Tariff Fallacies

Too much tariff analysis is faulty — Basing investment analysis on insufficient data is dangerous — Preparation is more valuable than prediction.

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TARIFF FALLACIES

Too much has been written regarding the recent tariffs, much of which will prove to be incorrect. Don’t fall for these tariff fallacies that are polluting your inboxes and timelines.

The Infinite Timeline

Any economic analysis based on the information we have today will be incorrect, just as forecasts about tariffs from just last month are now quite useless.

Economically speaking, tariffs create inflation. This inflation is driven by suboptimal usage of resources as global trade is blunted. But this theoretical approach assumes tariffs are here to stay. Economic modeling generally assumes a permanent, fixed structure to the world that does not reflect reality.

Tariffs enacted for weeks, months, or even a few years will have a markedly different effect than permanent tariffs. Yes, the tariffs could be permanent, but this outcome is only one of many possible outcomes and should be probability-weighted accordingly. Too many pundits are simply extrapolating the impact of tariffs into infinity.

The First Order Response

The application of tariffs has initiated an economic “game.” This is a repeated game, where participants will have an opportunity to respond. We are in the early stages of the game.

Countries can choose their response to U.S. actions. A “tit-for-tat” approach is likely to see a similar, escalating response. Countries willing to negotiate have an opportunity to defuse the situation. Understanding the next steps of the game is more important than understanding the impact of tariffs as they stand today.

The only certainty we have today is that the current tariff rates are not set in stone. Analyzing the current tariffs is simply panicking at the first of many moves to come.

Mind Reading & Hallucination

Worse than faulty economic analysis or first-order thinking is mind reading or outright hallucination. This mistake reveals the market participants that act as “animal spirits.” After all, market booms and busts continue to happen, so somebody plays the losing part of the speculator.

Pundits are currently engaging in mind reading, drawing conclusions on topics on which they have limited information. Articles claiming the White House “has no plan” or “has overplayed its hand” are simply fear-mongering, unless written by someone within the White House itself.

Maybe there is no plan. Maybe there is. Conclusions based on insufficient data are worse than no conclusion at all, particularly in investing. Many fact-based, data-driven investors are outing themselves as nothing of the sort.

Hallucination is worse, simply seeing and hearing what we want with no basis in reality. Yesterday the market exploded higher after a false report that tariffs would be postponed for 90 days. Our minds can play tricks on us in times of stress; this is no way to invest.

Preparation Over Prediction

Chasing headlines attempting to stay one step ahead of the market is futile. It is impossible to predict the extremely complex impact of tariffs, international negotiations, and the market’s response to these developments. Attempting to is a waste of time and reveals a lack of understanding of the markets.

Preparation is far more valuable. Today, there are opportunities for investors with sufficient cash reserves, limited leverage, and portfolios of businesses providing essential products and services.