Effective midnight last night, the United States unleashed a very strong reciprocal tariff program, targeting just about every country. The new tariffs have a baseline duty of 10% on foreign imports, along with significantly larger reciprocal tariffs, depending on trade deficits and tariffs on U.S. exports. While many financial events are overblown, this is a pretty big deal in my opinion, as these tariffs are much broader than the market was forecasting. Understandably, as the stock market over the short-term is a voting contest, the markets have tanked considerably.
While globalization has had some big benefits, as it has allowed us to import goods at lower prices and has improved the economic conditions in most countries, it has also greatly diminished U.S. manufacturing capacity. Just as bad, it has resulted in massive trade deficits, and along with profligate and inefficient government spending, U.S. debt is at catastrophic and unsustainable levels. Doing nothing is not an option.
Our country has been incurring trillions in debt buying foreign-made products for decades now. During WW2, it was imperative that the United States domestic manufacturers switch to war product production, which would be immensely challenging to do given the current status quo, as we are so reliant on Asian manufacturers, including China, particularly. We also can’t produce our own key pharmaceuticals domestically, which is another major risk. Many of our key manufacturing towns have been hollowed out, creating tragic conditions in once thriving cities.
With this argument laid out, how does it impact our investments? Firstly, I believe the current tariff levels are the starting point for negotiations. The best-case scenario is that our trade partners and the United States will have fruitful dialogue to agree upon a mutually beneficial relationship. I wouldn’t project these levels to last a whole year or longer for instance. This isn’t a sure thing, as there will be interests that want to stick it to us, as America is upsetting the globalization status quo that has made many of those same interests very rich. Ultimately, it’s in the best interests of everyone to come to the table and negotiate and while it may be rocky, I bet we will see that come to fruition sooner than later.
Secondly, we have been positioned extremely conservatively for a multitude of reasons, including a stock market bubble, egregious government debt and deficits, and we thought bonds and Reits offered better risk/rewards. Many of these investments actually will benefit from lower rates if we do indeed go into a technical recession, which I view to be a high probability event. While tariffs by themselves could have an inflationary impact, one must also factor in a significant decrease in consumption, which could actually lead to deflation in combination with a potential recession. 10-year Treasuries have been plummeting, which I believe gives credence to this argument. Given that we have to refinance trillions in debt, lower treasury yields are a necessity for better or worse.
Higher volatility has several major impacts. On the negative end, it increases the price of our previously sold options, causing short-term mark to market losses, which ultimately are irrelevant upon options expiration. This impacts options that are way out of the money, as well as options close to the money, so it is much more noise than anything. Conversely, the higher volatility creates the opportunity for us to capture those higher premiums as we sell new options, and the cheaper stock prices gives us a much larger margin of safety as we establish these new positions. Remember, we took profits on many of our largest positions at the end of 2024 and early 2025, so we are now able to buy back many of those positions at far cheaper levels once again as the market sells off. I view this as a very good scenario for our accounts long-term. When we feel like it is the right time, we can liquidate some of our very conservative short-term bonds and get more aggressive, which is a great position to be in.
I wouldn’t want to own the S&P 500 in the current environment, but I love what we own. The ability to sell options into this type of volatility is huge! I am in the process of selling my house after buying another, so I’m not particularly liquid until that sells, but if I was, I’d be adding aggressively. I tell you this because I always want to communicate with you as I’d want to be communicated to as an investor wearing your shoes.