SKEPTIC’S GUIDE TO INVESTING
Straight Talk for All, Nonsense for None
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Your Hosts - Meet Steve Davenport, CFA and Clem Miller, CFA as they discus the latest in news, markets and investments. They each bring over 25 years in the investment industry to their discussions. Steve brings a domestic stock and quantitative emphasis, Clem has a more fundamental and international perspective. They hope to bring experience, honesty and humility to these podcasts. There are a lot of acronyms and financial terms which confuse more than they help. There are many entertainers versus analysts promoting get rich quick ideas. Let’s cut through the nonsense with straight talk!
Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
SKEPTIC’S GUIDE TO INVESTING
Steel, Aluminum, Wine and Trade Wars: Oh My!
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By repeatedly threatening, imposing, and withdrawing tariffs, the Trump Administration is creating uncertainty for businesses who depend on international trade.
The result is a sharp drop in the stock market, with additional declines likely.
In this episode, Steve and Clem explore how Trump’s trade policies are based on 19th century economic assumptions and fail to recognize that high tariffs can trigger depressions, as they did in the early 20th century. They also discuss how tariffs on steel and aluminum are legally premised on national security grounds!
Steve and Clem discuss inconsistencies in Administration objectives: Are tariffs meant to be a permanent revenue source or are they meant to be a geopolitical or geo-economic bargaining chip? They can’t be both!
Steve and Clem explore ways in which investors can protect themselves against tariff-generated volatility.
Straight Talk for All - Nonsense for None
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Hello everyone and welcome to Skeptic's Guide to Investing. Here we are, thursday, march 13th, and I'm here with Clem Miller and we're going to talk about the turmoil among tariffs and every day it seems like we go from 25 to 50 in tariffs levels. And then we talk about aluminum, we talk about steel, we talk about almost everything as being something that we should put a tariff on. And after you know much surprise, I learned that Glenn Miller's family was involved in the tariffs that were set over 100 years ago, in 1922. And his relative was named Fordney and it was called Fordney and another bill and he was the chairman of the House Ways and Means, and this bill went after farmers and equipment and helped cause the depression in the farming and agricultural community in the 20s, before Smoot-Hawley caused further depression in other industries. So we could basically look at the depression and say it was related to a Klum's family. They were a main part of creating it.
Speaker 1:So, thinking about that as your investment advisor, that's why you want to listen more to me and less to Clem, because you're leading us down a path to another depression. So besides that, I think it will be good for Clem to kind of put things in perspective as a member of a family that has a deep history around tariffs, to help us understand what are tariffs, why are tariffs effective, why are they not effective and how do we look at this turmoil as it affects our portfolios? I believe that you know, I've never been a big believer in autos. I've never been a big believer in steel. They're very tough industries. They've almost become commoditized to some degree. But I think it would be good for us to understand for our own portfolios where are there opportunities and where are people who are in those likely to go for replacement stocks? So, clint, do you think you're going to cause a depression in the next two to three years or do you think it will be longer term before the impact of your ideas will?
Speaker 2:destabilize the US economy. Destabilize the US economy. Let me step back, steve, and let's talk about a little bit about the history of tariffs and the time, long ago, when tariffs actually worked, worked. Uh, if you have, and you really have to go back to, uh, the 19th century, uh, and even the late 19th century with, uh, you know, president Trump's uh hero, uh, president, uh, william McKinley, and by going back then you know you're looking at a world where there was less global trade. It was a world before you had a lot of trade and commodities and trade in manufacturers. You had less in the way of manufacturers. This was a world before automobiles. It was a world where, you know, you had just established telecommunications capabilities around the world. It was a world where you didn't have container ships, much less computers, much less computers. And in that kind of environment where there was a lot of, you know, trade friction and a preference for domestic goods and inability. Really, you know lots of barriers, physical barriers, to being able to conduct international trade. You know tariffs actually worked very well. You could put up a tariff and it basically, you know, tipped preferences into domestic businesses. You know tariffs, you know looking back even a little further, you know, you can look back to Hamilton right and Hamilton Secretary of the Treasury. His idea was to build an industrial power in the United States and he used tariffs as part of his plan for doing that. He also used government capital expenditure to do that as well, but he looked at tariffs as a way to do that.
