Imagine yourself at a blackjack table.
You place your bet. The dealer slides out the cards. You're dealt two eights. The dealer shows a 3—an inviting bust card. The book says split 'em, so you do. Your next cards come: a 9 and a 10. Now you're sitting on a 17 and an 18 with a very high probability of winning.
The rest of the table plays out. Just before the dealer moves to reveal the hole card…the rules change.
Suddenly, the bust limit is no longer 22, but moves up to 24 - giving the dealer a clear advantage.
You learn that every game at the casino is like this. You have to place your bet and take action before the rules are fully revealed. Sometimes they move in your favor. Sometimes they don’t.
This may sound outlandish, but this is happening - right now - to America’s capital markets.
In our casino example, think about how this would change behavior? Payout expectations may change. Strategy certainly would. If bettors can deduce the general boundaries of how rules move, the changes may be trivial. But there’s a limit to how large the changes can be before the games are literally unplayable.
In the span of the last week, the US administration went from no tariffs, to giant tariffs on the entire world (including the penguins), to upping the ante by implementing retaliatory tariffs, and back to no tariffs.
We don’t even know what the rules will be a week from now, much less 4 years from now, and even less beyond that.
In general tariffs aren’t great. We all know that - or at least learned it in the past month. But I have no problem with their tactical application. If we want to add some friction between us and another nation (like China), I think that’s fine. Maybe we want to foster relationships with other nations or even incentivize onshoring US manufacturing. The only way to accomplish that is to either penalize (through tariffs) the countries you don’t want to do business with or incentivize (through subsidies) countries you do. That’s all great.
The policy misstep is not making this law. Even if you’re going to attack the rest of the world with 30%+ tariffs (please don’t do this), at least set it in stone so that everyone knows the new rules.
The constant flux makes actual onshoring completely unpalatable. If I were a foreign manufacturer, even if I wanted to acquiesce by building production facilities in the U.S., how would I even begin to decide if that’s a worthwhile investment. What if I come to America, spend billions of dollars on a shoe factory, and the next administration reopens free trade? That capital was effectively lit on fire because I’ll never compete with cheap manufacturing abroad.
This doesn’t just stop at tariffs. The prior administration’s IRA bill took massive strides in incentivizing onshoring of EV manufacturing and other green initiatives by offering massive subsidies for battery cell and pack production, in particular. This was the ‘carrot’ approach. The current POTUS, while he hasn’t succeeded yet, has taken aim at repealing the IRA.
Whether you agree with the green ‘movement’ or not, the main thing that this accomplishes is actually lowering future investment and capex in America. If there’s a chance that the rules will change such that capex investments get blown up by the next administration (or the one after that), through reinstatement of free trade or policy reversal, required return on investment would be higher - payouts would need to be larger to justify the risk. Which means lower investment per unit of projected profit.
The math is simple. No spreadsheet will ever say “we should open up a t-shirt factory in America”. And even if you try it, what’s to say that it can even compete after the next election cycle.
If a capital project is worth a billion dollars, but is dependent on policy that has a marginal chance of being reversed, then it’s no longer worth a billion dollars, but much less than that. This makes some capital projects that would have otherwise been initiated, stalled endeavors.
Markets cheered the 90-day pause on April, 9th. I think the policy whipsaw actually does more harm to risk premiums and valuations than reasonable tariffs would have. We no longer know the rules.
Brilliant writing. The uncertainty in America’s current economy is definitely fueling a lot of unrest but I see the uncertainty as no more than an inevitable byproduct of the profound shifts introduced by the current administration. What troubles me more is how many people seem fixated on Trump’s rhetoric, while overlooking that (despite the instability) some of these policies do have merit. Ultimately, I think we’ve lost a sense of level-headedness, and in that void, panic has taken a hold on the masses. At this point, I honestly view the current stock prices as being on sale more than anything else. And who doesn't like a good sale?