The Trump administration has issued a flurry of proposals and pronouncements affecting trade, taxes, immigration, energy policy and more. What might these mean for the economy and financial markets moving forward? Plus, Peter and Jonathan share tips for teaching young children to value money and helping teenagers understand paycheck deductions.
Hosted by Creative Planning’s Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jonathan Clements: This is Jonathan Clements, Director of Financial Education for Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle. We’ve got a new administration in Washington, and policy proposals and pronouncements are coming out thick and fast with implications for trade, taxes, immigration, energy policy and more. Peter and I will leave listeners to debate the political merits of the government’s actions. Instead, our goal today is to tease out what this might mean for the economy and the financial markets.
Peter let’s start with a topic that’s been getting a lot of attention: tariffs. How do you think tariffs will impact the economy? Will it result in the higher inflation that many people expect?
Peter Mallouk: To talk about tariffs, Jonathan, I first want to talk about globalization, which sounds like a lot more complicated than it is. But the idea of globalization, which was the trend basically from World War II up until COVID, was the idea that capital would go wherever things could get done for the best value, where you could get what you needed at the best price. So instead of everything happening to happen in your backyard or even in your country, if Apple’s making a phone and 12 of the 100 parts are lower cost in China, they’re going to make those 12 parts in China. And if Ford is making a car and three of the parts cost less somewhere else, that’s what they’re going to do. And Canada’s the same and China’s the same. Basically, all the capital is going to get something done at the lowest price.
Now before we started talking about tariffs, COVID started to change this because from a national security standpoint and a supply chain standpoint, people realized, wait a second if I’m making a refrigerator with 100 parts and one of these parts is made in China, and because of COVID, I can’t get that part made and over to the United States and I can’t sell my refrigerator, that’s a problem. And so, the refrigerator company says, well, I’m going to start making these chips here. It’s going to cost more, but that way I control the supply chain. Now everyone’s not moving everything to their home country, but there was a trend towards that. From a national security standpoint, you really saw it.
For example, we got our chips in Taiwan and then we realized, wait a second, this is a big problem. And now the United States government is making a lot of them in Arizona and building plants here so we’re not dependent on foreign countries. Well, when you de -globalize, it’s inflationary because 100 % of the time when you bring something back to your country that you were doing somewhere else, it costs more because otherwise you would have never gone overseas to do it in the first place. Now, so much stuff still comes in from overseas that costs less to get overseas than from the United States, like an avocado from Mexico or energy from Canada or 10 million things from China. And what the current administration is doing is saying, look, we’re unhappy about certain things and we’re going to put a 25% tariff on what comes in here or 10% depending on which country we’re talking about, whether it’s energy or something else. Well, a tariff is another word for a tax. It is passed on to the consumer. This is unquestionable. I don’t understand anyone that debates this point. That’s what happens.
So, by definition, tariffs make everything cost more in the short run. The question becomes, what is the agenda? Is it about fentanyl, which we’re hearing a lot about from the administration that, hey, if Mexico and Canada secure the borders better around fentanyl, then we’re going to be more interested in removing these tariffs? Is it about making Canada become the 51st state? Is it about getting some other concessions from other countries? I think the answer is almost certainly yes. That’s what it really is about. Because when we impose tariffs on other countries and they impose tariffs on us, it’s actually war. It’s not military war, but it’s economic war. It’s just not good for anybody. Everybody loses in a world where everyone has tariffs on everybody else, unless that’s to get something. So, it’s possible for America to win here. It’s possible for everybody to win here. If a week from now or a month from now or six months from now, the current administration has gotten concessions. Let’s say there really is less fentanyl coming into the country. Let’s say the borders are more secure when it comes to drugs and illegal immigration. Let’s say that we get breaks on our goods going overseas. Well, then of course that would be better for the US economy. We’ve heard President Trump say a couple times now publicly, Americans are willing to put up with short term pains. So, he’s signaling, yes, something’s going to happen here, but there will be a resolution.
Jonathan Clements: So, you mentioned immigration and that’s the other big topic these days. Do you think that a crackdown on illegal immigration will help or hurt the US economy?
