Woe is Me!
- Matthew Ramer
- Apr 7
- 10 min read
Dear Clients & Friends,
This article was originally prepared a week ago, so the timing of this email given this weeks’ market deterioration may seem apropos, but the timing is coincidental.
In this article, we will discuss some of the more spicy parts of the current economic and political climate. Before we breach those topics, I wanted to make a comment about politics - or better yet, the lack of politics that will appear in this article.
Our readers have come to rely on MOR Wealth management to provide impartial, straight-forward, fact-based information related to a variety of topics that affect your finances – including politics. But lately, anything related to politics may appear biased. So, before I begin, I want to reiterate that assessments, conclusions, and subsequent recommendations made herein are based solely on our opinion as it relates to investment portfolios and your long-term financial model.
This week’s market crash will be addressed at the end of the article, because the body of this article is absolutely necessary to read in order to understand our current thesis related to this decline.
Let’s dig in.
We’ve chosen 3 topics that we feel are the most significant to the current investment climate. They are: 1) Tariffs, 2) Immigration, and 3) Nationalism. You’re probably thinking, “How can you possibly leave politics out of those topics?” Well, watch how we do it…
Tariffs
A tariff is a duty, or tax, placed on a person or company who imports foreign goods. Many believe that tariffs are paid by a foreign exporter, or by a foreign country such as China. That is incorrect. Tariffs work like sales tax, and I’d like to use that as an analogy.
A sales tax is NOT assessed on the consumer by the government. While we all regularly see a sales tax line item on our receipts, WE do not pay sales tax directly to the government. We all file a federal income tax return, and many of us file state and/or local income tax returns. Real estate taxes and estate taxes are also regular tax debts we attend to. But as a consumer, you do not file a sales tax return - the vendor or seller files a sales tax return. In our daily lives, we’ve gotten so used to vendors passing along sales tax to us that we forget, from time to time, that after passing that tax to us, they then escrow that money, and eventually use that money to satisfy their sales tax obligation. That is how tariffs will work.
There are some larger companies who have arranged for the addition of a tariff line item on their sales receipts. But regardless of who will rearrange their sales process, there is no doubt that the lion’s share of the tariffs will be passed on to the consumer.
Therefore, the reality of the situation is that a whole lot of things that we buy will get a lot more expensive. (Confirmed this Thursday with the President’s most recent tariff announcements.) And for companies who choose to absorb some, or all, of the tariffs themselves, their profit margins will be reduced, which will create a drag on their stock price.
While tariffs are inflationary for foreign goods, there are two reasons why this will cause an inflationary spike on domestic goods as well.
First, the majority of Fortune 500 companies who build and/or sell domestic products source parts from other countries. Ford Motor has publicized that about half of their parts will be subject to the tariffs; thus, we would expect their prices (or cost of assembly) to increase by roughly 12.5% (which would be 50% of a 25% tariff). It is interesting to think that a classic, legacy, American company such as Ford could be so badly affected by “foreign policy.” But that’s the reality.
Secondly, the notion that people will flock to American-made competitors in order to circumnavigate the tariffs is true. But that’s like saying that a sports team won a game after only the first quarter has passed. If the cost of a foreign-made good increases, people will indeed move to domestic alternatives, but the simple law of supply and demand will cause the prices of domestic alternatives to rise as well. More demand with the same supply means prices go up. This is Economics 101. In the long run, American companies can build more plants, erect more factories, and create more supply. But that will take years, not days or weeks. So, the newly minted phrase “short-term pain for long-term gain” may indeed play out. But the pain is not likely to be short-lived. Maybe it will be better in the long run. Maybe not. But this will, at the very least, be mid-term pain for long-term gain. Many retirees who can withstand short-term pain may not be able to withstand mid-term pain.
It is reassuring to know that, given the level of wealth we specialize in, our clients can withstand mid-term pain. The question is: can the masses? Because contrary to popular belief, the wealthiest class does not drive the economy. Middle-income Americans make up the largest swath of our consumer-based national GDP. If middle-income Americans fail, so too will the entire economy and investment market.
