I was at a conference last week and a financial advisor asked me what I thought he should say when a client asked him what was so bad about tariffs.

It’s a fair question. Many people who instinctively believe in free trade would still have a hard time in clearly explaining the trouble with tariffs. And since tariffs are likely to be a big issue this week, with the president promising to impose postponed 25% tariffs on Mexico and Canada and a new, second 10% tariff on China as of March 4th, it seems like a good time to review the problem.

In December, the Census Bureau announced that the U.S. population had grown by nearly 1% in the year ended July 1st, 2024, marking the strongest annual gain since 2001[1]. Given this, it seems strange to be already talking about slowing population growth. However, the reality is that the gap between births and deaths is continuing to shrink, with almost all of our recent population growth coming from immigration. Going forward, if immigration is dramatically curtailed, overall population growth could turn negative by the middle of the next decade while the working-age population would immediately start to contract.

In the four weeks since he took office, the president has issued an extraordinary number of executive orders, while promising dramatic change across the full reach of the federal government. While these policy moves have broad political, geopolitical and social implications, for investors, the most important concern tariffs, immigration, the federal workforce and the federal budget.

The rapid pace of these moves, along with frequent reversals, court challenges and mixed signals on future policy actions, make it difficult for economists to assess their cumulative effects. Also important, and even harder to analyze, is the potential for policy uncertainty to delay business decisions. Much has been said about the potential for the new administration’s policies to add to inflation pressures. However, investors should also consider how these actions, and the uncertainty surrounding them, could slow economic growth.

For investors, Europe seems like a train in a station, perpetually gathering steam and loading up for a long-delayed journey, but clearly advertising only a modest pace when it gets under way. Such has been the case for the European economy and, even more so, for European equities for many years. This has, of course, been deeply frustrating for those investing in European stocks, which, while often producing OK returns, have underperformed U.S. stocks in 12 of the last 15 years.

On Saturday, the White House announced the imposition of heavy tariffs on goods exported from Mexico, Canada and China and all three nations announced their intention to retaliate. These tariffs threaten to raise prices and slow economic activity across all four countries. While the end game of this trade war remains very uncertain, it has the potential to impact bonds, stocks and exchange rates. For investors, regardless of the early market reaction, the reality of a trade war suggest the need for broad diversification including allocations to real assets and international assets.

This Wednesday, at 2:00 PM, the Federal Reserve will release a statement on monetary policy. It will, as usual, be a brief and colorless document and will look paler still in comparison to the more than 60 executive orders, proclamations and memoranda that have emanated from the White House in the first week of the President’s new term. However, the Fed’s statement and Jay Powell’s press conference could well be of equal importance to financial markets.

“Unsustainable!”

To quote Inigo Montoya: “You keep using that word. I do not think it means what you think it means”

For decades, journalists, economists, politicians, and central bankers have said that the U.S. federal debt is on an “unsustainable” path.  However, it has stayed on that path, climbing from a very manageable $3.3 trillion, or 31.5% of GDP, in fiscal 2001, to $28.3 trillion, or 98.2% of GDP in fiscal 2024.

In football, it’s always better, at the snap of the ball to disguise your intentions. Are you going to pass or run the ball? Is it a zone defense or man-to-man?  In business or in military maneuvers the same rule applies – keep them guessing.

However, in macro-economic management, it is better to make your plans clear.  That way businesses can feel more confident in hiring and investing, as can consumers when deciding to buy.  It is one of the reasons the Federal Reserve publishes a quarterly Summary of Economic Projections (or SEP) and so frequently repeats its determination to achieve 2% inflation. 

Over the holiday season, we got to spend some time with our very charming granddaughter and, as a bonus, I am now fully re-acquainted with all the verses of “The Wheels on the Bus”.

As we enter 2025, the American economy is rather like an old school bus – slow but steady, reliable and resilient. It generally moves forward. However, it is not invulnerable. The wheels of the bus are being pulled off the ground by ballooning asset prices. The new driver of the bus may or may not try some dangerous policy maneuvers. The wipers of the bus may be obscuring obstacles in the road ahead. And the people on the bus, instead of spreading out and sitting down, are all standing up, crowded to one side so that if something does go wrong, there could be significant injuries.

When testifying to the Senate Banking Committee back in 1987, the newly-appointed Fed Chairman, Alan Greenspan, provided some insight into his views on communication: “Since becoming a central banker”, he said, “I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”

His successors have generally tried to be more open with regard to both their opinions and their intentions. However, there are times, when the Fed will want to communicate to financial markets without piquing the interest of either the general public or the administration.