariff twitch is endlessly dissected. Do you possess unheralded, unpriced information about their future direction?
If not, you have no basis for trading on tariffs.
Slashing equity exposure may feel wise after all this. But if you need equity-like returns over the long term, exiting stocks near panics is the biggest risk you could take. Doing it successfully requires knowing something big others don’t. Otherwise, patience is your best asset.
Ken Fisher is the founder, executive chair and co-chief investment officer of Fisher Investments.