Let’s just put all the cards on the table – Is all this talk of tariffs from the new administration going to sink the economy as everyone fears?
First, the answer to that question is unknowable because, as you have heard me pontificate many times, the future can't be known despite what you think will happen; it's still unknowable. There are no facts about the future.
Secondly, the media, specifically the financial media, are ALWAYS searching for the next crisis du jour to keep your attention span from wandering off. The formula is simple: Eyeballs + Clicks = Revenue
However, let's take a deeper dive into the issue of tariffs because, maybe, just maybe, the media may be on to something with potential adverse effects from tariffs. (Please keep in mind that these mindless rubes who are giving their opinions on the subject of tariffs are getting PAID to express an opinion.)
The media narrative on tariffs is rather simplistic: Tariffs cause inflation.
“Think again longshanks!” – Newman from Seinfeld
We must first understand that inflation is a byproduct of having too much money in the economy. It’s simple – if there's too much money in the system, it's worth less, and voila, you get inflation. Too much of anything makes that item worth less, it doesn't matter if it's money, pens, pencils, corn, or frozen concentrated orange juice – the effect of too much of anything on its value is the same.
And how exactly does money get into the economy? The Fed puts it there, that's how. They control the printing presses and, thus, how much money will get put into the economy.
So, how do you measure how much money is in our economy? Looking at M2 is widely considered the best measure of spendable money in the economy. Take a look, and you'll see that there is STILL too much money (compared to historical norms) floating around in the economy:
M2 exploded because of COVID-19 – as you can see, the government has printed massive amounts of money, which makes every dollar we spend/save worth less, thus igniting the inflation inferno.
Now that we’ve established that inflation is directly related to how much money is in the economy, how might tariffs impact inflation?
The challenge is that the tariffs could disrupt trade and slow global economies (including ours). The real key here, however, is that the administration's tariff policies could change 10 times between now and implementation, with negotiations continuing right up to the deadline.
Because inflation's primary cause is the amount of money in the system, tariffs may be a contributing factor to a slight uptick in inflation, but it's going to be temporary at best.
The larger (and more important) focal point of any tariff discussion should be that no serious investor can make an investment policy out of the waxing and waning of tariff threats.
Let's not make tariffs any more complicated than they need to be: They will end up being whatever they are – the more draconian, the worse for the American economy – and the great companies will immediately begin working around them, as indeed they do about everything.
That’s why you own the great American companies in your portfolio because they adapt and overcome the obstacles the government places in front of them. That's how our system works. It’s worked that way for nearly 250 years.
Leave the pointless discussions on tariffs to the rubes in the media, who, need I remind you, have no interest, much less any incentive, to help their audience become successful investors. Their only objective is to cause short-term fear and panic, and they have no patience to even consider any sort of long-term perspective.
Stay the course, my friends.