Dear Fellow Investors,
When I was a young trader on the interest rates derivatives desk at Merrill Lynch—a desk full of young, extremely intelligent, arrogant, and aggressive individuals—the head of our desk, who was all of 35 years old, had a wise saying: Never short stupid.
We are witnessing the single dumbest economic policy since WWII being implemented. Coming into 2025, the "terrible" economy President Trump is trying to fix was:
- Growing at 2–3% in real terms (meaning after accounting for inflation).
- Unemployment was in the low 4% range, historically indicative of a very strong labor market.
- Inflation, despite all the sensational news stories about $9 eggs, was about 3%, slightly higher than the Fed's 2% target.
- Stocks were up 20+% for two consecutive years and had started the year in good shape.
- Fixed income was yielding in the 4–6% range.
Basically, we had about as close to a solid economy as we've seen since the Global Financial Crisis (GFC). There are always issues in any economy—nothing is ever perfect. However, taking a sledgehammer to an economy that is, by most measures, very good, in order to fix imbalances that may or may not be actual problems, is incomprehensible.
President Trump is tunnel-visioned on the approximately $1.2 trillion trade deficit in goods (physical items) that we have with the rest of the world. However, he does not address the nearly $400 billion in services (a very high-margin business) that we net export to the world. In return for the goods deficit, U.S. consumers, on the whole, get high-quality goods at much cheaper prices. Finally, consider the things we export versus import. We import clothing and cheap goods from China, while we export Boeing planes and military equipment—extremely high-value, high-skill, and high-margin goods. So, while the top-line trade deficit might look out of whack, the U.S. exports goods with high knowledge content and imports simpler items that would be prohibitively expensive to produce domestically and a poor use of our manufacturing resources.
Trade is part of the reason the USD is the reserve currency of the world. As we buy goods from other countries, those countries recycle the dollars either back to the U.S. in the form of investment or use those dollars to conduct trade with other countries. A simple example is oil, a global commodity traded in dollars. The more our currency is used globally, the more soft power and influence we have.
Vietnam, on whom the President imposed a 46% tariff—higher than the 10% tariff he imposed on a remote island inhabited only by penguins and seals—has a $120 billion trade surplus with the U.S. (The U.S. buys $136 billion in goods from them and sells $15 billion to them annually.) They supply nearly all the clothing and shoes we import for both high- and low-end consumers. The country's total annual GDP is about $430 billion. There is simply no way Vietnam could ever buy $120 billion more in goods from the U.S. to even out the trade deficit. They did have some small, inconsequential tariffs on U.S. imports, but trying to even the playing field between the two countries, or between the US and most developing countries, is like an NFL team playing a high school football team and complaining to the refs that the game isn't being called fairly.
MAGA's dream of re-industrializing the U.S. is also misguided. A simple example is steel production, which the President has mentioned many times. Steel production could return to the U.S. given enough time and a willingness to pay more. However, a new state-of-the-art factory would result in very few blue-collar, hard-hat jobs. It used to take 10 man-hours of input to produce one ton of steel. Now, one ton of steel requires only one man-hour of input. The idea that making things in this country will lead to more blue-collar, middle-class jobs is simply false. Modern factories often employ more engineers and computer scientists than floor workers.
So, what do we as investors do? The first thing to remember is that my money is invested exactly the same way yours is. I am equally shocked and frustrated with the idiotic premise and methodology used to implement this policy. We are now roughly 20% off the highs in the stock market, and I am adding to my personal portfolios. I put some personal money to work on Friday and will put additional money to work today. While extremely painful and frustrating, drawdowns of this magnitude are rare. In the last 40 years, we have had only seven years where the market experienced a >20% drawdown, and only four of those were >30% (Crash of '87, Internet bubble, GFC/housing crisis, and COVID). While this self-inflicted wound will have global and long-lasting implications, it is not at the level of those four calamities. I don't try to time the markets, but I know history, and scary times like these have been opportunities every single time in the past since WWII.
As my clients in Texas know, I am heading there today for a long-overdue visit. However, I am fully available via text, email, or calls. Please reach out if you want to talk. Frankly, I would love to rant more on the phone—it's cathartic.
**Feel free to forward this to any friends or family nervous about what is going on or who would like to talk.**