• Cullen Roche
  • Discipline Funds
  • Why Tariffs Are Bad for the Economy (and You)
  • Finding Certainty in a Sea of Uncertainty
• Trump Announces 90-Day Pause on Tariff Proposal

Taylor Schulte:

Welcome to the State Wealthy Podcast. I’m your host, Taylor Schulte, and today I’m talking about the tariff-induced market mania that has consumed just about every news headline in recent days. Specifically, I’m joined by my friend Colin Roche, monetary economic expert and founder of discipline funds to discuss three important things with us today. Number one, how tariffs actually work and why economists across the political spectrum overwhelmingly agree that tariffs are bad. Number two, what the recent tariff proposal means for the economy and American consumers. And number three, what yesterday’s 90 day pause means for the markets going forward. We also discuss how retirement investors should approach their portfolios during this period of economic uncertainty and what changes are prudent for them to make to view the research supporting today’s episode and learn more about and his discipline based investment strategy .

I’ve started it and stopped and even trashed several client emails in the past week because every time I look up, there’s a new headline, rumor announcement, something that dramatically changes the market sentiment. And Colta today is no different. We’re recording this on Wednesday, April 9th, and President Trump just announced a 90 day pause on the tariffs, and now the market is ripping up 9%. So there’s a lot to unpack and discuss today. But first, just to set the stage for our listeners and ensure that we combat some of the common misconceptions. Would you mind just kicking us off by sharing at a basic level how do tariffs work?

Cullen Roche:

Sure, yeah. It’s crazy. If you had actually taken a nap on April 3rd and woken up today, which I actually wish I had done because I haven’t actually slept very much in the last six days. The stock market would’ve barely moved. You would’ve thought that maybe nothing had even happened, but in fact, we kind of mini crashed and now we crashed up. And so here we are, but at a very sort of basic operational level, the way a tariff works is really pretty simple. So we import a certain amount of quantities from China. So let’s actually put a concrete example on this. For instance, let’s just say there’s, there’s an Amazon shop that imports hats and they have some sort of operation in China that they partner with who makes all of the hats, and they have to, essentially, they’re buying these hats from China when they’re purchased.

And if the US government comes in and let’s just say they buy a batch of a hundred dollars worth of hats from China, if the US government comes in and says there’s going to be a 20% tariff on all Chinese imports, what happens is when those hats arrive at US customs, they’ll arrive on a ship or something like that or a plane. And what will happen is some firm like DHL or some shipping company, will send the US company an import invoice. And so in this case, it’ll be for 20 bucks. And the firm, the US firm, the domestic firm, whoever is intaking, the actual receipt of this shipment will be the one that is paying DHL for this shipment. And that fee ultimately gets passed on to the US government. So really at the simplest level, this is just a corporate tax. It’s a corporate tax imposed by the US government.

It’s applied to the US corporation. Corporations are virtually always the ones who are intaking the imports, except in very rare cases where it’s individuals or households or something like that. But for the most part, this is just a corporate tax. And so it’s the US government really coming in and just applying a corporate tax to imports here. And there’s some misconception over who is paying this. Donald Trump has repeatedly said that China will pay this. And there is a sort of shred of truth to that in the sense that there are very indirect ways that China could end up paying for it in terms of, gosh, well, if that firm were to move all of their operations to the USA, for instance, China pays for that, I guess in a sense that this will cost them something, or there are foreign exchange effects and other sort of indirect things.

But at a very basic fundamental level, the actual payment of this is just, it’s by the corporation. And the corporation will then have to wrangle with this new cost of their own. And typically what firms try to do is they pass that on. And one of the things I talk about a lot is that corporations don’t really pay taxes in any meaningful sense. And meaning that for the most part, firms try to always pass on taxes. And so when you slap a corporate tax on a corporation, they typically will just embed that into their margins. Corporations want to maintain their profit margins to maintain their profits, and so they’ll pass on a tax liability to either their consumers or if they end up not being able to pass it on, they’ll eat it. Somehow their margins will shrink, which means that shareholders will basically be eating the tax.

Or an even worse scenario is they’ll do what is probably happening a lot right now in that they will stop investing in their own firm. They’ll pause things, they’ll stop hiring people, they might even fire workers, they might reduce wages or they’ll just stop investing. And in that sort of sense, the firm is eating it to some degree, but they’re trying to sort of protect themselves from this cost by then hedging in certain ways where they’re essentially hedging with labor, which that’s the primary risk that corporations have is, and the primary way they manage their risks is through managing their labor force. And that’s kind of the way that unemployment and flows across time is really a function of how corporations are sort of managing their biggest cost and their balance sheet and income statements. So at a very basic level though, this is paid by the corporation and it’s a form of just a market intervention by the government in which they’re trying to sort of set prices to some degree and coerce corporations to behave in a certain way through this tax.

