I saw a tweet the other day on how to avoid the left tail, particularly a long left tail, when investing. If there is an investor who has figured out how to avoid the long left tail of the markets, they ain’t selling their process/tool/product. They certainly aren’t putting it on twixxer as a freebie. If it worked, everyone would own it and use it, and then it wouldn’t work. If it worked, they’d be making big bank in the worst markets - why would they want to dilute their amazing trade? And if I wanted to charge you a bunch of money - which I ought to do, if I’m a smart investor and can figure this out, because this little tool is worth, politely, a ton - to save you from a 7%, highly unpredictable in timing event, would you do it?
We are all riding this rodeo, and if you don’t have the brahma fear, I may be concerned for your sanity. Here’s the crux of the matter: this is a volatile, uncertain, complex, and ambiguous problem. The most predictable response is fear. Fear tends to trigger flight, and in all prior instances, unless you got both your takeoff and landing times correct, the outcome was almost assuredly less than optimal and at times disastrous.
The tail I am discussing is the negative, emotionally unpleasant end, which happens unpredictably - see the wonderful chart from Drew Dickson of Albert Bridge Capital below. In my experience, the -20% or more result is where people get really excited. It’s about 7% of all occurrences.
OK, you say, I get all the history, and this time is different. I really do like to say that this time is not different. It has always been a core investing belief of mine, at least once I got through getting my a$$ kicked in the tech crash. And perhaps in the long term that will be correct, long term being at least 10 years and really more likely 20. This time feels like a time that certainly is different, though. Can it be different and not different at the same time? It can.
What’s Different?
Right now what’s different appears to be a stunning own goal. We have an economic policy that we are deploying ostensibly as tariffs (which are typically set in response to unfair pricing or trading tactics) but whose stated intent is to eliminate trade deficits. Note that I did not say “our national deficit”, which requires spending less than we collect in taxes and other revenues and which I believe is a serious issue for our country. We are talking trade deficits here. A trade deficit occurs when we buy more from a country that we sell to that country.
Groceries seem to be a big topic these days, so let’s discuss the grocery deficit. I’ll pick on Kroger here. I go to Kroger and spend $100. Do I get $100 of goods? No. Kroger’s pre-tax margin is something like 2.6%, so I received not more than $97.40 worth of groceries. Actually, it was less than that, because there is overhead and other cost embedded in that margin calculation. Kroger’s gross margin is something like 22%, so the goods I received were really worth more like $78. So I have a $22 trade deficit with Kroger. Should I be mad about that? Does that harm me? No to both. And if I wanted to put it in dollar exchange terms, I have a 100% trade deficit with Kroger. They don’t buy anything from me. If I find that unfair, well then I guess I have to produce all my food. Is that cost free, would it save me money, would I spend less? Unlikely.
To eliminate a trade deficit, either buy only as much from that country as we sell to that country or stop buying altogether and run a trade surplus. Does a trade surplus really help up us? Not really. This is, of course, not what we’ve chosen to do. Then there is the practical matter of do we really want to make everything we consume in this country? Is that achievable? Will it be cost-efficient for our consumers?
We’ve chosen tariffs as the trade deficit solution. The effect of a tariff is a tax increase on ourselves (the “own goal”). This might be a complete product for resale or a part for a product that is assembled here. Said companies can either absorb the cost increase and earn less, which for a public company reduces the value of its stock and our wealth as stockholders and as a nation, or they can pass on the cost, which is far more likely, driving increased cost to us, the consumers. Inflation, anyone? And prices are truly a real Number Go Up in this country. Once up, they don’t tend to go down.
Recent analyses indicate that many vehicles, even those assembled in the U.S., contain significant foreign-sourced components. For instance, the Ford F-150, a model traditionally associated with American manufacturing, is only about 32% made in the U.S. or Canada. Similarly, the Tesla Model 3 Performance, often cited as one of the most "American-made" vehicles, still incorporates parts from various countries.
I will note, also, that there are roughly 5,900 publicly-owned companies in the USA and roughly 33 million privately owned companies. How many of these can afford to pay for the cost of the tariffs and continue operating? There is, unsurprisingly, a book called Bailout Nation. We seem to be heading there again.
Something like 40% of all US citizens do NOT own stocks, so you could argue that they don’t care. Well, tariffs increase prices for the goods they purchase. You need evidence? How about 2018? When stock prices drop, which tends to happen due to tariffs, the wealthier among us tend to reduce their spending. With consumers making up about 68% of GDP, that seems like the precursor to a recession. That hurts everyone, as well.
Will tariffs bring manufacturing back to the US? Perhaps. This will likely take years, and given that our labor is both limited and more expensive that many of our trade partners, the resulting goods may be years before becoming available and something like 40%-60% more expensive. This all depends on the complexity of manufacturing the particular product as well as its labor intensity. Or we might just be watching robots that we have to source somehow assembling these products. Do we have the patience and inflation-tolerance for this? Perhaps.
Not what I could consider short term pain for long term gain. It’s more like long term pain for perhaps a long term gain. That’s a lot of perhaps.
