Reacting to the Tariffs: A Classic Lesson in Letting Emotions Drive Your Decisions

Paul Winkler: Welcome. This is “The Investor Coaching Show,” and I am Paul Winkler, here talking money and investing. And of course, there is so, so much to talk about.

My goodness, what a week, right? Crazy week. All kinds of things going on.

What Is Going On?

People are wondering, what on earth is going on? I had some questions that have come in regarding that. So I’ll address that.

Also, just … man, there’s so much audio. There are so many people talking about what has been happening with tariffs and what’s been happening with trade, and negotiations, and trying to make sense of it all.

I did a video on Wednesday. I have great timing. Mason, I’ve got awesome timing.

Mason: Oh, yeah? That’s pretty confident.

PW: I really do. It’s really good. We know for a financial planner that had timing, it’s bad timing. No, I’m not kidding.

Wednesday, I’m talking about all of this stuff going on, the negotiations, what the tariff level is going to be. What’s going on with China? What’s going on in all the countries? And literally a couple of seconds later, after I do a whole video on it and send the whole thing out, this big announcement comes out and the market shoots up 8%.

Mason: Yeah, Trump loves to do that kind of stuff, doesn’t he?

PW: Lucky for me, I always tell people, “Don’t try to predict the future because you can’t.” And that is just absolute proof positive. You cannot predict the future.

Mason: Oh, 100%.

PW: So it is one of those weeks, if you look at the first quarter of this year, it feels like, “Oh, the market is down. The market is down. Oh my goodness, it’s the pain, and I hear them talk about it on TV, they talk about it on radio.”

And I go, “Well, actually international stocks are up. International value stocks, particularly small value.” The problem is almost nobody owns them. We do because we diversify like crazy.

But most people don’t own that kind of stuff, so they don’t realize that that happens. So that is another topic of conversation that I’ve been into is going, “Hey, make sure …” And I feel like a broken record because I’ve done this the past couple of weeks.

---

But I just want you guys to get, if in the first quarter especially, if your investment portfolio was down, that is because it wasn’t diversified. 

---

It wasn’t spread out amongst enough stuff. So if we go back through history, we look back at the 1950s till now, we see that large U.S. stocks and large British stocks actually had about the same return. I mean almost identical. And you think, Wow, totally different countries, almost identical returns.

If we look at small U.S. stocks, small international stocks, identical. Well, not identical. International is a little bit higher returns, but very similar returns throughout history.

And you go, “Well, okay, so what about value companies?” Yeah, same thing. Same story.

Value companies, a little higher return for international versus their growth counterparts. And same thing with the U.S., a little higher returns for value versus U.S. And there’s a logical reason behind it. And this is the key is making sure that I own all of these things because since they don’t move in a similar fashion, if you have what has happened this week, which is the weakening — or so far this year, really — the weakening of the dollar versus other currencies, then it takes more dollars to buy things that are outside the United States.

So hence that’s the reason, and one of the reasons people think, Oh, why is it they think there’s some other reason that international has done better? But that is a big part of it right there.

Free Markets and Tariffs

One of the things that we talk about is markets and markets being free markets is something you’ll hear us say a lot. And what does that mean?

Matter of fact, there was one of the old producers on the station here. I walked in one day and I had this shirt on and it said, “I’m a free market kind of guy.” He goes, “I love you, all right?”

One of these guys is just really, really into economics and I had that shirt on. He goes, “Man, that’s fantastic.” And he’s going on and on. “Well, what does that mean?”

---

Well, that means that we have the ability to trade, that we have the ability as a consumer to buy what we want to buy. 

---

I always say that capitalism works because I have to keep your best interest first. If I’m not totally focused on what you need and what you want, then you are going to just go someplace else.

That’s just how it works. That’s free markets. Now, you can have things that disrupt free markets.

And the question here was: “Paul, good morning. I was wondering if you could talk about how free markets and tariffs can both exist. How do those two concepts coexist? I’ll be listening to the podcasts later this week. Thanks.”

So he’s talking about how we take the radio show, make it into a podcast so that you get daily doses, and this is something that you can go to the website, paulwinkler.com, and do. Okay, so great question. Really great question.

How can free markets and tariffs both exist? Now, the idea behind free markets is that we don’t have anything inhibiting the trade of things.

Now, anytime you have a tax, I don’t care what kind of tax it is, you are going to have some kind of friction in the system, as I like to call it. So the idea is that if I have some new tax that’s introduced, it’s a higher cost of doing business. And you think about it, your income tax is a cost of doing business.