Speaker 2:But today, if you think about, you know, the post-war period, you think about, you know, global trade expansion. You think about containerization. You think about, you know, the use of computers to direct trade from one country to another. You talk about expansion of commodities, everybody being able to do optimization of pricing. You're talking about a world where tariffs are much less effective in achieving objectives such as reindustrialization, much less effective in achieving objectives such as re-industrialization.
Speaker 2:So it may be in in, uh, our president's mind that he can do what william mckinley did, or like, uh, you know, maybe my, my uh cousin long lost, uh, unruh, highly, highly distant cousin, um, joseph fordney tried to do in 1922, um, but you know, today it's a very different world and all tariffs do is create a lot of problems and confusion and um, and you know, just a lot of problems and confusion. In fact, I would argue that the biggest problem is for companies that are trying to do long-term strategic planning. And if a company can't, companies sit down. They do three to five year, seven year strategic plans and they build these around certain assumptions and scenarios. And if they can't rely on those scenarios because you've got external forces like tariffs, it causes a lot of havoc and companies can't operate effectively in that kind of uncertain environment.
Speaker 1:You think that what these tariffs will eventually do is force more unshoring, Because people will not want to have locations across the border where they'll have to deal with getting into the US, that the only real solution if you're a company is if I want to avoid these tariffs, I got to build it in the US. Is that possibly the logic for why we pursue this?
Speaker 2:Well, you know that's a stated objective, obviously, but think about it this way If you've got a capability already in the United States with capacity that's unused in the United States, sure that's possible. But if you don't have that, you actually need to build capacity in the United States in order to have operations in the United States, and that can take a year, two years, three years, five years, 10 years. It can take an awful long time to build capacity in the United States. I heard about Canada was.
Speaker 1:The aluminum trade is one of the dirtiest businesses and that's why we've left it in Canada. There's no, there's no smelting on aluminum capability in the U? S, so we don't get it from Canada. We can't turn a factory on that was shut last week. It's just that aluminum went a long time ago out of the US because it is such a dirty process.
Speaker 2:Right, and 80% of the value added in making aluminum is actually electricity added in making aluminum is actually electricity Because what happens is that you need to convert the bauxite into an intermediary product called alumina and alumina into the final product of aluminum. And in order to do all that, you need to have power. And that's why, over the last you know, four or five decades, a lot of aluminum production has moved into regions that have a lot of energy. So, for example, the Gulf states, where obviously you have a lot of energy, have built large aluminum manufacturing capability. It's not just that they wanted to build aluminum plants, it's that it was cost effective and they had a comparative advantage in terms of being able to provide cheap electricity to build aluminum, to manufacture aluminum.
Speaker 2:Um, but let's you know why you mentioned aluminum? Let me just mention something. You know why? Why is trump focusing on aluminum? Why is he focusing on steel?
Speaker 2:It's because there are laws on the books that give him authority to declare a national security emergency and allow for steel and aluminum tariffs. It's called Section 232. And Section 232 is a national security law and it arose from this notion that a country that the United States, in order to maintain a defense industrial base needed to have domestic steel and aluminum production, you know, for ships and aircraft, and so that allows the president to apply uh, to apply tariffs under his own authority without having to go to Congress for specific authorities to apply those. There's a separate kind of authority called Section 301 authority and what that does is that's more of the kinds of competitive authorities where if the Us finds that uh, that somebody else is dumping right, that you can have a countervailing tariff or countervailing duty uh against that that others. That's very narrow and specific and it's for a particular type of product and you know it's not a sweeping kind of uh of tariff that covers, you know, entire sectors.
Speaker 1:So couldn't the, the, the courts, strike down these tariffs, as there is no security at risk with canada? I mean, if the, if it's aluminum that's coming from canada isn't we don't have a shortage of it in our military and there's no, then how do we?
