Power Up Wealth podcast – Episode 91 – The Tide is Changing
Sharla Jessop 0:00
It seems the new administration is making good on its promise for big changes. I’m Sharla Jessop, President of Smedley Financial, and today, my guest, James Derrick, is going to share his perspective on how some of these changes will impact investors.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James, thanks for joining me today.
James Derrick 0:50
Happy to be here.
Sharla Jessop 0:51
James Derrick is our Chief Investment Strategist at Smedley Financial, and he has a CFA and MBA. James, there has been so much speculation and concern about changes that the President is making and implementing, specifically on tariffs. What type of a picture is this research that you’re finding painting?
James Derrick 1:09
Well, there are so many ways to think about it, and everyone is talking about tariffs specifically. I mean, there are other things we can get into, but let’s I mean, if we focus in on tariffs, there’s a lot to say, and it’s not even over. I mean, it’s only just begun. We’re two months into the presidency. I mean, plenty of time for future change, and it’s going to have an impact on investors as well. And I, before we get into that, I think it’s worth reminding everybody that it’s good to stick with your plan. To be anchored. I mean, let’s jump in. I mean, tariffs are a tool. They’re a tool that the nation is going to be using, whether you like it or not, it is the new normal for the next few years. First of all, it’s a tool for negotiation. I think that’s a good place to start. A lot of these tariffs are not even implemented. They get announced. And at least on Wall Street, investors are like, it’s not going to happen. It’s not going to happen, it’s not going to happen. And the President says, oh yeah, it’s going to happen. And then eventually the market reacts, and then world leaders start making phone calls to each other, and then they begin to negotiate. And with the negotiation, the tariffs are often postponed, and sometimes they’re done away with, or sometimes there are exceptions. Every one of these is just a political win, I think, for the President, and possibly has a good economic impact for Americans when they come to an agreement and can avoid the tariffs. That’s the tool perspective.
Sharla Jessop 2:28
So let’s bring it down to in your money moxie, you had a picture which was very telling of who a lot of the trade partners are with the US. Talk a little bit about that with our listeners.
James Derrick 2:39
When I first started hearing the news about tariffs with foreign countries. I was a little surprised that we went after Canada and Mexico first. I thought it would be China or some other country, but our biggest trade partners are Canada and Mexico. It makes sense our neighbors, and they are the first where tariffs were threatened. In Utah, our main trading partner is Mexico, and that’s typical for also Arizona, New Mexico, Texas, Louisiana, Mississippi and Alabama. And so what’s coming over the borders? Well, a lot of vehicle parts, vehicles themselves, cars, trucks, busses. The top three types of imports all deal with vehicles, and it’s interesting because there are special exceptions being made on the tariffs for vehicles, so the US auto manufacturers are getting these exceptions. And so it could be that most of these headlines just aren’t that big of a deal.
Sharla Jessop 3:36
So the impact on everyday person in America may not be as great as we anticipate it will be. If you’re thinking of buying a car, or if your car needs repairs, you might not be hit as hard as the initial thought of, oh my goodness. Let’s look at what they’re doing with tariffs from Mexico.
James Derrick 3:53
They’re doing 20% tariffs. Is everything I buy gonna be 20% more? And the answer is probably not. It’s not gonna be that bad. In addition to the exceptions being granted. Also Fidelity did this research into what has happened in the past with tariffs, and what they found was that 1/3 of the increase that actually took place through tariffs was passed on to consumers. So this is one of the big questions people have too. Like, well, how much is it going to impact us like and you hear this from the other side that doesn’t want the tariffs. They’ll say, Well, if we put on 20% tariff, everything’s going to cost 20% more. It’s the Americans that are going to have to pay for that. And that’s true, but it’s not true for the full 20% so Fidelity said it was 1/3/. The other 1/3 would approximately be absorbed by the company, meaning that their profit margins would come down, and then the final third would be gobbled up by changes in the currency, meaning that the US dollar could change in value, and that that would actually absorb a third of the increase. So it’s complicated, but it’s not all bad news.
Sharla Jessop 5:02
Well, that’s that’s promising just to hear that. I think that should give listeners a relief that maybe they won’t be hit as hard, especially after coming through some pretty high inflationary years. People are feeling just a little bit pinched.
James Derrick 5:14
People are very worried about inflation. And if, if I could just in touch on one other idea, and that is the idea of bringing manufacturing home. And we all know that less and less manufacturing has been done in the United States over the last 50 years, and this is a great thing because it’s brought down costs. The globalization has been fantastic for bringing down costs and boosting our standard of living, but it also makes us vulnerable, and this would be another argument in favor of some tariffs. And the ideas is just that the United States would be more self sufficient if we’re capable of manufacturing. And I think if you’re taking this point of view, getting closer with our trade partners in North America would actually be positive, you know, if you’re fearing World War, for example, then having your good friends close, like Mexico and Canada would be a very positive thing, and so, you know, that’s just another benefit that they could play out in the future.
Sharla Jessop 6:12
So we’ve talked about individuals and a little bit about the tariffs and individuals, but what kind of an impact do you think that’s going to have on the economy?
