Another day, another market-shaking headline out of the US.
This morning, we woke to news that US President Donald Trump had imposed the threatened tariffs on Canada, Mexico and China.
And that, as a result, China and Canada had announced trade retaliations, with Mexico considering its options.
Now, there's a lot of politics mixed up with economics, these days. And vice versa.
I care not for the political affiliations, or the parties that stand behind economic policies, as you'll know from my past commentary on Australian economic policy.
But it's worth restating, because there are too many who will only view this announcement through a political 'my guy vs. their guy' lens.
And so, with that said, let me restate: protectionism is stupid.
No, I don't use that term lightly.
I've said it about the Australian government's 'Future Made in Australia' program, and I'll say it about the US government's application of tariffs.
Why?
Because protectionism raises prices for consumers, by increasing the price of imported goods (if local businesses were going to undercut those prices, they already would be).
Because protectionism rewards inefficiency, by propping up otherwise failing businesses.
Because protectionism therefore means people and capital aren't being put to the most productive uses.
Because protectionism slows down the pace of local and global trade, gumming up the economic works.
Which all means protectionism lowers the standards of living of those in both the country applying and the country being targeted by those tariffs or subsidies.
Here's a quick example.
Let's say Australian states applied tariffs to each other. Victorians would either not have bananas, would pay an inflated price for 'imported' bananas, or spend time, money (and probably government subsidies) trying to start a banana industry.
Meanwhile, Victorian beans would either not be available to Queenslanders, or be available at a higher price. Or Queensland could spend time and money trying to build its own industry.
Not a fan? Try NT mangoes and NSW tomatoes. Or anything else. You get my drift.
So either a state's people have to pay more for imports, go without, or spend unnecessary time and money duplicating an industry inside state borders that is more efficient and productive elsewhere.
Ah, but the jobs! Sure, banana plantation jobs in Victoria would be higher in number than without the tariffs. 100% true.
But each job comes at the expense of higher taxes, to subsidise the otherwise-unprofitable industry, or higher prices, to pay the higher tariffs.
And those workers have to come from somewhere. If you're really lucky, a few come from the unemployment queues, fortunate enough to have the right skills and be in the right areas.
Most, if they can be found at all, would come from other jobs for other employers… who'd then be short of staff.
Don't get me wrong; I get the emotional appeal of 'making stuff here' and I get the idea of 'creating jobs'.
The problem is that when you think a little further… about the second- and third-order knock-on effects… the 'solution' carries less and less weight.
Now maybe, as some people say, this is all just a negotiating tactic. Maybe Trump doesn't want them in place, or for long. If so, that contradicts his plan to fund tax cuts with tariffs.
But even if that is the new plan, the US should carefully weigh up turning century- (and sometimes centuries) long alliances and friendships into adversarial trade agents. Because memories can be longer than trade wars.
I hope that's clear.
I don't care which party or which country is in favour of protectionism, or who your or my favourite politician is. Policy – and the economic outcomes of same – don't care much for 'red' or 'blue'.
Oh, and if you don't believe me, maybe you'll listen to Warren Buffett on CNBC over the weekend:
"Tariffs are actually — we've had a lot of experience with them — they're an act of war, to some degree."
"You always have to ask that question in economics: Always say, 'And then what?'"
For the record, my view, expressed above, was expressed before Buffett's comments here and in other places. So I'm not just jumping on the bandwagon.
(There is one justified case for trade protections, by the way: short term 'dumping' when a country sends a large amount of below-cost product to another country, thereby 'dumping' it on them. That has the potential to damage or kill local industries with one-time actions.)
So, where does that leave us?
Well, US markets have flirted with a 'technical correction' – a made-up term that just means share prices have fallen 10% from their recent peak.
The ASX is down 5% from its recent high.
Why?
Well, the truth is no-one can say for sure. Ever.
But we can assume some correlations and imply some loose causation.
It's likely that a combination of fear and uncertainty about the impacts of the trade war are 'weighing on sentiment', as the jargon goes.
The question is whether that 'sentiment' presages lower profits, justifying the falls, or whether the new equilibrium is much like the old one, and the fear is unfounded.
For sure, some companies are very exposed. If they're making products in Mexico, Canada or China, and exporting primarily to the US, things are going to get tougher. If they're in the global steel or aluminum game, with significant volume going to US customers, life just got more difficult.
And – hence the fear – no-one knows how long these tariffs will remain in place, what other dislocations (and opportunities) might arise, and whether other protectionist measures will be put in place.
More broadly, the Atlanta Federal Reserve Bank is predicting that the US economy will shrink, and potentially enter recession.
There is a lot there.
So, what am I doing? Nothing.
At least, nothing different.
Doesn't that seem a little… neglectful? Lazy? Irresponsible, even?
It might.
But it's not.
See, as an investor, my first lens is the long term. And, despite what others might tell you, 'long term' isn't six months!
No, proper long term investment is measured in years. For me, that's five or more years. Preferably longer.
But it's not just that.
Think about the chain of forecasts you'd have to make to try to 'trade' this.
How long will the current tariffs persist?
What others will be added?
What 'carve outs' might be made for certain companies, industries or countries?
What will the impact be on sales and profits?
Will those companies find other markets?
And that's just the short list.
That's not it, though. Next comes the big one:
"How does all of that compare to the current price, which may already have factored some or all of that in?"!
Because remember: we're not the only people who know what's going on… so does every other investor or trader.
And if we're just doing what everyone else is doing… we'll get the same results.
Which is a long way of saying what I said above: there's little to be gained (outside just getting lucky) from trying to 'trade' your way through these sorts of market disruptions (real or imagined).
Instead, I'm still doing what I always do: look for companies that I think are going to be worth more in 5-plus years' time.
Sure, my view of some companies might be a little less rosy – if it met some of the above conditions when it comes to certain manufacturing locations or markets – but I expect that the stock market will overcome this obstacle, just as it has overcome similar obstacles – plus wars, terrorism, recessions, inflation spikes and lots more – in the past.
I get the urge to 'do something'. To 'take a position'. To 'take advantage' of this sort of thing.
I just don't reckon it's likely that we can out-trade the other guy over short periods of time, using unknown and unknowable futures.
Oh sure, plenty of people are trying. Some will even succeed.
Who? We can't know yet.
Why? Probably some combination of skill and luck.
But 'luck' isn't an investment strategy. It's gambling.
So yes, the world is uncertain. But honestly, when wasn't it?
And yes, I think the policies being followed are nuts.
But as an investor, I'm relying on both my reading of history, and the fundamental human desire for progress.
I think the future will be brighter. And that's why I continue to invest, just as I ever have.
(I'm planning to buy more shares today, by the way. Not because I know this is the bottom, but because I think the future is bright. The latter is far, far more important than trying to guess the former.)
Fool on!