Speaker 2:I can't tell you. I can't tell you what the courts would do, but I think my guess would be that you know they would allow steel and aluminum tariffs. Uh, because they are. There's a clear law that says the president can make a national security determination. But on some of these other things, you know, if, if, if, if Trump were to to to have like 10% across the board tariffs or 20% across the board tariffs, I think those are potentially subject to court striking them down, because I don't think, I don't think necessarily the president has the authority to do that, not, not that I'm aware of, at least, Well, I just saw something come across the wire that I found to be very frightening, which was a proposal for 100 percent tariff on EU wine.
Speaker 1:Yeah, I don't know where you are with wine, but that's a lot of wine and that's a lot of tariff, and we don't need that kind of effect on our lives. To be taking my Beaujolais or my Chianti away from me, that seems kind of harsh, so I don't know. You can talk all you want about aluminum and steel, but once you touch my wine, I think you're dealing in a very dangerous slope.
Speaker 2:Well, I think, Steve, that that was aimed at the Democrats who sip European wines and helps protect the bud-swelling mega folks. Okay.
Speaker 1:I think it's a little frightening when you talk about national security for steel and aluminum, and I think the only reason to tariff wine is strictly symbolic. I mean, I think it's all about symbolism is strictly symbolic. I mean, I think it's all about symbolism, and I guess that's what I'd ask you is how much of these discussions or issues are just bluster or puffery and how much of it is. These are real things and real problems and we're going to straighten out the US trade deficit through this process. It's just a bump in the road towards a greater place. Paul Jay 007, md, phd, phd, phd, phd, phd, phd, phd, phd, phd, phd, phd, phd. Is it 80 percent puffering in negotiation and 20 percent real?
Speaker 2:Well, let me say this I think Trump believes it's real. I mean, this has been something he's been harping about for decades tariffs and I believe, I think he believes that high tariffs work. They worked for his hero, william McKinley over. High tariffs work. Uh, they worked for his hero, uh, william McKinley, uh, over a hundred years ago, and I think he thinks that you know they're going to work as they did for McKinley and not work the way it did. You know, uh related to uh, fortney McCumber and uh and Smoot-Hawley uh, which were proved to be disasters. So I do think he believes in that. Now here's the problem. Problem is, is that there are irreconcilable objectives with regard to tariffs. On the one hand you've heard this story I'm sure that if we have tariffs that are high enough, that it'll help control the deficit or help to pay for tax cuts or continuation of tax cuts. It's just a different revenue form, right? I'm sure you've heard that one.
Speaker 1:Yeah, it's all taken care of.
Speaker 2:Right, but that assumes, of course, that tariffs are persistent, large and persistent, but what we've seen in reality is that Trump is also using them, right as, or the threat of them, in order to bring about various objectives. You know some, not even having to do with economics, like, uh, you know political objectives, objectives regarding, um, you know, immigration, you know migration, um, you know these are objectives that you know. If you make, if you do a negotiation and tariffs are part of it, and you achieve what you want in the negotiation and withdraw the tariffs, that's not a persistent tariff that can be used for deficit reduction.
Speaker 2:No, I think that's what I'm trying to figure out.
Speaker 1:Are we doing this just for spite, to try to create a more level? I agree that perhaps the US has been more open than other markets and therefore has been taken advantage of for our openness. I think ultimately we benefit from lower priced goods and ultimately we don't want some of this smelting going on in the US for the aluminum. So there's a reason why it's done in Canada. They've got more energy available. They've got, you know, larger land and less issues with density, whereas if you put an aluminum facility in a dense area of America, it would be horrible for those people who live there. They can locate these facilities in ways that are accessible to the energy. So there is a reason for doing this and it has nothing to do with the price. It has everything to do with the visuals of what it means if we're hurting Canada and where that's one of their main products. I think aluminum has got to be one of the larger items in terms of the GDP of Canada. So I see why it's being done.
