Complexity makes humans uncomfortable. To deal with this, we as a species, have developed a long list of coping mechanisms. We simplify some things. We accept at face value other things without understanding the underlying mechanisms that make them work. We develop systems and processes to guide us through complex issues. Sometimes we try to apply simple notions that work in other less complex systems to complex systems. Perhaps the most complex system in the world is the global economy. 

The global economy has billions of participants, all making decisions influenced by self-interest, cultural norms, vast amounts of laws and regulations, and possibly whether or not they had their morning coffee. It has millions of goods at various stages being shipped from one nation to the next and onward. No single nation has everything it needs to create everything it needs within its own borders. More complex products, like microchips, require vast supply chains requiring goods from across the globe to be manufactured. Global trade is a reality of modern life and will not go away. Like any part of the human experience, global trade has brought with it many advantages along with some striking disadvantages. Global trade allowed for substantially cheaper goods and the ability for various new goods; however, it also brought with it an increasing wealth disparity with an ever-shrinking middle class, among other things.

To combat the issues from global trade, the current administration has brought back an old idea: tariffs. Tariffs are taxes that importers pay to bring goods into a nation. Tariffs have always been part of the United States.  In fact, one of the first bills passed and signed by President George Washington was placing a 5% tariff on many imports to raise funds for our fledgling nation. Most economists would acknowledge that targeted tariffs, meaning on specific goods, are an important part of a nation’s trade policy. However, most economists would also say that broad tariffs, on all goods, are not a good policy. It is here that I am reminded of President Harry Truman’s request for a “one-handed economist” because he was tired of all his economists saying, “on the other hand”. 

Whether or not tariffs are a good idea is fairly moot at this point, as we now have tariffs and will likely continue to have tariffs for the foreseeable future. Time will tell whether the current tariff strategy is beneficial in the long term or not.  In the meantime, investors need to decide how to react. Initially, there is likely to be a strong reaction to the tariffs from the markets. In the longer term, a number of questions remain. These include: How will other countries react, what will the inflationary impact be, and how quickly will the United States’ economy adjust? 

In light of these questions, we will continue to ratchet down risk where appropriate and look for opportunities as they present themselves. Interestingly, this may result in more opportunities outside of our borders as economies decouple. If uncertainty continues to increase, we may see precious metals continue their rally along with fixed income. The best course of action, in our opinion, continues to be adjusting portfolios slowly   but consistently in cases like these rather than making sudden large changes.

As we go through this change, and as you have questions or concerns, please don’t hesitate to reach out to me or my team to discuss your specific situation.

Kevin P. Sullivan, CFA, CFP®, AIF

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