Peter Mallouk: I think immigration is a much more complicated issue. I mean, there’s this mythology that all of them are working in agriculture, which is not true. A small percentage are working in agriculture. But it’s also untrue that most of them are on government assistance and not contributing to society. The reality is most of the illegal immigrants are actually working and 100% of them are being paid less all in than if legal immigrants and other Americans were doing that work. So, when someone goes to a Home Depot parking lot and hires a bunch of people to go do the work, why are they doing that? They’re doing that so they don’t have to pay legal Americans more. When you really think about it, it’s exploitative, right? You’re going out of your way to get people for below market value.
So, on the one hand, first of all, if it’s just half a million move — and I’m only talking about the economic element here — there’s a big social element that’s beyond the scope of this. But economically, if the Trump administration deports half a million or a million, this is not going to economically change things. If it’s three million, five million, seven, of course it will. It will drive up prices because 100% of the people that were working will be replaced with people that are 100% of the time going to be paid more. Now there are other costs to society because a larger portion of illegal immigrants are on government assistance. It’s just a fact than legal immigrants and Americans. So, you have other issues. It’s like the tariff issues and economic issue just on paper. Yes, you take a bunch of illegal immigrants, you send them out of the United States. Of course, everything costs more, but there are a lot of other issues around it besides just the short-term economics that make that a little muddier.
Jonathan Clements: So, if we saw a spike in inflation, it would presumably impact the financial market. On the other hand, the new administration is set to be very pro-business, reducing regulations or possibly cutting the corporate income tax rate to 15%.
Overall, Peter, don’t you think that this should actually give a boost to share prices?
Peter Mallouk: Well, the corporate income tax part of your question is extremely easy. Just like in your household, if you pay a 30% tax and the tax goes to 20, just boom. The extra 10? It shows up in your pocket. With corporations, it’s that simple. That’s exactly what happens. If you take a corporate tax rate and you drop it 5 or 10%, that becomes profits. Stocks trade into multiple of profits. So, it’s good for stock owners, it’s good for private equity owners, it’s good for people that are partners in corporations. There’s no question about that. Where it becomes negative is if, as under the Biden administration or the prior Trump administration, the deficit goes up. Yes, in the short run, it’s great for everybody. In the long run, it’s much worse. The question becomes, if they have these tax breaks, is there an offset somewhere? Is the commission that Elon Musk is running going to find enough savings to keep the deficit from increasing when you cut corporate taxes? Or are they going to make up the tax somewhere else? If you really have a situation where the deficit is increasing because they’ve got other policies to control it, and you have a corporate tax cut in the short run, it’s good for the economy now and it’d be good for it later.
Same thing with an individual tax cut. If you cut taxes to zero on low-income households, but you don’t have the deficit go up because you have other policies in place, that’s obviously good for those households and it’s obviously good for the economy as well. So, the key is we have to look beyond just the cut and go, what else is going to happen?
On the regulation element, when you asked about what the impact would be on the economy for that, I like to use traffic as an example. Like if I’m going from point A to point B, I don’t want there to be no traffic lights. It’s probably not very safe. I don’t want there to be no speed limit. I don’t want everybody to go whatever they want and have some teenager drive by me at 140 miles an hour. I also don’t want 10 stop signs per block, right? So, you’re looking for that perfect amount that lets everything proceed safely, but everyone to get where they need to be. That’s what good regulation is supposed to do. It’s supposed to make aviation safer. It’s supposed to make the food safer. It’s supposed to make the drugs we use safer, the financial services, everything safer, but not get in the way of growth and people just doing the right thing every day with getting bogged down in paperwork.
Europe is a great example of an over-regulated society. And we see this new rule in place that for every regulation that’s imposed, there have to be 10 that get removed, according to the recent executive order. Of course, if you lower regulations, you increase profitability. If you tell a corporation you have to regulate yourself a little less here, well, you’re going to hire less people – you’re using less technology that flows through the consumer. The key is, can you do that without creating an unintended negative consequence of the reason you have regulations in place anyway, which is to protect, which would be the long-term cost?