Speaker 1:But my question is is it really the economics or is it really just? You know, we're playing a game here where we keep slapping this, and that's why I bring up the wine. I mean obviously France. One of their main exports is wine and cheese and butter. And I look at this and say, boy, this is just like attacking the French, and I'm not sure. I guess, if we do all these things on our own and there is no coordination, aren't we less likely to be successful with this, and isn't it? Isn't there just going to be successful with this, and isn't it? Isn't there just going to be a reciprocal tariff put on some of our goods? Oh, of course that ultimately just neutralizes the benefit of the tariff and therefore we end up in a state where now we've got two more things with larger tariffs, and so our level of tariffing, if tariff affects.
Speaker 1:Let's say, the average American has an income of $65,000 and let's say their expenses are $60,000. I don't know if that's the way it works out. I think in the lower middle income it might be close to $65,000 and $65,000. But how much are these tariffs today and how much do you think they'll be tomorrow? It feels to me like they're probably four or five thousand and we're probably going to go to a place where they might be six or seven thousand. But I don't. I don't see us having a plan that says here's the biggest injustices and we're going to attack those first and we're going to do it in a way, and there just doesn't seem to be a rationale to which do we do first? And then, how do we make sure that the reciprocal tariffs? You know, maybe we don't send those semis to Canada, we send those semis to someone else who has a better record with us in terms of reciprocal tariffs?
Speaker 1:It feels like it's just another example of Canada is the 51st state and Greenland is going to be the 52nd, and the Panama Canal is going to become owned by the.
Speaker 2:US. I just saw an article today I think it might have been in the journal where somebody pointed out that there's a new portrait hanging in the Oval Office. It used to be, the new portrait, you know, under the first Trump administration, was Andrew Jackson. The new portrait, you know, under the first Trump administration, was Andrew Jackson, who you know kind of resonates with with certain people in the US. Now the portrait is James K Polk, and he's an otherwise unforgettable president, uh, but the one thing that history remembers him for is the fact that he basically engaged in the Mexican war.
Speaker 2:Us Mexican war took over a large chunk of Northern Mexico, uh, including what is now California, uh, arizona, new Mexico, parts of Colorado and Wyoming parts of Texas. Uh, and engaged in other uh, uh, uh, engaged in negotiation and expansion with, uh, with Canada, uh, in order to try to take over a good chunk of Canada. And he ended up with, you know, a 49th. You've heard of the 49th parallel. Uh, they ended up with the 49th parallel being the border, but at one point it was 54, 40 or bust. I don't know if you've heard that slogan. Yeah, 54, you know 54 is quite far north and uh, and you know, if that had been. If that had been the case, 54-40, most of where the current Canadian population is would be in the United States. So you know, I'm just waiting for Trump to say 54-40 or bust.
Speaker 1:I thought he had the picture of himself for the mugshot when he was arrested.
Speaker 2:That's outside of his office.
Speaker 1:Oh, okay, I hope they didn't take down that to put up the Polk picture, you know, I mean, I think they all established a certain feeling about the office, you know.
Speaker 2:Right, well, maybe they put a red hat on top of Polk, I don't know so we talked about Canada.
Speaker 1:We talked a little bit about French wines. What do you think about Mexico? And the person who seems to be no longer an issue is Xi in China. I don't know why we're not talking anymore about China as one of our major trading partners and we focus so much energy on Canada, when I thought the purpose of all this was for fentanyl and to prevent the fentanyl from getting into the U? S.
Speaker 2:So. So there is a theory, and I'm not, I'm not a hundred percent convinced that this is accurate, but there is this theory that that Trump is trying to create uh spheres of influence, uh, which is a you know, an old geopolitical uh concept, uh, where you know the U? S would be, uh, the big power in the western hemisphere, certainly in anything north of panama, right, but perhaps even the entire western hemisphere, where you know russia would control. You know, you're right, you know, let's put it, western eurasia, let's say, including parts of eastern europe, uh, where you've got Western Europe, maybe being its own sphere of influence, eu and UK, and then you've got China basically controlling large parts of Asia. I know that leaves out parts of the world. I mean, where does Japan fit? Where does India fit? Where does Australia fit? But you know, the general notion is that there are these, you know, spheres of influence which are, you know, u and this kind of corresponds.