Well, let me just use an attorney, for example, let’s say. If I have an attorney and that attorney is in a super, super high tax bracket, they’re in a 37% tax bracket, or maybe they live in a state where they have an income tax in that state, then they are competing against somebody that might be in a lower bracket.

And you might have an attorney that just hasn’t built their business enough and they might be in a lower tax bracket. And because of that, maybe the attorney in the lower tax bracket.

Now, you’re not going to get in the higher tax bracket if you don’t charge more, but if you don’t have a lot of customers, you might be able to charge less. And because you’re not paying those income taxes, think about that. You’re not paying the taxes and then you end up with the same take-home pay for that job that you did. Okay?

That’s an example of that. We might have to charge more to provide a service because of the tax.

The Effect of Taxes on Economic Activity

Now, if you have a state tax, it becomes even worse. Rex Sinquefield and Art Laffer actually did this work where they went all around the country. They went, literally, to cities, municipalities. They went to states and they were looking at taxes and how taxes affected behavior.

---

What they found is when you instituted taxes, you actually had a reduction in economic activity in those areas. It was hurtful.

---

So we don’t want a lot of taxes, we want to try to reduce that. And there’s been a lot of talk about where the taxes are supposed to go up at the end of this year, 2025.

Coming in and saying, “Hey, let’s maybe not raise the taxes. Let’s make the tax cuts of the past that were put in place several years ago. Let’s make them permanent.”

Or as permanent as we can make them. And it’s because it’s the recognition that taxes are a drag on the economy.

Now, what they found was that, let’s say, if you live in one state and you’re really, really close to another state, people might go buy groceries in another state because of the fact that they have a lower sales tax. So it’s not that you can’t have free markets, but free markets are disrupted when you have taxes like that. So all of a sudden what happens is if you are a company that builds something and then you need certain products like tires or you need computers, or you need chips, or you need metal, or you need whatever, copper or whatever, maybe you’re going to have to change suppliers for those things.

And when you change suppliers, it can be a pain in the neck. It can be disruptive. So a tariff and free markets can definitely coexist. No question about it.

It just can make them less efficient. And that’s the issue. That’s really what people are talking about is are we going to have efficiency issues? But if everybody is subject to them, if everybody is subject to those taxes, then it makes it more of a fair game and everybody is having to deal with it.

So if you have two companies that build the same product and they both change suppliers, now you have a situation where they’re both dealing with the same thing. So it’s not like it’s an unfair situation.

Now, gas taxes are another example. That can change behavior. If we have a new tax on gas, then maybe people won’t travel as much. Now, what has been happening recently, that’s an interesting topic in and of itself, where you have the OPEC nations actually increasing output.

I was wondering why the gas prices and why oil prices have been coming down. Is there something else going on? And lo and behold, what it is, is the OPEC nations have been increasing output.

It also could be because economic activity could be slowing. That’d be another reason that might happen.

So the whole idea of free markets — just to finish this question, and it’s a great question — it’s a continuum. You can have super, super free markets and then you can have semi-free markets is the idea.

The 10% Tariff

So if we look around the world, we notice that — and this is something I talked about in this video on Wednesday that was ill-timed — if you look at the United States and the level of freedom, in other words, the level of tariffs that we charge on goods coming in versus other countries around the world, we were number two. Japan was number one, we were number two.

But in some instances, we were number one. And the point that was being made by one of the commentators on one of the financial channels is why aren’t we number 10 or number 20?

I mean, why is it that we have to be number one in having the lowest trade barriers? And there are a lot of people who say, “Well, the reason being is that the lower your trade barriers, the lower the cost of goods coming in and you can spend your time focusing on other things.”

---

But there are certain products that we don’t necessarily want to have delegated to other countries around the world.

---

So that’s really what it gets down to. Now, the question gets asked is are we going to be dealing with what’s going to be happening as far as these tariffs?

Where are we going to land? Are the tariffs permanent? Are we going to have a certain level?

And in the video on Wednesday, I talked about a 10% tariff. Now, here’s something that was talked about on one of the financial channels regarding it.

Joe Kernen: So, Kevin, you add the 10%, the tariffs on Canada and Mexico and you add in China, and these are still the highest tariff rates I think we’ve had people say since Smoot-Hawley. So is that permanent? Is this now … We heard the other things are going to be permanent. It’s hard to really gauge what’s real and what is sort of more posturing, but do you expect this —

PW: Yeah. Are we going to be dealing with these tariffs forever? That’s the question. Is it going to be that high? What’s going on as far as negotiations go? And they continue on.

JK: — just to be a permanent situation, or this is fluid as well?

Kevin Hassett: I think everybody expects that the 10% baseline tariff is going to be the baseline and that it’s going to take some kind of extraordinary deal for the president to go below there.

