The Market kicked off the quarter by serving investors a healthy dose of whiplash, mostly driven by tariff news. On again. Off again. Liberation Day! Never mind. The outlook for the American economy now starkly contrasts with how we entered the year. Even after the recent 90 day pause on tariffs, our expected effective tariff rates are much higher than economists predicted. After inheriting an economy that was the envy of the world with growth of 2.8% in 2024 (faster than almost all developed economies), stocks near all-time highs, an unemployment rate of 4.1%, and inflation of 2.8%, the Trump Administration’s attempt to upend the world trading order has left investors and companies confused. Are these efforts intended to extract concessions from other countries so that President Trump can declare victory, or do they truly want to create protectionist barriers to restore U.S. manufacturing? The likley answer is “yes”.
The rationale for the moves, the notion that the world has been taking advantage of the U.S. for decades, does not align with historical evidence. The U.S. has been running a persistent trade deficit (meaning imports exceed exports) since the 1970s[1]. Additionally, the US has had the best economic performance in its history, and it has been arguably better than any other economic region of the world. Of course the U.S. is running a trade deficit with Vietnam where the average annual household income is less than $3,000. What would the average Vietnamese household need from the U.S.? Moreover, a ‘surplus’ or ‘deficit’ does not imply a good or bad outcome. A trade deficit is typical for a rapidly growing economy[2]. The United States ran a trade deficit for most of its first 100 years as a nation and ran a surplus during the Great Depression.
Our view is that some of the end goals are worthy of pursuit, but the current strategy for implementation leaves much to be desired.
The White House has stated that “tariffs are going to raise about $600 billion a year, about $6 trillion over a 10-year period.” If you raise $600B more a year in revenue for the federal government through tariffs, the majority of that revenue is being taken away from individuals and businesses in the private economy. Increased prices slow demand which then slows global economic growth, which slows employment and that, of course, decreases demand.
We are operating in a unique environment. From an economics perspective, it is hard to imagine three decades of globalization being unwound in a few years, much less in the weeks and months that the current administration wants to achieve. If the premise is that the world is ripping us off, then it can’t also be that this is just a negotiating tactic. We believe that President Trump wants to create a transactional world where weaker countries make direct payments to stronger countries for the privilege of transacting with them. This is not a realistic outcome. And what we view as continually “moving the goalposts” will only further dampen other countries’ interest in partnering with, and investing in, the United States. President Trump says that trade wars are easy to win. The Market doesn’t believe him.
Businesses are already slowing their investments because they are uncertain of the future. Surely, some countries will come to the negotiation table. Some countries will make investments in the U.S. But all will re-consider whether the U.S. is a reliable trading partner for the future. The reputation damage for brand U.S.A. could take decades to rebuild.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett
Normally, investors can consult data and references from the past to put our current state in perspective and calm fears. But nothing like Trump’s trade war has occurred in almost a century. How this reaches a conclusion is unknowable. However, our task at Richie Capital Group is to understand how potential changes will impact our investments and where opportunities will arise. What would have happened if Trump had continued forward with his full tariffs as stated on “Liberation Day?”
We believe the economic damage would have been catastrophic, but not the end of the world. When a city-sized asteroid struck Earth 66 million years ago, it triggered mass extinctions, yet many species survived thanks to traits like their small size, flexible diets, and the ability to burrow or live underwater. These resilient creatures included early mammals, birds, reptiles, amphibians, and even plankton.
Likewise, there were categories of companies that fared well during the “asteroid impact” of the 1929 stock market crash that ushered in the Great Depression. The effects of the Black Tuesday Crash were deep and lasting, causing widespread unemployment, bank failures, and a sharp decline in industrial output. By 1933, U.S. unemployment reached 25%. Historians have analyzed the companies that successfully navigated the period from The Crash through The Great Depression and found that most delivered essential goods that remained in demand even as the economy soured to extents never seen before in American history:
- Food and Beverage Industry – Regardless of the economy, Americans still wanted to eat.
- Healthcare – Demand for healthcare remained including pharmaceutical, medical equipment, and healthcare services.
- Utilities – Fairly obvious.
- Consumer Goods – Essential and basic necessities.
- Entertainment – While luxury goods did not shine, attendance at theaters remained high as people sought respite from their economic woes.
Specific companies that survived are familiar names including Archer-Daniels (food processing), Coca-Cola (affordable treat during difficult times), Deere (farming equipment), Federated Department Stores (fared well by extending credit and establishing a reputation for community involvement in times of crisis), IBM (continued to invest in new technologies and focus on innovation), and U.S. Steel (manufacturing and industrial production) among many others.
Back to our current situation, whether the new tariff regime is good or bad will be decided over time and evaluated in the context of history, but good or bad is not the point. Our objective is to identify opportunities within uncertainty.
The future economic outlook is likely to align with the consensus of Economists residing outside of The White House. And that means we can make general assumptions about the future (or at least the next four years) under an increased tariff regime:
- The U.S. economy (and likewise the global economy) will see slower growth.
- Consumers will experience higher prices.
- A recession is in our future, but hopefully mild. The good news is that this could temper inflation. The bad news is that we’ll have to wear ties again.
- Increased unemployment.
- Current reshoring trends will continue, and we could benefit from increased specialized manufacturing in the U.S.
- Globally, companies will need to restructure supply chains and make expensive investments.
What is most important in the current market uncertainty is to think deeply and act sparingly. What we know from history is that the world will adapt and there will be companies that will thrive in the new environment. It’s an ideal time for stock pickers to identify the winners and losers after impact.
[1] https://www.stlouisfed.org/publications/regional-economist/third-quarter-2018/understanding-roots-trade-deficit
[2] https://www.wsj.com/opinion/notable-quotable-robert-bartley-on-trade-balance-fictions-policy-tariffs-economy-bd2eefa2
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