A trillion-dollar shift in trade policy is coming. Here’s what it means for your investments.
KEY TAKEAWAYS
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Tariff collections are soaring, but they’re being paid by U.S. companies—not foreign governments
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Tariffs act as a tax hike for corporations, reducing earnings and pressuring stock valuations
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Consumers bear part of the cost through higher prices—i.e., inflation
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The Fed may be forced to hold or hike rates longer due to supply-push inflation
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Tariffs are politically popular but economically inflationary and regressive
MY HOT TAKES
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Tariffs are corporate taxes in disguise
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Investors should focus on EPS and P/E—not headlines
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The Fed can’t fix inflation that comes from policy, not demand
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Consumers will pay more—whether they realize it or not
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This is a political game with your portfolio as collateral
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You can quote me: “The Treasury may be celebrating, but investors should be worried.”
POV. It’s going to be a happy Christmas for the Department of Homeland Security, and not for the reasons you think. Actually, the US Customs and Border Protection (CBP), which is part of DHS. Sounds very government-like (GL 🤣) doesn’t it? Actually, CBP, amongst other things, is tasked with collecting tariffs on behalf of the US Treasury, and the folks over there are probably going to need a bigger safe because they are going to be collecting a ton of cash if existing and proposed tariffs remain in effect.
The US Treasury has collected $152 billion in duties through last month, and estimates that it will collect some $300 in 2025. That is quite a bit of unexpected revenue for the Treasury. Assuming no changes, tariff revenues are projected to be between $2.1 and $2.5 trillion through 2035. Now–that is a number to write home about, isn’t it. Well… if you work for the Treasury and your only job is tallying up collections.
If that is your job, it hasn’t exactly been a great year so far. You see, the One Big Beautiful Bill Act was–amongst many other things–a big tax cut. Tax cuts are great for you and me as individuals, because it means more cash in our pockets. Who doesn’t want to pay less taxes, except maybe Warren Buffet, who is not exactly a good representation of the public at large. However tax cuts, for the Treasury, mean less revenue, and that is not a good thing, being that it has lots of bills to pay–around $7 trillion–including around $950 billion in interest expense alone. The Government does not take in enough revenue to pay the bills already, so a tax cut–equivialent to a pay cut–only exacerbates the situation. It increases the deficit, and the Government needs to borrow more money to keep the lights on in DC.
Can you see that this is setting up a discussion around Point of View, or POV? Let’s step back for a minute. I am not sure if you noticed, but some politicians have recently been touting how great it is that the Government has collected so much money from tariffs. Taken completely out of context and in a vacuum, it is certainly something to celebrate. You will notice that those tariff-collection fanboys always fail to mention where the revenue is coming from. Why? Because it is US companies who are writing the checks. US COMPANIES–not foreign governments or companies.
We need to be clear on this. If a US company buys a nut and bolt from just about anywhere other than the US, it will have to pay something on the order of 18% of its cost to the CBP starting a minute after midnight this Friday. Need some aluminum? Great, if you buy it from Canada, or anywhere else except the UK, you will pay a 50% tax? CBP projects that 2025 goods imports will total some $2.7 trillion. Most of it will be subject to a tax… paid by a US manufacturer or reseller. Let us be crystal clear: tariffs are a–not equivalent to–form of corporate taxation. From a company POV, new tariffs are a tax hike.
No matter what type of tax hike, income tax or other, a hike eats into corporate earnings. If no other action is taken by the company, its EPS will be less than it was prior to the tariff. P/E multiples used by many investors to value companies would be impacted by that decrease. The E (EPS) in the denominator will go down, and when that happens, the P/E multiple will go up making the company more expensive by that measure. It’s just math, silly. From an investor POV, your stocks will appear richer. Let’s be laughingly clear here. If the P/E goes up because the P in the numerator goes up, the same thing happens, but in this case the value of your stock has gone up! Investors like that! The other way? Not so much.
Let’s get back to the company. Companies are in business for one sole purpose: to maximize profit. That means, companies will seek to minimize expenses and maximize revenues. Taxes are like any other expense, and tariffs are like any other tax. If they go up, the company may be forced to act. In economic theory, that increased cost will be passed onto the consumer through a price hike. It is maximizing revenue because it cannot minimize the cost–it is mandatory–from the Government. That could be bad news for the consumer. The company may not be able to pass the entire expense on to the consumer if it is in a competitive market as it may lose customers to the competition, but the company WILL try to pass as much along to the consumer as they will tolerate. It is likely to be greater than 0%, but it may not be 100%. From a consumer’s POV, that is INFLATION. Yeah, that dirty, 9-letter word! Consumers are tired of paying more for things, and it is highly likely that they are going to be doing just that sometime soon.
You know who else doesn’t like when consumers are paying more for things? The Federal Reserve. From its POV, this is classic supply-push inflation! A VERY BIG part of the Fed’s job is to fight inflation. Tariffs cause inflation! The Fed can fight it by either keeping monetary conditions tight or by tightening them further. So far, it has chosen the former, thankfully. But that is bad news for folks who like to see further rate cuts. They may come sooner than expected, but only because of the decaying labor market.
Would you believe that there is still another POV for us to examine? It’s true, we still haven’t thought about the political strategists who hatched the tariff strategy. They are looking to level the field in global trade. It is true that many countries have taken advantage of the goodwill of the US. The US invests in foreign companies and also serves as the world's largest consumer. It is US-spent dollars that fill the coffers of foreign governments and companies. Why then, would those same foreign governments charge import tariffs on US exports? The short answer is that they want to protect their domestic industry from competition by US companies. A political strategist would seek to upend that system to advantage US companies. Using the same strategy as foreign governments, US import levies would make foreign goods more expensive and cause demand to shift to local companies. From the political strategist’s POV, tariffs are one of the most effective tools to shift power.
So, to sum it all up, tariffs mean different things to different entities. From the POV of the Treasury, it is a windfall revenue. From the POV of a company, it is a tax increase. From the POV of an investor, it diminishes the value of their investments. From the POV of the consumer, it means paying more for goods. From the POV of the Fed, it means inflation. From the POV of the political strategist, it is a win, demand for US goods increases. There is something we forgot to mention in this. If importers rush to shift supply chains to the US, their costs are likely to experience inflation. You know, increased demand for a limited and possibly inefficient supply.
Folks, at the end of the day, this is a big experiment, and you are going to hear everyone’s agenda, and each agenda will be self-serving, based on Point Of View. Your job, as investors, is to understand the facts. The facts about what will happen to your investments if tariffs go up from 2.5% (effective tariff at the start of 2025) to 18.3% (effective tariff rate at Friday, 12:01 AM). Please focus on the facts and don’t be wooed by agendas that are not aligned with your hard-earned savings–your POV.
YESTERDAY’S MARKETS
Stocks faltered yesterday as investors continued to reel over threatened tariffs on US trade partners. The services sector is losing momentum–almost collapsing–according to the latest ISM data.
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