James Derrick 6:19
Well, nobody knows for sure. The general rule of thumb is that tariffs are bad for the economy, that they will raise prices and consumers will spend less. And I think that is most likely to play out in the short to medium term. I think that’s accurate. I mean, certainly like if I need to buy a car, and cars were 10% more money, like I might delay as long as you know, as long as I can. And I think that that’ll ring true for most people, for many, many products, but especially those big-ticket items. So I think it’ll have a slowing effect on the economy.
Sharla Jessop 6:54
We’re talking 2025 maybe even to 2026. It’s hard to tell is what I’m getting from you. We don’t really know a time frame.
James Derrick 7:02
Oh it is impossible to pin down. Because not only do we not know how the prices are going to change, we don’t even know from day to day whether the tariffs will ever even be implemented or not.
Sharla Jessop 7:12
I bring that up because, as an individual, and you’re trying to plan when you’re going to buy a next vehicle, and your vehicle is maybe at end of life. You’re probably pretty concerned about, am I going to be able to buy a vehicle this year? Is it going to be next year? When am I going to know what’s going to happen?
James Derrick 7:28
My personal advice there would be, if you need the car, you buy the car, and if you don’t, then you don’t and you try not to make decisions based on the tariffs. Large corporations may do that, and it may have an impact on them, but at the individual level, by and large, I would just say, try to ignore it. And it’s like I always say about homes, think of your home as a place to live, not as an investment. And I think that when you’re looking at buying a car, that you ought to do the same. We know they’re not great investments.
Sharla Jessop 7:58
Absolutely, those depreciating assets. Another thing changing off from tariffs, the other thing that’s impacting the economy, or could have a big impact, is the sun-setting tax law. The current tax law is set to sunset at the end of this year. What changes do you think we could expect to see?
James Derrick 8:14
So this is known as the TCJA. These are the tax cuts passed in 2017 that took effect in 2018. They are set to sunset. They will be over, and we revert back to the way things were. But it’s fully expected that they will be extended. The impact as an investor would be nil if we we take the status quo and we keep the status quo and so that should not have an impact on people’s money or their portfolios.
Sharla Jessop 8:46
More so on this, on their particular discretionary income.
James Derrick 8:50
Sure. Now, if it didn’t get extended, that has a huge impact. But the way investors look at it in the stock market and the bond market is that it would just be a continuation of the status quo. So not a big impact. I think the bigger question might be, how does the government continue to pay for it? Because, as we know, the deficit is large. The total debt level is incredibly huge, at $36 trillion so how do we pay for it? How do we pay for what we keep?
Sharla Jessop 9:21
We’re pretty much paying out what we’re bringing in at this point.
James Derrick 9:25
Well, we’re paying out more than we’ve been bringing in. We’ve been spending equivalent to what we would do in a recession. So typically what happens in a recession is, is that a lot of people lose their jobs, and income tax drops significantly. Corporate profits drop significantly, so they’re paying less tax, so the government’s bringing in less revenue, and at the same time, they want to increase spending so that they don’t get it stuck in a downward spiral. So the government tries to keep spending going, even though they’re bringing in a lot less money, and so the deficit balloons, the total debt increases. What has happened in the last couple of years is as we’ve been spending at those levels, even though tax revenues have not gone down much. And so the deficit is about 7.2% last I saw, so 7.2% of GDP, which is significant because the economy is only growing at about three so it’s big, and the administration says they want to bring it down, and that’s going to have an incredible impact on the economy. And we don’t know how quickly it’s going to happen. We don’t know the impact, but we know it’s going to be massive when it happens. And I think what we can hope for is that it is a gradual process. And even though it sounds like in the headlines, like there’s some emergency every single day and that everything is falling apart, I don’t think that’s reality. I think that it’s happening very gradually, and I hope that gradually continues.
Sharla Jessop 11:00
So there’s a lot of cogs in this wheel, and they’re moving at different speeds, and it’s really hard to see what the outcome is going to be. Probably the most prudent thing is to just understand that there’s going to be change and not be overwhelmed by it.
James Derrick 11:12
Yeah. Try not to focus wholly on it. It’s good to be aware of what’s going on, but you definitely don’t want to focus all of your energy on it, because I think it would be exhausting, and from an investment point of view, it’s not going to help make better decisions.
Sharla Jessop 11:27
It’s not in your control.
James Derrick 11:29
No, it’s not in your control. And nobody knows the future. We don’t know what’s going to happen with government spending or government borrowing. We don’t know what’s going to happen with deregulation, which is the last thing that I talk about in my article, and deregulation is generally seen as a positive, especially when you’re looking at it as an investor, very positive. We’re waiting to see what kind of deregulation takes place. We don’t know yet. I would say, for anybody who is concerned, give us a call. We’d be happy to talk it through. The main thing that I would say is you’ve got to have goals, you’ve got to have a strategy, and you need to stay focused on that.
Sharla Jessop 12:10
Very insightful information. James, thank you.
Shane Thomas 12:18
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Osaic Wealth, Inc., member FINRA/SIPC. Investment advisory services offered through Smedley Financial Services, Inc.® Osaic Wealth is separately owned, and other entities and/or marketing names, products, or services referenced here are independent of Osaic Wealth.
