The policy is crystal clear. Listen to the messaging coming from Commerce Secretary Wilbur Ross, Director Larry Kudlow and Treasury Secretary Steven Mnuchin. These are competent managers tasked with executing directives. They and their staff have delivered deregulation and tax reform and are now focused on trade.
Their message is clear. They are going to keep ratcheting up tariffs until the eurozone and China come to the table. They care about the North American Free Trade Agreement (NAFTA) and the Asian trade protocol too, but these have been pushed to the back burner while they focus on the big dogs, China and Europe.
If you listen and believe the noise, this is economic suicide and will result in the end of the free world as we have known it.
So why has the market not corrected, and why have many stocks continued to hit all-time historic highs? Because the potential to equalize tariffs has such tremendous economic upside for the U.S. economy, investors are willing to put up with pain even if the chance of success is only 50 percent or less.
How much pain? A lot.
The markets know this is not going to happen overnight, but the upside is so enticing that it is willing to wait. Case in point: Trump recently remarked to German Chancellor Angela Merkel that he sees a lot more German cars driving around the U.S. than he sees American automobiles on the Autobahn.
Maybe the Germans got the message. They are rumored to be bringing a deal on auto tariffs between the two countries when they meet at the White House soon. This is proof that if you don’t ask, you don’t get. I am going to go long on the U.S. auto sector going into that dinner.
My bet is that the strategy is about to start to paying dividends — the equalization of trade tariffs. This is a move toward a more free and competitive trade between the two auto markets that we have not seen in decades. Investors and employees will benefit.
China is going to be far more complex, but I’m willing to wait and, for now, so is the market.
I never endorse politicians. You can’t win because you will always make 50 percent of the constituency unhappy. But I do watch and study policy. I have to because I have to put money to work in the market every day, and policy can have a tremendous impact on returns.
You never know what the market will do tomorrow, but you can manage risk. My best advice in these extraordinary times? Tune out the circus and focus on the policy that actually gets implemented. It's getting interesting.