Will Taxes Be Higher in the Future?

PW: Now, why does that matter? Well, a lot of people are running around, and I’ve talked about this, telling financial advisors, telling people, “Hey, go and convert your IRA to a Roth IRA. Pay taxes on it right now because tax rates are only going up in the future.”

And one of the points that I’ve made is you might have a consumption tax, you might have some kind of a national sales tax, you might have a tariff that replaces some income from income taxes from the past, and therefore you may have a situation where you’ve converted a Roth IRA. And I’m not saying don’t do that, that it doesn’t make sense. In many circumstances it does.

But you have to be super careful about being overly zealous. I’ve seen there was one proposal that came in from another financial firm telling a person to convert a $900,000 IRA to a Roth IRA. Well, $900,000 Roth conversion to a Roth IRA, that is going to be a huge tax.

---

Now the question is, “Will the taxes be higher in the future?” You don’t know that. Especially if you have a change in how taxes are raised in the future. 

---

And that is something that this whole Smoot-Hawley thing, which was the tariff back in the 1930s during the Great Depression, that was something that Jeremy Siegel from Wharton, the Wharton professor, was actually talking about as well.

Jeremy Siegel: Actually, interestingly enough, with the 125% tariff on China, the 10% blanket tariff, the average tariff actually went up yesterday with the raise in China, and JP Morgan calculated at 23%, which right now is higher than the Smoot-Hawley tariff.

PW: So he’s sounding a little frazzled right there. But I guess at 5:00 in the morning when you’re doing an interview, it’s kind of hard to pull yourself together.

But he’s saying, “Hey, this is really, really high.” And I want you to just catch kind of the anxiety in the voice when you’re listening to this, and then how that translates to what investors are doing.

JS: So we’re not out of the woods on the tariff. I mean, we’ll see what gets negotiated. It definitely will have to be negotiation with China. I don’t know whether Trump holds as many cards as he thinks he holds on that, but I know that Trump will declare a victory. And by the way, it is good to the extent that he has 75 countries he will be negotiating with.

PW: Some positives.

Investor Shock

JS: But the shock of what happened, I don’t think you can get that out of consumers’ minds or investors’ minds for quite a while.

PW: I think that’s a really, really good point right there. So you can’t get that out of investors’ minds for a while.

Back in 1979, Businessweek had an article called “The Death of Equities,” and people had literally given up on stocks. That was the point that they made.

Now, the interesting thing is they were saying the same exact thing back then in the 1973, 1974 downturn in the stock market. The shock was so bad for people because the market went down 40%.

I mean, you talk about what’s been happening lately. It’s nothing compared to that. But they said the shock was so bad that people were literally declaring equities dead in 1979.

Now, mind you that the stock market had gone up in 1975, 1976, 1977, ’78 if you were diversified. Now, U.S. markets didn’t go up all of those years, but if you were diversified in an international, you went up all of those years.

And 1980. Well, that relates to this article that was written in ’79, so let me come back to ’79 and just stop there. The market had gone up all of those years.

Now, what did investors miss? What did they miss?

---

They missed huge upturns in the stock market because they couldn’t get over the shock of the ’73-’74 downturn. 

---

Now in the 1980s, of course, they were saying death of equities in 1979, you’d think, Well, don’t touch the stock market. Stay out of it. Don’t be a crazy person and jump back in. And you would’ve missed a 500% run-up in the S&P 500.

So you would have missed, oh, it was about a 700% run-up in international stocks during that next decade. So there’s a real risk of looking around and going, “Hey, what’s going on?” And as he’s talking about here, getting really, really psychologically damaged and making changes in your investment portfolio based on this kind of stuff.

Now, it’s not necessarily the average investor that is getting freaked out and changing things, it is the professional. And I have a whole host of audio here talking about what the professionals are saying you ought to be doing.

It’s scary when you listen to these people. And you may not be paying attention to your portfolio being managed by these huge mutual fund companies, but recognize that this is what happens. Matter of fact, there’s going to be more about that in the second hour.

We’re going to be talking about a big mutual fund company with one of the guys, Michael Dossier … Michael Sharpnack. That was a Freudian slip. Anyway, you like that?

Mason: I’m not letting you get away with that one.

PW: I don’t know if I’m going to get away with that. You’re not letting me get away with that. You went and hit the mute button, didn’t you?

Mason: Maybe, maybe.

PW: No, maybe you did.

Mason: You’re talking to static right now.

PW: Oh my gosh, that is so funny. All right. So I’ll tell you what, let’s take a quick break and be right back after this. You’re listening to “The Investor Coaching Show.” I get excited sometimes.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.