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Here are three things I am thinking about that are really only one thing, of course.

1) Why Tariffs are Bad.

I got back into making YouTube videos this weekend. This time I touched on tariffs, how they work, the many myths around them and why they’re bad.

This whole thing really blows my mind because this was never a controversial topic in economics. It might be one of the few things that Milton Friedman and Paul Krugman would have agreed on completely, despite their vast political differences. So it’s disappointing to see so much misinformation about it.

In this video I discuss how tariffs work and why 95%+ of economists think tariffs are bad. I try to clarify some of the confusion surrounding this topic and the bad narratives swirling. I hope you find it helpful. And yes, I apologize in advance if this sounds political. I can assure you it’s not. This is just one of the most empirically supported concepts in all of macroeconomics and it’s frustrating that, after 80 years of putting this idea to rest, it’s suddenly being revived. I saw someone online say that tariffs arise once every 80 years because it takes an entire generation to forget how terrible they are. I hope that’s not true, but it sure looks like it’s the case.

2) A Little Game Theory.

One thing that the administration doesn’t appear to have done here is any game theory around this topic. I think they thought that they could bully the rest of the world because we’re the biggest kid in the schoolyard. But as it turns out the other kids aren’t being so easily bullied and many of them are actually fighting back and hitting us pretty hard. And I am not sure how the administration can back down from this view now. In fact, they appear to be steadfast in their view that this is going to work in the long-run and that we all just need to endure a bit of short-term pain.

Anyhow, I am trying to assess the various ways this could all play out. My baseline view on the sheer size of these tariffs is that they’re almost certainly recessionary if they remain in place. So the question is how long will they remain in place and what would it take to get the White House to realize this is a bad policy? Well, it’s looking like a stock market decline isn’t going to convince them. And that’s probably the right call. The stock market overreacts sometimes. But what if the stock market stabilizes from here? That’s a good thing, right? I worry that it might embolden the White House and give them confidence that this isn’t really a big deal. And what could happen in that scenario is that global trade slows meaningfully, business uncertainty lingers and that ultimately starts this long slow bleed into the real economy over time. We start getting weaker and weaker employment reports, the unemployment rate jumps to 5%, 6%, 7% and then it becomes abundantly clear that this isn’t just hurting a bunch of rich stockholders, but is actually hurting the people the White House wants to help with this policy.

I sure hope I am wrong about that. And I hope we can all move past this self inflicted wound sooner than later because the longer this lasts the worse the economy will get.

3) How About that Countercyclical Indexing?

Okay, this isn’t really about tariffs, but it is related to the way tariffs have impacted my portfolio.

The Defined Duration strategy is a bucketing style strategy that implements a financial planning based asset-liability matching strategy. In short, it tries to quantify your expenses and liabilities over certain time horizons and then matches them to specific assets. I came up with it during Covid because the Covid crash scared me, primarily because I had an infant which made me realize I couldn’t afford to be as risky as I was being. After all, I had dependents now and their reliance on me created more short-term AND long-term cash flow needs than I could predict. I needed more certainty in my portfolio and after having gone thru the last few weeks I can’t tell you how powerful I think this approach actually is. I feel more behaviorally resilient to stock downturns than I ever have because I have near certainty over my ability to meet short-term expenses and liabilities thanks to the shorter duration buckets. It’s a very cool thing to implement and then live through when compared to the way I used to allocate assets in one big random blob of diversified things.

In theory you could bucket it out across a million time horizons, but for the sake of simplicity I like to bucket this out in 5 specific buckets (0-2 years, 2-5 years, 5-15 years, 15+ years & insurance if necessary). The short-term bucket is, ironically, the most active because it’s typically T-Bills maturing regularly. The next rung is intermediate bonds. But the 5-15 year bucket is the one I find the most intriguing because it is where our multi-asset instruments make the most sense. That is, something like 60/40 or any diversified stock/bond strategy ends up with a blended duration of something close to 10 years on average. 60/40 is about 12 years and so the reason I find this one the most intriguing is because it’s the one that is closest to what the average investor holds and also requires the most sophistication. After all, the bond buckets are just bonds of a certain duration and the 15+ year bucket is usually just stocks of some mix. But the reason the 5-15 year bucket is interesting is because it’s the one that’s most behaviorally difficult. After all, that weird time horizon is the one that’s kind of a gray area for most of us. You can’t be super short with it, you can’t be super long with it and you don’t want to be only bonds with it (because you have too much inflation risk over that time horizon).

Anyhow, I choose to use my Countercyclical Indexing strategy in this bucket because the countercyclical approach helps to throttle the risk in the stock piece a bit. In other words, if you defaulted to a 12 year duration via the 60/40 then you end up with an uncomfortably long duration because the stock piece dominates the volatility of the portfolio. If you want more certainty you have to tilt the duration shorter and the only way to do that is to either hold something very conservative like 40/60 or use an instrument that can tax efficiently move that 40/60 INSIDE OF ITSELF without tax implications, as the risks evolve over time.

And boy has that worked well this year. Of course, you get less upside on the way up, but you get more protection in the moments when you really need it. And it’s times like these where the behavioral robustness of your portfolio becomes most important. And that is, after all, why John Bogle used a countercyclical approach at times. It’s just a super sensible behavioral tool to help you stay the course in a multi-asset portfolio.

I live for these moments because these are the times where behavior really becomes magnified. I hope that some of my writing over the years about these time-based approaches has helped you build a little bit more of a robust portfolio so that moments like these don’t keep you up all night.

More By This Author:

How Did We Get Here?
Finding Certainty In A Sea Of Uncertainty
GDP Now, Tariffs, And Hedging