As of Friday evening, the Dow is down nearly 4,000 points in 2 days following Trump signing additional tariffs into law.
Immigration
On average, undocumented immigrants occupy jobs paying roughly 40% less than the median US wage. Currently, the United States is very close to full employment: 96% is considered full employment and we are now at 95.8% (which is down slightly from 96.2% at the end of last year, but we’re still really close). Quite simply, no one in their right mind will leave a job paying $15 an hour for a job paying $7.25 an hour. Flat out, not gonna happen. Again, the law of supply and demand applies: if the supply of low-income employees evaporates, the only way to replace those workers is to incentivize their replacements with higher income. That’s called “wage inflation.” Wage inflation leads to higher corporate costs, lower profit margins, and a drag on corporate earnings. When corporate earnings fall, so too does the company’s stock value.
While I promised not to digress into traditional politics, we are very aware that our readers have come to trust our ability to differentiate between fact and fiction. There is a large misunderstanding related to undocumented immigrants that I’d like to debunk.
There is only one state in the US that formally and directly correlates its criminal records to immigration status, and that’s Texas. During a 10-year independent study commissioned by the state of Texas, it was found that undocumented immigrants have a 20% lower instance of committing a violent crime per capita than native born citizens. Sociologists have written extensively about why this is the case, and their hypothesis is pretty simple: undocumented immigrants, for the most part, want to stay out of trouble so they don’t get deported.
It is estimated that the Trump administration’s current deportation policy will cost the American taxpayer between $600 billion and $1 trillion over the next 10 years. (*American Immigration Council, Penn Wharton Budget Model, Migration Policy Institute.) For reference, Elon Musk’s DOGE hopes to cut $2 trillion from the national budget, and the cost of their deportation policy is roughly one third to one half of that total.
Nationalism
Economists often talk about “free trade” and the benefits of “globalizing” the world economy. This isn’t just to be kind and welcoming. Free trade is absolutely necessary in order to fully maximize the efficiencies and minimize inefficiencies of the global workforce over a variety of metrics. These metrics include, but are not limited to, climate (agriculture), cost of labor (manufacturing), proximity to natural resources (mining), water supply (high technology), local education quality (research), and the list goes on and on.
Allow me to give you a simplistic fictional example that outlines this concept.
Let’s pretend that the cost of growing one orange in the warm climate of Florida is $1, but the cost is $2 in the colder climate of Ontario. Let’s also pretend that it costs $1 to manufacture an ice cube in Ontario where it’s cold, and $2 in Florida where it’s hot. Lastly, let’s pretend that it costs $0.25 to ship either item between these two regions.
Without free trade between the US and Canada, it would cost $3 for one of each item in both places. However, with free trade, residents in both places could have one of each for $2.25: they’d pay $1 for each item plus the cost of shipping one of the two.
Again, free trade is less about welcoming our neighbors and more about exploiting the efficiencies of various economies and geographic realities. Thus, without free trade, the cost of total consumption is higher for everyone. I hate to sound like a broken record, but this isn’t complex. This is Economics 101.
Historically, tariffs have been used to punish foreign governments under the presumption that their pain will be worse than ours, or under the expectation that a population is willing to endure its own pain for a greater cause. The best use-cases have involved war time. However, there have been times when a government has imposed tariffs for other reasons, such as unfair trade practices – which is what the White House currently claims.
In order to make their case, the White House has released an equation that they’ve created to measure and implement retaliatory tariffs (or “reciprocal tariffs”), which we have pasted below. We’ve also taken the time to clarify the equation, as I’m certain most people don’t know what the variables stand for. Please pay careful attention to the numerator (the number above the line in a common fraction).
As you can see, this equation suggests that our new tariffs should neutralize the trade deficit. Nowhere in this equation is any reference to tariffs currently placed on the US.