Taylor Schulte:

You’ve already alluded to some of the reasons why tariffs are bad, and I think what’s maybe most interesting, I dunno most interesting, but certainly interesting, this very divisive world we live in is that most investors, most economists, I think you said something like 95% of economists agree that tariffs are bad. So I definitely want to touch on a little bit more of these negative outcomes and maybe also why this topic has become so controversial. But before we go there more, what’s the intent of these widespread blanket tariffs imposed by the United? What is President Trump trying to accomplish through this tariff plan?

Cullen Roche:

Well, I think from his perspective, the free trade system has been bad for the United States. He thinks that it has caused us to lose a lot of manufacturing jobs. It’s caused the manufacturing sector to shrink. They tend to view the trade deficit as problematic. So they think that the trade deficit is, that’s essentially the amount of imports versus our exports. It’s negative in our case because we buy more from the rest of the world than we sell. And then if you look at this at a broader level, you can look at our foreign balance of payments is composed of two segments. Really, it’s the trade balance, which is really the balance of goods and services that go in and out. And then the current account deficit is the total amount, the total cost of everything, meaning that’s really the aggregate money that goes in and out, and that includes things like investment and whatnot.

And so from an aggregate level though, they think that because we’re sending more money out of the country, so our current account balance is negative, they think that that’s necessarily bad. It creates some sort of unsustainable financial position that is making us poor in the long run. And so the thinking here is that we need to reposition this in a way where we become more of a balanced trading partner with everybody from a current account balance perspective, and we try to bring back all of these jobs so that we can rebuild manufacturing domestically and sort of recoup these high paying jobs that were so abundant back in the say 1940s and 1950s. And that’s, I think, the basic gist of their thinking.

Taylor Schulte:

And what are the misconceptions you see in that line of thinking?

Cullen Roche:

I would say almost all of it. So there’s a lot to unpack in this, but I would say let’s start with the most basic one, which is the manufacturing argument that we need to bring back all of these jobs. So to put some data on this, since 1940 manufacturing as a percentage of total employment in the United States has fallen from about 40% down to 7.5% or so. And so on its face, this might look like a huge problem, but the reality about why that has occurred has less to do with, or almost nothing to do with free trade, I would argue, and much more to do with just the way that the United States has evolved as an economy over time. So back in the early 19 hundreds, we looked a lot more like an emerging market manufacturing economy, not dissimilar to the way that a lot of our foreign sort of Asian trading partners look today in terms of they were factory based manufacturing sort of companies.

We had a lot of people sitting in factories literally making stuff. And so we looked like this sort of developing emerging market economy in a lot of ways. And over the course of the last 80 years, we’ve just evolved away from that. We have grown into really the most dominant wealthiest tech and services economy in the world. And so although we technically lost manufacturing jobs over time, the reason that happened was really because of technology and services growth. The other sectors, the diversification in our economy just became so vast that manufacturing shrunk. And probably the most important element of all of this is that automation has just replaced the vast majority of these jobs. And so that’s really important to understand going forward because the likelihood that, I mean, when you look at this trend, this isn’t like something that happened in 1990 when we started implementing these sort of free trade deals.

So in 1993, we implement nafta, which was the North American Free Trade Agreement. China enters the World Trade Organization in, I think it was 1999. And before this, the trend in employment as a percentage of manufacturing relative to total, it had already crashed from 40% down to like 15% before any of these big trade deals were even implemented. And this is, I shouldn’t even say it crashed. This was just a super steady trend over the course of history. And that’s just indicative of something that is very fundamental in the change of the way the economy evolved over time. And so with it at 7% or so right now, and knowing that automation and AI are going to be the way that we evolve in the future, even Lutnick, the trade secretary has said all these jobs that come back, if they come back, it’s all going to be automated.

So even looking forward the idea that we’re going to bring back all these jobs and then have this huge factory boom or something like that, I think it’s a little bit naive. It’s a little bit backwards looking. It’s a little bit misunderstanding of what the US economy even is. And so I think that because the likelihood is really, I mean, in my estimation, I think that the percentage of manufacturing as a total is very likely to go down in the future because the robots are going to take over the remaining manufacturing jobs that we have in this country. And this is not a bad thing. This is a sign of progress of growth of the way the economy is evolving into lots of other things. There’s always these fears that robots and technology will destroy jobs. And the evidence is really the opposite, that people have to change jobs.

And that’s unfortunate in a lot of situations because you get people that have worked in places for a long time and companies fail and for whatever reason, and they have to shift and adapt and evolve. But that’s the way that the economy works. It’s difficult for a lot of people because the US economy is evolving faster than it ever has in large part because things are changing and AI is probably going to be a big disruptive change that continues to sort of impact a lot of this in an acute way. But so I think the manufacturing argument is sort of fundamentally, it’s a misunderstanding not only of the history, but the future of what is likely to transpire here. So I think the goal is, is noble, but the goal is unrealistic, I think. And then the other big one is this current account deficit problem.