Speaker 2:I don't know if you remember the book 1984, or read the book 1984, but there was this concept in the book 1984 where there were three great powers Oceania, eurasia and East Asia and that there was always a struggle, a war between two of those three, and then, sort of overnight, the warring parties would change. So you'd have all this propaganda of oceania versus eurasia, and then the next thing you would hear is that the fight is actually between oceania and east asia, and that propaganda would change overnight and people just couldn't figure it out. Um, you know the people who were being uh, hit with the propaganda, but you know but something similar is happening here Something similar-.
Speaker 1:Can you imagine the current administration read 1984, though, can you? No, that seems like a stretch of if you're counting on people reading a book in order to come up with a strategy. I think it's more like a cartoon would be better. Like, are there any cartoons that he could be basing his strategy on?
Speaker 2:So are we. I mean, isn't what's going on sort of cartoonish enough? I mean?
Speaker 1:I'm saying it looks to me like you're looking at a textbook and a classic in American literature. For the analogy and I'm saying, should we look towards Flash Gordon Thor?
Speaker 2:I mean the thing about 1984, it was a book about authoritarianism and you know, I think it's. You know, somebody, ok, is advising Trump on how to, how to you know, be a quasi-authoritarian, and I think one of those elements, or some of those elements, could be taken from 1984, including control of the media and this notion that you should always be involved in some kind of conflict.
Speaker 1:I kind of believe that that's what Russia is worried about is that if they stop for too long and there was peace, he would lose a lot of that urgency that Putin is trying to establish of their need to reestablish Russia in its native homeland. And I think that he would love to keep the chaos and I think that Trump admires that thirst for chaos because it makes him feel like maybe he will be more stable. I mean, I think the whole idea of martial law and the questions about whether we're being attacked like to base the tariffs on Canada on a regulation regarding national security.
Speaker 1:I haven't really thought about Canada and more of an adversarial, and I don't really think that their productions of aluminum are doing anything to hurt our national security. Right, I could be wrong.
Speaker 2:Yeah, I mean. The question is how dependent are we? Is US aircraft production on Canadian aluminum, aircraft production on Canadian aluminum? And it probably is very dependent because Canada is an ally, a NATO ally, of the United States.
Speaker 1:Yeah. But I guess I'd say well, are we short airplanes? Are we short Like? Is there a national shortage of military equipment that's made from aluminum? I guess maybe we've sent some of those planes over to the Ukraine and maybe we need more planes now. Maybe there is a bigger need here.
Speaker 1:But I guess I'd like to just take the last five minutes and just think about what do people who are investors need to take from the tariff discussion? A way that they can use in their portfolios to try to help them immunize against this, what I will call outlandish kind of behavior, because on one day we're going to 50% and then we've dropped that idea by the next day and if we continue with that, nobody is going to be able to live with that volatility. I think everybody wants to see nobody is going to be able to live with that volatility. I think everybody wants to see government, individuals, companies. They want to see some kind of calming or some kind of resolution so that we can invest for a longer time horizon without thinking about well, I can't buy this company because it's Mexican and they're going to be subject to more tariffs and we're going to not have the ability to regulate their earnings and their ultimate revenue right.
Speaker 2:So, steve, I think this is a period where investors have to kind of lay low, and by laying low I mean have relatively defensive portfol, um, low beta, more cash, um, in my case, uh, I've got a significant gold chunk, um. So I think I think that's what you have to do in this environment, and I know you know many of you uh may see, you know, you might see like three or four days of an up market in an otherwise downtrend and you might think, oh well, we've reached the bottom. You might be tempted to think that I'm not so sure about that. Um, it could be a while before, uh, this chaos goes away. I mean, if this were an, if I mean if this were a normal situation of a pullback without like a real, solid explanation, yeah, I mean you could look at three or four days as the beginning of a bounce back. But we know what's causing this turmoil, this chaos. We know what's doing it it's the tariffs, the uncertainty around the tariffs.
