This Morningstar podcast episode features Cullen Roche, discussing the economic and market impacts of tariffs, particularly the Trump administration's policies. Roche critiques the justifications for tariffs and explores their effects on various sectors and investment strategies. He also discusses his "defined duration investing" approach, emphasizing the importance of aligning investment time horizons with asset characteristics.
Tariffs are based on misunderstandings: Roche argues that the justifications for tariffs stem from a misunderstanding of the global economy's causality. He refutes claims of the US being taken advantage of through free trade, the possibility of restoring manufacturing jobs, and the unsustainability of the current account deficit. He also challenges the notion that reserve currency status is detrimental.
Tariffs as a negotiating tactic: While acknowledging the potential of tariffs as a negotiating tool, Roche highlights the risks of escalation and retaliation, leading to negative consequences for all parties involved. He also points out that tariffs can expose weaknesses in supply chains, a point which he feels has some validity.
Winners and losers from tariffs: Roche explains that tariffs create an "invisible tax," benefiting specific sectors while harming others. He uses South Korea's automotive industry as an example, where tariffs benefited domestic automakers but hurt consumers and other businesses. Tariffs are also viewed as regressive, disproportionately affecting lower and middle-income individuals.
Economic slowdown vs. inflation: Roche considers the risk of an economic slowdown and recession more significant than that of inflation due to tariff-induced uncertainty. This uncertainty reduces business investment, which he sees as crucial for economic growth.
Defined duration investing: Roche advocates for a "defined duration investing" approach, aligning investment time horizons with asset characteristics. This involves bucketing assets (cash, short-term bonds, long-term bonds, stocks) based on when the money will be needed, enabling investors to weather market volatility without making emotionally driven decisions. He suggests an 18-year time horizon for equities, based on their historical performance and ability to recover from downturns.
Global diversification: Roche counters John Bogle's preference for US-only equities by advocating for global diversification as a currency hedge. He argues that owning international stocks mitigates the risks associated with fluctuations in the US dollar's value.