This idea that the idea that we import a lot of cheap goods has somehow been bad for the United States. And I think the reality is that when you look at the United States objectively, despite all of the social problems that we have, and there are many that need to be solved, the economic problems that are being, I think promoted by certain people are just so vastly exaggerated. I mean, we’re the wealthiest economy in all of human history. Median wages have increased by 50% over the course of the last 75 or the last 50 years. So there’s this narrative that wages have been stagnant and that’s exaggerated. It usually uses the wrong inflation deflator, it usually uses incomplete compensation data. When you look at the total data, personal incomes for instance, it’s increased by 50%. So this is the real median wage, so the inflation adjusted median wage.

So our workers are paid a lot. We have low unemployment, almost record low unemployment, at least for now. And the median wealth of the American in today’s world on a global stage is in the top 10% of all global wealth. So by almost any metric, the United States, despite having vast inequality within the United States, the inequality between the United States and the rest of the world is vastly larger. So as at the average sort of person or even the median person in the United States is just incredibly wealthy. And that’s not to say that their inequality isn’t a problem at all, but I think there’s this narrative that the world has somehow sort of taken advantage of us. And the reality is that the three trade system was a system that it was built by us in large part for us and has benefited us the most of anybody. And so when you think of this in terms of a singular person, I like to use the example where the aggregate numbers are basically are roughly that we send out about a trillion dollars. That’s our current account deficit. So we send a thousand dollars abroad or a trillion dollars abroad, but our GDP is $30 trillion. And most importantly, the private sector total assets in the US economy are just unfathomably huge. It’s 250 trillion. The net worth of the private sector in aggregate is $160 trillion. So if you thought of this as a singular person, this person has $250,000 of assets, $160,000 net worth, they make $30,000 a year.

And they have convinced themselves that because they pay their barber who lives, let’s just say in Mexico, they pay him a thousand dollars a year, that person has convinced themselves that they’re on the verge of financial distress or something. I mean, when you put it in those terms and you think of it in the aggregate, it’s ludicrous. It’s really ludicrous. A large part of why we’re so rich is because we have outsourced what economists call our comparative advantage. We have, instead of taking our citizens who are tend to be well-educated and more service and tech oriented, we’ve given those people more of a common analogy for what the United States is, is we’re the front office of the world. So we kind of manage everything and a lot of the rest of the world is the factory workers that work for us to a large degree.

And that’s not true in total, but it’s a decent analogy for the way that the United States kind of operates now. And a big part of why we’re so rich is because we have outsourced this comparative advantage where we can focus on building technologies, building intellectual property, and doing a lot of the innovative creative things that Americans have tended to be very good at over the course of history. And that is accrued to us by through these huge profit margins, in part because of free trade that has allowed us to outsource these things and outsource our time and productivity and then benefit through the wealth. And the reversal of this is very disconcerting because this idea that we need to sort of crash the dollar to make things more equal and then potentially get rid of our reserve currency status and balanced trade is reversing a lot of the very things that made us wealthy in the first place. And so to me, a lot of this is just sort of, it’s an exaggeration of how bad the system has been for us. And then the solution of it is just implementing tariffs is just, even if this was a problem, the implementation of tariffs is just an especially bad way to solve a problem like that.

Taylor Schulte:

Setting aside the 90 day pause, which we’ll get to in a minute, let’s just assume these tariffs do go through as proposed. What is the, let’s call it the medium to longer term negative outcome of these tariffs. Obviously in the short term, the market has not liked it. We’ve seen the behavior of the market in recent days, but just so everyone can understand at least your opinion here, what is the medium to longer term negative outcome of these tariffs being imposed?

Cullen Roche:

It’s just a gigantic disruption of business activity. So it’s hard to know what is actually going to stick here. I mean, it sounds like based on today’s news that the baseline is going to be 10% for most countries, which is 10%, historically is still very, very high. And then they announced what 125% for China. And that one’s especially worrisome because China, on a trade weighted basis, today’s reversal, a lot of people called it a reversal. We reversed the tariffs against a lot of countries, but on a trade weighted basis, the increase against China, actually it almost balances out. It leaves us equal to where we were before because China’s just mean, China’s the big dog in all this. They’re the trading partner that really matters the most. And so in terms of the actual personal impact and the business impact, I mean, it’s gigantically disruptive.

And so what happens here is that firms just, they don’t know how to operate under this sort of an environment. They don’t know what their input costs are going to be. So all of their costs of goods sold are now going to be this uncertain number. And so like I said before, what’s probably going to happen here and what is happening here is that firms kind of put things on hold and they stop investing. And business investment is kind of the lifeblood of the entire economy. It’s the thing that drives innovation and employment and everything really. And that’s the main thing that makes the US economy. What it is really is that we are fabulous, fabulous business investors. And I don’t mean that from a stock allocation perspective. I mean that from a business spending perspective that we as an aggregated economy of businesses, we innovate and spend money incredibly wisely on things.

