Last week, a select group of clients and our financial advisors had the privilege of listening to Dr. Tom Howard and Lambert Bunker from Athena Invest discuss investments, in particular some of the behavioral research we use to make our investment decisions.
“Behavior is predictive. Past returns are not,” said Dr. Howard. Never has this been more evident than in this year’s negotiations between the White House and Beijing—recent behavior is completely different than in the past. The amount of the US economy that depends upon China is small, relative to the amount of the Chinese economy that depends upon the US. Furthermore, “the stock market over-reacts…this happens all the time.” The amount of trading with China is large, and we run a deficit, but the “trade deficit” is not the problem. (1)
According to Dr. Howard, the problem we have, if there is a problem at all, is that “China behaves like a teenager.” Now the USA is asking the country to behave like the other “grown up” countries in the world.
One of our research partners at William Blair sees Taiwan as another factor to consider. “The Taiwan issue is the most important and sensitive issue in Sino-U.S. relations,” said Chinese Foreign Ministry Spokesperson Geng Shuang. (2)
The methods, the personalities, the bluster, the threats, and the news media itself adds to the stress we are feeling. For most of the companies in our investment portfolio, the omnipresent trade war threat is an unwelcome cacophony that confuses their long-range business plans.
People who wear white coats call this logical fallacy “Availability Bias.” Just because it’s everywhere, and everyone knows the story, does not make it true. Learn more about it here.
Other fallacies that hurt us are “Myopia” (short-sitedness) and “Social Validation.” We look for news from others who think the same as we do (about politics namely) and that fuels our negativity. We look more, and feel worse, and you get the picture.
In these short-term negotiations, the Chinese may have more levers to pull than the US, since they effectively have a government-run economy vs a free-market economy in the USA—so says a local fund company, Janus Henderson. Another research firm we use, who visited our investment policy committee this week, said they expect the “trade war” to be a short-lived skirmish—as scary as it seems today.
We know so much about the trade war—and still know so little—because we have little to no context in which to put the news. Our lunch and learn events are one attempt, on our parts, to deliver context. Please click the link and pipe in with what you would like to see and hear and we’ll put it on the calendar!
In summary, we expect more volatility and perhaps less clarity in the short term. However, over the long-term, we believe these trade wars will be inconsequential to our clients’ long-term, real-life financial and retirement income plans.