Speaker 1:Well, there's also profit-taking in AI.
Speaker 2:And, I think, the profit-taking in AI.
Speaker 1:I think AI went up probably too much.
Speaker 2:You think that's causing.
Speaker 1:No, I think it's a combination of factors. I'm just saying that if I was, you know, I think my advice to investors is to try to stay calm and try to make sure that they're positioned in a way that they could live with a 20 or 30% drought, because I believe that we're still got debt ceiling issues, we've still got extension of the tax cuts, we've still got some pretty major things on the table that aren't being resolved and don't seem like there is a coherent plan. It seems like a little bit of this, a little bit of that. We'll try talking about firing IRS agents so that will make it easier for people to file their taxes.
Speaker 1:It's just a kind of soup du jour of what's the industry or country that we're going to attack today, and I find that to be a little frightening. So, yes, I think there are reasons to own healthcare, there are reasons to own communication, there are reasons to own tech, and I think they just all need to be kind of modestly or reasonably allocated in your portfolios so that you're not exposed. I'd say you underweight steel, you underweight aluminum, you underweight autos, you underweight industrials, because they tend to be the bigger ticket items that will be affected by tax.
Speaker 2:Yeah, materials industrials consumer, discretionary I would underweight all those. Yeah, what? Industrials? Consumer discretionary I would underweight all those. Yeah, what about staples? Staples I would well see there's the problem. Right, there's a problem with staples. You have to pick those. You don't want to pick those companies that are too dependent on China right.
Speaker 1:I mean Starbucks is the example. I guess I would say Starbucks future depends on growth into China. Is the growth into China going to happen? Is it not going to happen? Is the economy in China too weak for it to happen?
Speaker 2:And what about Walmart's dependency on products from China?
Speaker 1:I kind of wonder where the Walmart and Target you know both come because they're both very, they are, by definition, importing goods across the border to satisfy US demand. So I kind of think that retail, which you know, if we look at a client, don't you think there's some, there's some people that say never buy the airlines, never buy autos, because they're just too much of a cycle, there's too much up and down and it's not always clear that they're tied as closely to the economy, because there's usually some type of a delay or some type of an offset. And I kind of think that when we look at our portfolios, energy looks like good value here. I think that energy is going to benefit, even though it hasn't yet and we haven't seen any Trump. And I think that technology is going to benefit Because I think that we are. You know, there's one part of America that even after this China deep seek, we realized that we do have a lot of companies here and things here that are going to benefit.
Speaker 2:So I think there's a lot to like in technology, except that right now it's getting cheaper. Well, it's gotten cheaper, no question about that. But it has high beta and so market goes down. They tend to go down further.
Speaker 1:I think that I think some of the names that are in tech, like a cisco or a glassware or you know, corning, you know, I think some of the names are pretty low multiples that weren't part of the ai. I think it's tech, non-ai that I would look at right now and look at some dividend yields. That's my recommendation.
Speaker 2:I've got Corning in my portfolio, yeah.
Speaker 1:And you might consider dividends someday, right? So I'm pretty much done with the tariff conversation because I think we might have beaten this. Done with the tariff conversation because I think we might have beaten this horse, the Fordney horse. We might have ridden on too long. So I'm going to say I'm recommending to people that we try to be thoughtful about what you own and try to avoid some of the things in the tariff space because I think it's going to go on for a while. Do you have any final comments?
Speaker 2:No, I think we've covered it adequately, and I don't think this will be the last time we talk about tariffs, steve.
Speaker 1:No, I don't think so Well either. So I think, it's good to look at where it's come from, look at where it's going and think about why and how it works today versus when McKinley and Polk were running around. So thanks everybody for listening. Please like and share us and let people know that you're listening and that we can help them with improving their investment IQ and helping making their lives and their financial wellness better. Thank you, everyone.