And that’s always been the thrust of the sort of ingenuity behind all of the American economy throughout history. And when we pause that and we stop because we just don’t know what we can do based on our costs, all of that dries up and that just at a minimum, it means that we stop sort of growing in that sense. And that has a humongous multiplier effect in the long run when these things all halt. And so I think that from a more specific perspective, I mean every business that imports things from China currently in the last couple of days, they started getting invoices. And these invoices are going to just be incredibly shocking to them because if you got a thousand dollars shipment of hats in, like I mentioned before, I mean a few days ago, it all added up. I mean, there’s so many tariffs now it’s almost hard to keep track of them all, but a few days ago it was 75%, so there was a $750 fee attached to that.

Now imagine being that person who runs a small business, you live in Wisconsin and you run this small hat business and you’re used to making these regular thousand dollars payments to bring in these hats, and then you’re able to sell all the hats for let’s just say $2,000 or whatever, and you have a thousand dollars net profit from all this. I’m using an overly simplified example, but just to keep the numbers really simple, all of a sudden what happened in the last few days is you now have an extra 7 55 or $750 cost in all of this. So now all of a sudden your net profit just fell at 250 bucks. So what are you going to do there? You have either source all of that domestically. Now, in which case, the likelihood of you finding a US company that’s making the same hats for anything close to that thousand dollars, probably zero, probably a lot more than heck, it might be more than $2,000.

So you have to either onshore everything or you have to eat a lot of it. You have to sit around and wait for hopefully all of this to change. It’s we’re talking about just an incredibly huge disruption. And these supply chains, I mean a hat supply chain is an incredibly simple one. The vast majority of businesses in this country are infinitely more complex than that, and they source their parts and materials from all sorts of different economies. And so now everybody is scrambling or just in this sort of freeze to figure out what are we going to do?

Are we just going to pay the Chinese this huge or pay for the Chinese imports to continue and pay the US government this huge fee, or are we going to try to source it here? Nobody knows. And so all this uncertainty just it starts to freeze up business, and that’s just in the short term, it’s really bad for the entire economy. And so the big question here is how long can this play out and how long can they stick to their guns on this the 90 day freeze? Gosh, in a lot of ways, I almost think it’s, I don’t want to say worse, but it’s not good because it’s 90 more days of just uncertainty of waiting for Donald Trump to wake up and decide how does he feel that day? And so nobody really knows where all of this is going. And I think that the China thing worries me because China is much, much more powerful than I think we’re giving them credit for.

And these are incredibly proud people. These are people that they will not be disrespected. And if anyone in this world doesn’t like to be disrespected, it is the Asian societies. And so when they see this sort of stuff, I think they look at this and they say, Hey, not only do you not have leverage over us, and this is a big, big part of this, is that a lot of these Asian companies, they can look at this and they can say, you know what? We don’t care if you do less business with us. We’ll take the profit margin hit. The Chinese economy has never, and you can see this in their stock market too, they’ve never been really hugely profit motivated to begin with. So whereas the United States is incredibly, incredibly sensitive to single digit profit margins, and so I think over time, I think the US economy is much more sensitive to all of this, and we just don’t have the leverage that I think Trump maybe thinks he has over them.

And so the whole Chinese thing is very, it’s very worrisome just because, I mean 125% is, I mean, it’s so big. It is the biggest tariff ever, especially on a trade weighted basis ever. It’s so much bigger than the Smoot-Hawley Tariff Act back during the Great Depression. And China is so crucial to all of our supply chains, and they know this. They know that. I mean, this is a trade, we call it trade because it’s a give and take. Nobody’s really taking advantage. I mean, these companies in the United States that do trade with China are, nobody put a gun to their head to make them do this. And so they’re getting something out of it, and the Chinese know they’re getting something out of it too. What this all does is we’re kind of just sinking each other’s boats here and hoping that somebody raises the white flag first and brings in the rescue vessel, and the timing over which that’s likely to occur is just such a huge unknown. And I suspect that the Chinese are going to come out and say, I wouldn’t be shocked if they come out on today’s Wednesday. I wouldn’t be shocked if they come out on Thursday or Friday and they say, you know what? Right back at you, 125% to you.

And they’re going to say, we will not be disrespected by you. We have vastly more people than you. We are your economic equal in almost every way. We are. Your military equal. You’re not the biggest kid in this school yard anymore. And they know that. So yeah, I don’t know. I think that a lot of this trying to bully China is worrisome. And then this whole thing, the thing that really kind of irks me about this too is that we’re lighting a lot of relationships on fire that never should have been on fire to begin with. I laugh at the way we’ve treated the Canadians during the course of all this because the Canadians are the nicest neighbor in the universe. Imagine living in a neighborhood where you live with a bunch of people that you kind of don’t like, but you have one next door neighbor who’s just fantastic.

You love them, and you just wake up one morning mad and you go over there and you kick their door down and you start screaming at them and you decide, you tell them you hate ’em. And it’s like, why that person? What did they do? So yeah, I think there’s a lot of bad things going on that are sort of knock-on effects here. And this is not even to mention that there were already a bunch of other bad things going on in the US economy, whether it be just the Fed already being relatively tight or the spending cuts at the government level, the stripping of a lot of the research at the school, the university level, a lot of this stuff has huge, huge multiplier effects, especially in the long run that these were already damaging to some degree. And all of this is just, it seems like seems a big own goal that was just completely unnecessary.

