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Fisher Investments on Trade War Fears [2018]

Fisher Investments on Trade War Fears [2018]

Trade war fears are at top of mind for many
investors. Are the current tariffs likely to escalate
into a broader trade war? At what point would you view a trade war as
a threat to global markets? Nobody wants to hear what we would say about
this. These tariffs are so insignificantly small
that the answer to your question is they would roughly have to be 50 times bigger. That’s 5-0. Just think this through ’cause it’s really
simple. One of the points that I made in one of my
USA Today columns is when I studied economics, a kind of a launching point for studying economics
is understanding Alfred Marshall’s concept of the second derivative, which comes straight
outta calculus. I think almost all economists go astray when
they get to calculus. The reality is then they start applying second
derivative concepts instead of applying fourth-grade arithmetic. Most of time, fourth-grade arithmetic is what
really works. Think this through in this way. If you take all of the items that have been
discussed as tariff-able, that is, in 2018, somebody’s gonna put a tariff on this, might
be America, might be retaliatory from China, might be something from Europe, might be this,
might be that. You add ’em all together, as of about 10 days
ago, and it was $640 billion of items. Tariffs range, depending on which one you’re
looking at, from at the very low end 5% tariff on that amount to 25% tariff on that amount. Let’s just pretend they were all at 25%, all
right? That’d be the most that those tariff-able
items would be being taxed. All a tariff is is a tax. It’s a tax, and just a tax. Now we’ve got 25 on 640. That comes to 160, 160 billion. That’s the max potential tax on those items. Now let’s just think about that. We have an $80 trillion global GDP that might
be growing at 3% real terms this year, plus maybe a couple of percent of inflation. That’s 5%. 5% on 80 trillion is 4 trillion. 160 billion on 4 trillion is 4% of one year’s
growth. That’s how big it is, 4% of one year’s growth. Now we make it 10 times bigger. That’s 40% of one year’s growth. If you wanna wipe out everything and go into
recession, you need 50 times bigger. Now mind you, that’s if it was 25%. That will happen only after hell freezes over
because, in fact, 25 is the max and five is the low. Let’s say you averaged, with all those together,
instead of 25%, 16%. Now you’re down instead of 4% of one year’s
growth to 2 1/2% of one year’s growth. Now you’d need even more. Now a lotta that’s never gonna happen. A lot of that’s never gonna happen because
you have the potential for substitution. I’m gonna buy this instead of that. You also have the potential, which people
do not want to accept, but it’s absolutely true, to ship through to third-party countries
and through brokers to get a brokerage cost rather than a bigger tariff cost. I wanna go back to something Ken said about
thinking about who actually pays the tariffs, adaptability, having a broker, finding a different
source for your commodity or whatever the good or service might be because Ken made
this point that economists sorta go to the first derivative, and then they tend to go
even further than that. That’s where a lotta mistakes go. I think even a part of that, too, is that
most economists don’t build in the adaptive mechanism of what a market looks like, and
that we can observe this in real time. That when we look at the companies we hold,
big multinational organizations, and we listen to their conference calls, they’re already
well on top of this and actually pushing through a lot of many of these concerns, finding alternative
ways to get whatever good or service it is they need. One thing that Ken has said in his writing
over the years is that in a world such as this, who do you think is really smarter? A government that puts on one new regulation
of any sort, or the big, adaptive market that’s gonna work around all that? So often in the media, they ask this question. Well, you have this new rule. Isn’t that automatically bad, and it translates
to X, Y and Z? Well, sort of, only if you can account for
the notion of how does the market actually going to adapt to things? In my career, I find that the market is much
more adaptable than people tend to realize. I think we see that today. We made a few references today to the fear
of a false factor, and why that’s a positive thing. I think it’s important for people to understand
why that is. You think about what the stock market does,
is it’s a great discounter of all known, worried-about information. When everybody’s worried about something,
that it’s gonna be a huge negative, that gets reflected pretty quickly into stock prices. That’s kind of what you saw on the correction
earlier this year, that people were worried about inflation and then trade and these other
geopolitical concerns. That gets baked into equity prices really
quickly. But when those false fears turn out to be
less impactful than people worried, then people get some relief from those concerns. They get more clarity, they have less concern
about them. That’s a bullish feature for the market. When you see the market overreacting to something
that’s a false fear, it’s really not nearly as bad as people worry that it is. On a forward-looking basis, that’s bullish. Can cause some near-term volatility, like
it has this year early on, but on a forward-looking basis, that’s a bullish signal because eventually,
investors will overcome those fears because, as it turns out, what they were initially
worried about wasn’t nearly as bad as they thought it was at the start. Let me give you a modification of that. Fear of a false factor is always bullish. But another feature that’s bullish is big
fear of a small negative. Big fear of a small negative is bullish for
the exact same reason. Tariffs are a tax. They are a negative. There’s no disputing that. We’re not suggesting that a tariff isn’t a
tax or that that tax isn’t, for example, as a tariff imposed on America, a punishment
to American purchasers of that item that actually purchase that. They’re paying more somehow. They may only be paying more by a brokerage
commission snuck in through the black market, they may be paying more by the tariff itself,
but if they’re buying that thing, it’s punishing the American. It’s a negative. But it’s a little negative, and the fear is
big. Big fear of a little negative is always bullish,
just like fear of a false factor is always bullish. For views on current events in the world of
investing, visit Updated daily, it offers on-demand access
to Fisher Investments’ most current thoughts on capital markets and the global economy,
as well as our sometimes irreverent commentary. We hope you’ll enjoy it.

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