Jonathan Clements: So, a week ago, Peter, when we were talking about today’s conversation, you mentioned the possibility that something could come out of the blue and radically change Washington’s focus, that we should be prepared for the unexpected. What were you thinking about when you said that?
Peter Mallouk: I think when you look at the big things that have happened over most presidents, it has been something completely and totally unexpected. So, we can talk about regulations and corporate taxes and immigration and tariffs. All of these things have short-term and long-term consequences, but there will always be something, whether it’s COVID or an ‘08 or ‘09 crisis or 9/11, usually negative, unfortunately, that comes out of nowhere and changes the entire agenda. And so, when we have these conversations, people often think, well, what should I do with my portfolio? All these things seem like they could be bullish. If you’re somebody who believes, oh, the tariffs are going to be short-term and we’re going to get concessions, regulations are going to be pulled back a little bit, but nothing that will harm safety. Corporate taxes will come down, but the deficit will come up. If you believe all those things, you become extremely bullish on the market. The issue is something is going to come out of nowhere. The market’s too dynamic. There is too much stuff going on. And you can be perfect on all of these things and get the wrong outcome in your portfolio. You need to have enough bonds to cover the next five to seven years, no matter what, to cover the unexpected. From then on out, am I bullish about equities, private equity, real estate stocks? Of course, you have very much so.
Jonathan Clements: It’s that time of the podcast. Time for your tip of the month. What have you got for me this month Peter?
Peter Mallouk: I’m going to talk about allowances. I remember when my daughter, she just went off to college, but when she was five, we gave her her first allowance. And just as we did with all our kids, it was five dollars. And every time we would go to Target, she’d stop at that little, they have these racks right when you walk in where everything’s a dollar. And it’s basically a lot of junk. And she would grab stuff and hold as much as she could in her hands. And there’d be this battle out we were going to let her buy. Well, the first time we gave her her five dollars, we went into Target just for our own. We were just running our own errands, and she went and grabbed a bunch of stuff and said, I want all this. I said, yeah, absolutely. You can have whatever you want. You’ve got your five dollars in your pocket. And she literally instantly just looked at her hands and put everything back. And it was the discernment. I mean, just the instant impact of like owning that was really powerful. It really gave me a lot of conviction around allowances. We did a dollar per year. If they’re 10 years old, you have ten dollars, but with inflation you might do more now. We didn’t tie it to chores. They should be doing that anyway. But I found it to be incredibly effective. What’s your tip of the month, Jonathan?
Jonathan Clements: Well, you were just saying, Peter, one of the things when I was raising my kids that I discovered was that as your story indicates, what you want to do is make your kids feel like they’re spending their own money rather than spending your money. And my great example of this was when my daughter was five or six and she went on her first school field trip. I gave her five dollars to spend at the museum gift shop or whatever it was. And she came back with a bunch of junk, and I was, of course, a little horrified. So, the next time I gave her the five dollars, but I said, if you don’t spend it, you can keep the money. And she came back with five dollars. What you want to do with the allowance, or any money is to make kids feel like they’re spending their own money, because that way they’ll be much more thoughtful. If they feel like they’re spending your money, they will, like any sensible individual, spend it freely.
So that brings me to my tip of the month, which also relates to children, but to teenage children. And what I would suggest as you try to educate them about money is to show them your pay stub. And so, they can see what your gross income is and then how much goes to federal taxes, how much goes to state taxes, how much you’re putting into your 401k or 403b plan, how much you’re putting towards social security payroll taxes, how much you’re putting towards health insurance. I think it’s a great way to get kids to realize how expensive life is and that when they go out into the workforce, whatever the salary is that they’re offered, that is not the money that they’re going to be free to spend every month or every two weeks, whatever it is.
So, Peter, that’s it for this month. This is Jonathan Clements, Director of Financial Education for Creative Planning. I’ve been talking to Peter Mallouk, President of the firm, and we are Down the Middle.
Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