Taylor Schulte:

You mentioned being concerned about this 90 day pause that it’s going to just be 90 days of uncertainty here, and you’re not sure that it’s a good thing. I guess two things here. One, obviously the market doesn’t quite agree being up 9.5% markets really appreciates this 90 day pause, and maybe it’s just some short-term optimism and that’ll change in the coming days. But there’s also this argument too, to your comment earlier about these small businesses all of a sudden getting hit with this tax out of nowhere that they couldn’t plan for that this 90 day pause would give these businesses an opportunity to plan ahead, that things just happen too quickly, that it’s not that tariffs are necessarily bad or this plan was bad, it was just the timing and implementation of it, and these companies just need more time to plan for these proposed tariffs. So what do you say to that argument about just timing, implementation strategy?

Cullen Roche:

There’s truth to that. I don’t want to harp too much on the short-term moves of the market. I think you and me, you and your listeners all are probably wise enough to know that the daily generations of the market are sort of irrelevant in the long run. I think the market today probably just is probably relieved by the idea that he at least appears like he’s flexible on this, so he’s willing to move towards a more reasonable position. But at a baseline level, I mean even if you’re doing 10% tariffs with 125% on China, I mean it’s still a net drag on everything, and it’s still relative to where we were before. It’s just a tax on us corporations that in the minimum in the short term is incredibly disruptive and is a net negative in the short run for sure. So who knows where this is all going to be in the long run, but I think that for certain in the short term in aggregate, it’s all going to continue to be disruptive and uncertain even if the relative certainty has increased, he called the highest potential level and unfriendly tariff.

And so we’re back to what I guess he would call a friendly tariff now, but from the eyes of an economist though, all tariffs are unfriendly because all tariffs are, they’re all taxes on the domestic corporation that they at a really basic fundamental level, what they do is they impede competition. They impede consumer choice. And so by implementing the tariff, what you really end up doing is you end up reducing the competitive forces that are at work in the economy that drive prices down. And so it makes everybody worse off in the sense that you take out a competitor that might be able to pressure someone to lower their prices, and by making the domestic firm potentially better off, you make that firm better off, but you make everybody in the economy worse off because you’ve given them fewer choices, you’ve forced them to pay higher prices for a particular good.

So the classic example that I’ve used recently is Korea, where Korea will implement a tariff on US cars coming in. And what they’re doing is they’re protecting their domestic automakers. And what this does is it results in the domestic automaker in Korea being much more competitive with the handful of other Korean companies, but by basically locking out or making it harder for the American firm to compete, you’ve reduced the competitive forces in the market and you’ve reduced the number of options that the Korean consumers now have by making the cost of the US cars higher. And so the Koreans now, they might look at this and they might say, but see, look, we made our corporation better off. But in reality, although you made your one sector of the economy better off, you made all the other sectors of the economy worse off because now what consumers have to do is they have to spend more money on Korean cars, which means they have less of their income to spend on everything else.

So there’s less revenue going to all the other firms in the aggregate in the economy, which means less profit for them, less public investment from them, less employment from them. And so people will oftentimes look at these big Korean car makers and they’ll say, well, look at Kia or Hyundai or whoever it is, and they’ll say, look how great these companies have done. And that’s kind of the goal. It’s like, yeah, of course they did great. They did great at the expense of the rest of the economy. And you don’t see it. Milton Friedman famously referred to tariffs as the invisible tax because you don’t actually see the counterfactual where you don’t know that you’re worse off than you otherwise would be because you just see the effects of what actually happened. But the reality is, and you see it really in the United States for the most part, where one of the main reasons why we became this just incredibly wealthy diverse is because we imp government, I should just call it government price manipulation. That’s really what it is. It’s the government manipulating the price of certain things to try to benefit certain industries, and that makes everybody worse off in the aggregate, even if it makes a certain sector of the economy better

Taylor Schulte:

Off. Is it fair to summarize and say that the reduced competition helps companies but hurts consumers, and so all this ends up just kind of trickling down to the consumer and hurting the consumer at the end of the day?

Cullen Roche:

Exactly. Yeah, and it probably hurts companies in the long run too because it causes these sorts of short-term disruptions. It hurts certain companies and not others. So we run financial services firms. We’re not going to be impacted by any of this. So that’s the other thing that’s sort of weird about all of this is that the services firms that kind of dominate this economy are, to a large degree, they’re not going to be impacted by any of this, but it’s the companies that make real stuff, the literal manufacturing company that now have to wrangle with all the problems. And so weirdly, this ends up hurting the firms that they’re trying to help the most by imposing the costs on them. And the rest of us who aren’t in those sectors that are actually importing physical goods, we’re the ones who are most likely to be able to navigate this with some clarity and potentially even benefit from it in the long run because we won’t have to navigate those price increases and whatnot.