I am neither forecasting nor predicting. After all, the forecasters’ hall of fame has no members. However, we have seen these things before and therefore we at least know the most likely outcomes. Is this time different? It is. Will the outcome be different? No stinking idea. At all.
What’s The Same
Let’s get back to our economic policy. We are doing what appears to be nothing regarding the budget deficit. Here is a few days of history using data from The Debt Clock. I know it’s an eye chart. Here’s what it says. Regardless of any political messaging and claims, our debt continues to rise.
We’ve been incurring a budget deficit for a long time, with much debate as to whether it harms us or not. As individual citizens, can we do that? Only so long as we can borrow, and none of us has unlimited borrowing power. Now, if I borrow and don’t pay my loans back, what happens? Bankruptcy. Most of us can only do that once, maybe twice, and then we can never borrow again. Our country has the power of the printing press, so it can borrow, a lot. Can the USA borrow un unlimited amount? Some say yes. Some say no. I do not know, which is uncomfortable to say. We appear to be testing the yes theory (see the bottom part of the top left corner, where our debt now stands at 122.62% of GDP). Do tariffs solve the deficit problem? So far, no.
Nonetheless, the US economy is large, successful, and has made us extraordinarily wealthy. It is the most successful in documented history. We have the most liquid and active equity markets. We have the most liquid and active fixed income/bond markets. We have a deep and resilient consumer base.
We have excellent per capita income.
There are over 900,000 high net worth families in the USA - about twice the number in China. Note that China has something like 4 times the population of the US.
The US has A LOT of manufacturing. It’s just different from our manufacturing base of the 1970’s.
In terms of global manufacturing output, China leads with over $2 trillion, representing 20% of global manufacturing. The United States follows with $1.867 trillion, accounting for 18% of the global total. Japan contributes $1.063 trillion (10%), Germany $700 billion (7%), and South Korea $372 billion (4%). Brookings+1Coalition For A Prosperous America+
We have an incredibly healthy and successfully exported service economy.
The United States maintains a trade surplus in services with the rest of the world, meaning it exports more services than it imports. In February 2025, the U.S. services surplus was approximately $24.3 billion, a slight decrease from the previous month. This monthly surplus contributes to an annual services trade surplus, which was around $295.81 billion in 2024.
What Can We Do?
While you cannot control what this administration does, you can control what you do. The only thing we can predict about anything, really, is that it will change. And while neither I nor anyone else can predict what will happen, my best bet is to look at history, assess probabilities, and then act. Poor decisions (which, I know, we can only see in hindsight) are what hurt us in times like these, so let’s try avoiding self-inflicted wounds.
You can go to cash, and maybe you’ll miss some downside. What we know, pretty predictably, is that when you do that you miss worse on the upside, because you’ll always be looking for the downside. I mean, you could get it right. Probabilistically? Extremely unlikely. Or you might go to cash at the bottom and capture all of the downside. What’s more likely is that you permanently imbed a loss instead of suffering through a temporary decline and recovery, which you might see described as “peak-to-trough-to peak”. Ask ChatGPT “what is market timing and how does it work?” I suggest you pay attention to Response 2. By the way, here are the last 5 days’ performance of the S&P 500.
You can buy the latest “no downside” fund - remember portfolio insurance? Google Long Term Capital Management on this one. Will it work? Highly unlikely.
You can do absolutely nothing. Mentally, this is a huge challenge. Historically, it’s been a really good strategy. The problem here is that we engage in extreme thinking. That is completely normal. Human nature is to think about it. Fine, think about it. Worry some. Let it out. The trick is to avoid acting on this thinking.
If you overhaul your entire portfolio in response, you aren’t just acting as if you know what the market is going to do next, which is close to impossible. You’re also acting as if you know what Donald Trump is going to do next—which is impossible.
Taking some action may make sense, although it might not be what you think. And it just might keep you from that extreme act. Here are some thoughts:
- Tax loss harvest. And maybe gain harvest at the same time.
- Review your plan. Stress test it with market crash-level values. Still OK? Excellent. Breathe deep, think all you want, action is likely not needed, not even one little bit of it. OK 70+% of the time in terms of scenarios using Monte Carlo modeling? Really good. Brain science tells us that a little pause, like taking the time to review your planning, often stops instinctive actions.
- Pile up cash. No, not by trading to cash. Direct portfolio earnings to cash rather than reinvesting them (Hopefully, you maintain an emergency and/or income reserve, regardless. Times like these are exactly why we recommend doing so).
- Stay invested by making a trade to an asset class that historically has been less volatile. Keep in mind the potential tax consequences as well the times (see 2008, for example) when all asset classes were affected negatively.
- If you are living off your invested assets, reduce controllable spending and thereby reduce stress on your portfolio. If this is, indeed, a permanent drop in value, however unlikely that possibility is, you will be in better shape as a result. For most people, withdrawals present a far larger portfolio impact than taxes or rate of return.
There’s this, attributed to A. Gary Schilling:
Markets can remain irrational a lot longer than you and I can remain solvent.
These days, I am modifying this slightly:
- Markets can correct for bad policy longer than Presidents can remain irrational. I hope.