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Exactly What Problem Is The President Looking To Fix With Tariffs?

Exactly What Problem B

Dear Mr. President, no one wins with tariffs. If I had the ear of President Trump, that’s exactly what I would tell him. While I believe he believes his tough talk on tariffs is a means to deliver on his campaign promises to Make America Great Again and Put America First, I also believe they are misguided and unnecessary.

First, I’d like to state the obvious.

The U.S. economy is doing great with the current trade deals it has in place. U.S. multinationals are selling into other countries profitably. Consider the numbers: U.S. GDP grew 4.1% in the second quarter of 20181, the highest growth rate since the third quarter of 2014. And just about everyone has a job, with unemployment sitting at just 3.9%.2 The New York Times reports that even the least educated Americans and those hardest hit by the recession are back to work.3 Not surprisingly, consumers are confident and they are spending.

This is a very good news story

Which is why I don’t understand the President’s decision to threaten a trade war with China by raising the rate of tariffs on $200B of Chinese goods to 25% from 10%. Not surprisingly, China has responded by threatening to tax an additional $60B a year worth of imports from the U.S.4

Increasing tariffs is risky business that affects everyone, not just businesses and investors. Tariffs are an added tax placed on specific finished goods and raw materials. That increased cost is ultimately passed on to the consumer, who will choose to pay or not. If they choose the latter option, then businesses fail. If the cost cannot be passed on to the end user, margins are eroded, people lose jobs and again, companies fail. It’s that simple. Beyond individual businesses, higher costs and prices lead to inflation for the broader economy, which in turn will lead the central bank to raise interest rates, increasing the cost of borrowing.

Bottom line

Contrary to the President’s recent tweet that his tariffs are working big time5 they really aren’t and here’s why. If all parties decide to stand their ground by imposing more tariffs, which is what seems to be happening, then everybody loses. The immediate result will be pain on both sides of the trade border. In the U.S., all of the growth that the President’s tax and deregulation policies have created will be curbed and maybe even negated. It’s already happening. The President has had to promise $12B in subsidies6 to U.S. farmers who are among the first casualties of the trade wars he is triggering. Iconic American brand Harley-Davidson has also announced it is moving production to Thailand from the U.S. because of the EU’s new tariffs on motorcycles--a direct result of the President’s steel and aluminum tariffs.7 I’m also hearing that domestic production of steel and aluminum is not able to keep up with demand as U.S. companies try to avoid paying more for steel coming from the EU.

In effect, the opposite of what President Trump wanted to happen is happening because of tariffs. And I don’t think there will be any long term gain to come. Yes, I agree the current trade deals may not be ideal but no trade agreement is ideal or ever will be. There are always necessary tradeoffs, a give and take so that everyone gains something. Make no mistake, the U.S. has gained from existing trade agreements, however President Trump chooses to paint them as bad for the U.S. My question is, what is the President trying to achieve by imposing or threatening to impose tariffs? As already noted, the U.S. economy is strong, the country is at almost full employment, and people are spending and thriving. Tariffs will only hurt a very good situation.


References

  1. US GDP growth highest in near 4 years in Q2, Trading Economics
  2. US jobless rate decreases to 3.9% in July, Trading Economics
  3. Workers hardest hit by recession are joining in recovery, New York Times
  4. China threatens new tariffs on $60 billion of US goods, New York Times
  5. Donald Trump Tweet, Aug. 5, 2018 4:59 am
  6. US$12b state aid for American farmers, Rural News
  7. Trump threatens Harley-Davidson, says leaving the US could end its iconic brand, Business Insider

Are Mutual Fund Fees Too High? Probably Not.

AreMutualFundFeesTooHigh B

It seems like every time I turn on the TV, there’s a commercial pushing the narrative that mutual fund fees are too high and the fund companies are coming out ahead to the detriment of their investors. Ads by their nature offer one specific point of view and I’m not so sure these ads paint a full picture, especially when you consider people have been successfully building their retirement savings in mutual funds for decades and fees have been declining.

According to a recent study of U.S. funds by Morningstar as reported in Pensions & Benefits, mutual fund and ETF investors paid lower fees in 2017 than ever before, saving $4B in fund expenses. Canadian mutual fund fees are following the same downward trend. They’ve had to in order to stay competitive.

But Are Mutual Fund Fees Still Too High?

My question is, too high in relation to what? The only way to answer that question is to look at what mutual funds provide: diversification and professional management. These are hard and expensive to get outside a mutual fund. If you’ve just entered the workforce and are able to invest $200 a month, where are you going to put that money to get the most value? The current share price of CIBC is about $115. That $200 investment won’t get you very far.

Depending on the product, a mutual fund will give you exposure to many companies in a range of sectors or in a specific sector or in a specific geographic region. It’s up to you and where you want to invest. A mutual fund also offers a professional manager whose job is to be an expert on the companies held in the fund he or she is managing.

Fees will vary with the level of activity in the fund. More actively traded funds such as growth, technology and foreign funds tend to have higher fees than passively traded funds, such as balanced funds.

Another key consideration when deciding on whether mutual fund fees are too high is performance. Is the fund meeting your investment objective and at what cost? For example, if you are a moderate risk investor paying  2% to 2.5% in management fees and making 8% after those fees are paid, I think that’s a pretty good tradeoff and I think most investors would agree. Ultimately, the bottom line is what investors should focus on. What are you earning after fees? Is the fee justified? If the fee is more than the return, then you should sell that fund.

These are the same questions you should be asking of any professional service you engage. If you hire a lawyer who helps you win a $100,000 settlement in court, you’re not going to get the full $100,000. He or she is going to take their fee.

The Key Is To Find A Mutual Fund That Meets Your Needs.

This is where you should be speaking to your advisor about your objectives, what different funds offer and which funds align best with the type of investor you are, your risk tolerance, time horizon and what you’re trying to achieve. It’s no different than creating a stock portfolio. I build portfolios based on the client sitting across the table. My job is to choose the right products that will help you attain your financial goals.

As I see it, flexibility not fees is the biggest issue with mutual funds today. There are still investment companies that offer non-transferrable products, which means if you want to change advisors, you have to sell those products even if that doesn’t make financial sense for you. This is a topic that I don’t think gets enough attention. When it comes to mutual fund fees, concentrate on the following:

  • Understand what you’re paying for.
  • Performance. Is the mutual fund delivering the returns you’re after?
  • Is the expense worth the return on investment?
  • Does the fund align with your risk profile and goals?

Call Me or Email Me

My approach to investing is straightforward. I help my clients find good quality investments, follow trends and adjust as needed. With all the volatility we’ve had, it’s a good time to review your investments and make sure you’re on track to achieve your goals. I welcome you to call me at 416-332-3863 or email me at This email address is being protected from spambots. You need JavaScript enabled to view it..

Meet Allan Small

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