So it’s complex, but in the aggregate, the reason that you mentioned the study before from the American Economics Association, that 95% of economists reject tariffs, and it’s because the evidence is just, this one’s frustrating for me because the evidence on this is just, it’s so vast. There is so much research on this topic, and American economists have rejected this across the board. I mean, it’s probably the only thing that an economist like Milton Friedman and Paul Krugman would sit in a room and they would hug each other for 60 minutes talking about tariffs as they both agreed about every aspect of it for the most part. So

Taylor Schulte:

When they disagree about everything else,

Cullen Roche:

You disagree about everything else, but on this one, they will hug and love each other for as long as they talk about it because the evidence is just so abundantly clear. And it’s been clear across American history too. And so I mean, the evidence is just so clear that not only in sort acute situations that free trade has benefited us, but closing your trade to trading partners has been really bad throughout history. So I think this one’s especially frustrating for that reason.

It seems to be not only based on so many different narratives that I think are wrong, but also it’s just that even if the reserve currency status is a problem or you think that the trade deficit is a big problem or that we need a lot more manufacturing investment, I just think tariffs are such a bad way to go about it because of the sort of disruption that we’ve seen in the last few weeks. And there are vastly better ways to do this. I mean, if you wanted to bring the manufacturing sector back, well, why not put together a bill and do something where we actually invest in domestic manufacturing by giving them some government spending or try to work on ways to incentivize them. And even if it’s tax cuts or whatever it might be, I think there’s much better solutions for this than lighting a lot of our foreign relationships on fire and imposing corporate taxes that just create a huge amount of uncertainty and reduce competition.

Taylor Schulte:

Before we shift gears here and talk about what retirement savers should be doing and maybe what they shouldn’t be doing in response to all of this uncertainty, ask you maybe a tough question to answer at the moment, but I feel like we’ve been talking about a lot of the negative consequences of tariffs and why tariffs are bad. I’m just curious, is there anything in recent news headlines in the last week that you are optimistic about? Is there something that is optimistic that we can be positive about? Perhaps it’s some of the headlines today or the market reacting and being up 9.5%, but is there anything in here that we can be optimistic about?

Cullen Roche:

Oh yeah. I mean, I think the thing to be optimistic about is that I think that this can’t last for a super long time, and I know that that’s not necessarily reassuring for people who are in retirement and sort of having a more inherently short-term time horizon. But I think that the market moved very, very fast on this and they claimed that they didn’t react to the market. I find that a little hard to believe because the bond market, I mean, I was watching every tick of the bond market last night and it was weird. It was a little, I don’t know, I don’t get scared by market moves typically, but there was some stuff going on that it was strange. And so I find it hard to believe that anyone wasn’t sort of disturbed by what was going on. But I think that’s the most reassuring aspect of this is that I don’t think there’s any scenario in which this can last for, I don’t think this can possibly last in the 2026 because either you either get a scenario where Trump completely folds on all of it, or China potentially folds on all of it.

Or the sort of worst case scenario with all of it is that this actually continues, it drags out. You keep the 10% tariff in place even after the 90 days, China never relents. And what’s eventually going to happen is the unemployment rate is going to start going up. You’re going to start getting increasing earnings reports, you’re going to get CEOs continuing to come out. I mean, this next earning season is going to be, it’s going to be interesting because there is going to be a relentless parade of CEOs coming out and being like, we have no idea. We’re pulling our guidance. We do not know what is going on. We are not hiring anybody. So what’ll happen is if Trump sticks to his guns here, I think what happens is you end up getting a scenario where the economy softens labor reports will soften over time.

They potentially turn negative, the unemployment rate starts to tick higher, and CEOs will increasingly voice their displeasure with everything that’s going on. And over time, you’ll get this backlash where Trump will, he’ll either be forced to fold on this or the unemployment rate will go up enough where he will then see empirical evidence showing that, Hey, this is actually hurting the people that I expected it to help and I need to maybe try to save face as much as I can on all this. And so he either relents on it or the very, very worst case scenario is Congress has to come in and pass a bill that ultimately overrides all of this, and that would require two thirds vote in both. That’s kind of the worst case scenario where you have to get Congress to come in and intervention and intervene because he won’t.

And I don’t know, I don’t know how likely all that is. So I think that the potential, I mean, the thing is that this is going to be so disruptive to business investment in the next six months that the likelihood that you could keep this in place and last even six months without seeing a meaningful increase in the unemployment rate and start seeing real tangible evidence that this is hurting the economy in a really obvious way. I just don’t see that as a very likely scenario. So this is unlikely to last very long. So this is the sort of thing where if you’re able to take a six month nap, this might be a pretty good time to start getting some rest.

Taylor Schulte:

Yeah. Wouldn’t that be nice? I dunno when the last time you took a nap. I know you’ve got two little ones, but naps are few and far between in my household.