We Americans import more than we export. That’s called a trade deficit and is notable because we buy more foreign products than foreigners buy from us. That reality is common among developed nations but has nothing to do with tariffs. The definition of “reciprocal tariffs” is: tariffs placed on imports from another country that are equal or greater to the tariffs that the second country imposes on the first country's exports. A trade deficit or surplus is not a tariff. I think it’s important to remember from hereon, that the White House’s stated math used to define tariffs we are “retaliating” against, have no mention of said tariffs. As financial counsel for 160 families, this is truly unsettling. Furthermore, we believe the White House didn’t really use this equation, because if Heard Island doesn’t have any imports, the denominator would have been zero resulting is a 0% reciprocal tariff of a colony of penguins.
As it turns out, the primary cause of our trade deficit is the higher cost of labor and manufacturing compared to most foreign nations (particularly undeveloped countries). That’s not necessarily a bad thing, by the way. Services and innovation in America is far more robust than most undeveloped nations. So, while anyone would prefer a trade surplus, a trade deficit is not necessarily a red flag like a budget deficit is.
[late addition] On Sunday, The White House said that China has to fix their surplus problem. That’s like a football team saying that its unfair that their opponent is better than they are, and the opposing team should wear ankle weights or the game is unfair, and we’re going to declare ourselves the de facto winner.
There is one possible good outcome of this tariff war. Futures now suggest that traders anticipate that the Fed will lower rates at least 4 times in order to bail out the US economy from a recession. On the other hand, it is alarming that news sources such as CNBC are using the term “bail out.” Whether or not that media vernacular is warranted is anybody’s guess.
Portfolios
Since Trump’s inauguration, most clients have moved from the top end of their risk profile to the bottom. For example, if a moderate portfolio usually has 60-75% “risk-on” assets, and 25-40% “risk-off” assets, we’ve moved them back to 60%. For reference, most moderate clients were at 75% a year ago because we went dip-buying during the last market crash of 2022. So, a decrease in risk has occurred. But we’re not bailing out of the markets.
As of late last year, we shifted a relatively large portion of client portfolios out of the domestic markets into the foreign markets. Foreign developed markets have outperformed the US by over 13% year to date. Unfortunately, over the last two days, that outperformance has turned from “better” to “less bad.”
Most of you have been with us through at least one recession, and some of you have been with us through several. The 2001 tech crash, the 2008 collapse of the banking system, 2020’s COVID pandemic, etc. Discipline is critical at these moments. Almost everyone following our guidance has enough “risk-off” assets in their portfolio to carry them for several years. (If you’ve elected to depart from that guidance, we discuss it on a regular basis for safety’s sake.) For the lion’s share of our clients, when we send distributions during market declines, we are taking money from the risk-off bucket that should not decline with the stock market. Diversification is not only for the sake of spreading risk around. It’s also utilized to be sure that your liquidity is suitable to withstand a deep recession.
I can also assure you that, no matter the reason or cause of the current market decline, we will end up in a recession before I retire – 3, in fact. This is because recessions are an expected predicament of the investment journey. Whether or not we end up in recession this year, next year, or next decade, it will happen. Again and again, at least once every decade. Prior to the 1920s recessions occurred roughly twice every 10 years. Since the 80s, they are a little less frequent, occurring roughly once per decade, but the fact is that recessions are a matter of course.
Remember this: what goes down must come up (unless we’re expecting the end of global capitalism, which we are not). That’s why discipline is so important. Gravity might suggest otherwise, but gravity is a physical science, whereas this is economic science.
In Conclusion
Folks, we’ve intentionally left out any and all references to social, religious, ethical, and environmental opinions related to the topics at hand (although we can assure you that we hold strong opinions about these topics). It’s important to keep in mind that the following observations are that of the CEO of a private wealth management firm, and our conclusions are derived from our background in economics. Over the last two months:
• Employment is down
• Taxes (in the form of tariffs) are up
• Inflation is up
• The market is down, a lot!
These are not good metrics. The Trump administration’s expectation is that this pain will be short lived. Time will tell.
I wish all of you a peaceful weekend. At least the markets are closed for the next two days. LOL.
-Matt & your never-sleeping safety-crew at MORWM
Advisory services offered through Commonwealth Financial Network®, a Registered Investment Adviser. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.