Cullen Roche:

Oh yeah. No, there’s no napping. There’s not a lot of tweaking at all.

Taylor Schulte:

No.

Well, to your comments there about this wide range of potential outcomes, we don’t know what’s going to happen. It is nice to hear you say, I’m sure it’s refreshing for a listener to hear you say that this likely isn’t going to last very long, but nonetheless, there’s uncertainty ahead. So let’s talk through some things that you think retirement savers should do and maybe even shouldn’t do in response to all of this uncertainty. I don’t know if you agree here, but a lot of times when there’s uncertainty in the markets or we see market corrections, a lot of us financial planners run with the stay focused on what you can control, ignore the noise, turn the news off. This just feels like one of those situations where it’s just hard to say that it’s hard to just do nothing, just turn the news off. And sure, it’s a good message to send out, but it just feels a little bit different and unique. So what are some actual things that retirement savers, retirement investors, people should do potentially in response to all of this uncertainty?

Cullen Roche:

Yeah, I’m optimistic about the time horizon over which this will settle, but there is that outside chance that they really believe that we need to completely shift the world order of trade and they don’t even feel the need to ever fix the relationship with China. And we go through the whole year and even, gosh, there’s even a scenario in which you could argue that he’s repeatedly said they might have to take some short-term pain for long-term gain, and they might actually look at the unemployment rate and trauma in the stock market and bond market and whatnot and say, you know what? This is the price of a good change in the long run and long run. If that happens, that’s going to be tough to navigate. There is going to be just relentless uncertainty for over a year, and I don’t think that’s a very likely scenario, but it’s not a totally implausible scenario. And so I think you do have to consider that to some degree.

I think the way to respond to this sort of stuff is, I mean, gosh, I always tell people that if this sort of an environment really, really scares you, then that’s probably exposed a problem in your asset allocation. So I always tell people that your asset allocation is really more of a function of your ability to predict cash flows over time. It’s what I always call an asset liability mismatch. When your risk profile seems to be out of whack, it’s really because your assets are mismatched, your ability to predict your expenses and liabilities in the future. And so when somebody sells stock into a bear market, what they’re really doing is they’re capturing the certainty of cash because the stock market has created so much uncertainty for them in the future because the stock market is this inherently, I quantify it as a 17 to 18 year instrument.

And I think that that instrument is just inherently impossible to predict over 17 hours or 17 days or 17 months, but we kind of know that over 17 years, well, that instrument actually becomes, it becomes a relatively high predictability instrument, but you have to be willing to wait 17 years, which is obviously that’s a long time, especially if you’re in retirement. And so cash on the other hand, money market funds, T-bills, cash equivalents, those sort of instruments, they give you a very, very high degree of certainty even over a 17 day period. And so they’re very much the opposite type of instrument in terms of your temporal certainty. And so I think that what happens to people is when they get scared in environments like this, they, they want the temporal certainty of something like a TBI because the uncertainty of the stock market just becomes so much higher than it is on average.

So I think that when you find yourself in that scenario, I don’t think that it is necessarily wrong to pare back a little bit of risk. I think the problem that a lot of people make, if they will look at an environment like this and they see the stock market go down 20% very fast and they say, I don’t agree with Donald Trump’s politics, or I think that he has lost it, or he is creating this enormous risk, and they say, I’m going to pull the ripcord on the whole thing. I want to be completely out of this until Donald Trump is out of office. And that’s the huge mistake because even over a four year time horizon, the likelihood of the stock market being down or being up, it’s not a hundred percent, but it’s a lot higher than even 50%. And so you’re flipping the coin there when you start playing that game and you, you’re probably taking a loss in a lot of cases, you’re incurring a tax liability and in the long run, those are all just bad things that add up to a big cumulative negative impact. But at the same time, I don’t think there’s anything wrong with coming to grips with the reality that, hey, in this sort of an environment, if you were a hundred percent stocks and you’ve got no cash savings and you’re not working, or let’s say you do work, or heck, let’s use a more applicable example for even a retiree where they have a 60 40 allocation, let’s say. You might say, well, that 40% piece, it’s not enough or it’s not even allocated across different cash equivalent type instruments to give me enough certainty to.

And in that sort of a scenario, I don’t think there’s anything wrong with peeling back a little piece of the 60 and reallocating it to something like T-Bills or something that gives you a lot more certainty, something that’ll help you maintain the plan, but avoid that scenario where you just sell the entire 60 and go all into bonds or go all into cash. So I don’t think there’s anything wrong with that, but at the same time, I do think in terms of our actions, I do think that ignoring a lot of this is probably good for people. I joke a lot about doing leg day and things like that, but there’s a lot of truth to it. I mean,

Getting out and getting your mind off all this, sitting around and watching financial TV and obsessing over the news and whatnot, it’s good to be informed, but when you’re attached to the screen, which is often the case, especially with a lot of retirees who they now have a lot of free time on their hands, in a lot of cases that can be hard, and I totally understand it, and it’s easy to say, Hey, just ignore this. It’s like watching a train wreck if you kind of can’t keep your eyes off of it. But it’s good though to get away and know that you can’t control the outcome of the markets, but if you don’t have your asset allocation right in the first place, you’re going to struggle with that. And so I think that you’ve got to make sure that you’ve got your allocation right and then know that, hey, I can push forward even through imagine three years of uncertainty and sort of a bear market and ask yourself, could I ride that out and would I be okay living off of the other 40% of my portfolio that is in safer instruments over the course of that time horizon?

Taylor Schulte:

Yeah. I want to make sure I am hearing you clearly, and listeners are certainly hearing you. Clearly, you mentioned events like this exposing your portfolio, exposing you to the risks that you’re taking, that there is this mismatch in your asset allocation and you saying it may be okay to make a change to your asset allocation during a time like this if you don’t have the proper allocation in place. I think what I’m hearing you say, I think this is what I agree with is if you are going to make a change in the midst of all this uncertainty, it is because there’s a mismatch in your asset allocation and this change should likely be more or less, especially if you’re in retirement, more or less kind of permanent. This isn’t like a market timing change right now, I don’t feel good, so I’m going to change my asset allocation, but in three years from now, I might feel better, so I’ll change it again.

This is, oh no, this event, this uncertainty right now really woke me up and made me realize I’ve got the wrong investments in place. I need to reallocate some things to get them in balance. I don’t know what the future is going to look like, but I’m going to stick with this asset allocation for a long period of time, unless of course something in my life changes, which is very different than this reaction, go to cash or make a dramatic change and I’ll revisit it in a month or a year and I might change it back.

Cullen Roche:

Bingo. Yes, exactly. So to use kind of a simple example, I mean, let’s just say that you were following a really simple asset outpatient where you had a 60 40 and you had 60% in the s and p 500, and you had the other 40% in a bond aggregate. And you see bonds can almost be more confusing for especially a lot of retirees and people who don’t have a lot of experience with bonds because when you start to see these gyrations in that 40% piece, you start to say, well, wait a minute, this was supposed to be the safe part of my portfolio and now it’s moving more than I’m comfortable with. And so if you, I’m a big advocate of stripping the 40 apart and disaggregating it. I actually think bond aggregates are, I don’t want to say they’re terrible, but in a lot of ways they can create a lot of behavioral problems for people, especially when you’re using bond funds that move every day and things like that.

And so I think that when you strip it apart and you start disaggregating it and you take that 40 and you rip it down into, say, the actual components that exist in the underlying, you rip out, say 10% of it goes into T-bills, and then another 10% goes into two year notes, and then maybe the other 20% goes into something that it looks more like a 10 year T bond that gives people a lot of certainty. And so it’s kind of ripping that down and building something that looks a lot more like a TBI ladder or a bond ladder in total. To me, it gives people a lot more certainty. And if you find yourself in that sort of a situation where you’re looking at your bond portfolio, you’re thinking that, I don’t think there’s anything wrong with ripping it apart and rebalancing it, reallocating it in a way where you just have a lot more certainty over the time horizons over which that thing’s going to do certain things, and you should be planning to make that change if you do make that change with the idea of permanency in mind so that you’re not getting involved in the whole market timing aspect of all this.

Taylor Schulte:

Well, Colin, I could keep asking questions and talk about this for another hour, but I want to be conscious of your time, and I know you’ve been talking about this stuff a lot in recent days. So before we part ways here today, are there any final thoughts on your end? Anything else you want to share about the current environment, where we’re headed, how people should react or shouldn’t react?

Cullen Roche:

No, hang in there. Time really does solve all things. So this will all come out in the wash, I think, in the long run. And I think that even as gripping as this moment seems, it is important to maintain of a long-term perspective so that you can know that these things are always going to happen in markets. The story as old as markets. And so although it feels different this time, it’s probably in the long run, it’s really not going to be that different in the long run. We’ll get past it, businesses will start investing again, and I’m sure that in the long run, America will be the America that we all think of it as. So yeah, so much of good investing is just good behavior and making sure that you’ve got that asset allocation in place so that you’re comfortable with being able to ride out the next year or two or whatever it might be, and then being able to focus the other 80% of your thinking on the long-term and compartmentalizing things like that in a certain way, I think will do a lot of mental health for people in a really positive way.

Taylor Schulte:

It reminds me of something Josh Brown recently wrote in one of his most recent pieces. He said, it’s always different, but it’s always the same.

Cullen Roche:

Yep.

Taylor Schulte:

Well, we’ll be sure to link to everything in today’s show notes, including discipline funds. You had a great YouTube video that you put out recently combating a lot of misconceptions around tariffs. So if people want to dig more into some of the topics we covered today, I’ll be sure to link to that. But as always, really, really appreciate our friendship and appreciate you coming on the show and sharing your knowledge and wisdom with everybody today.

Cullen Roche:

Thank you so much, Taylor. It was great talking to you.

Disclaimer

This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.