Here are some things I think I am thinking about this weekend.

1) GDP Now – Still Going Down.

When the Atlanta Fed’s GDP Now crashed down to -2.8% back in February a lot of us looked at the data and said “this doesn’t add up”. It had to adjust upwards for some reason because the data was being skewed by trade data that wasn’t yet adjusted for other factors. Well, we got that adjustment thanks to an update from the Atlanta Fed and it turned out to be largely the result of huge gold purchases that, when adjusted, made the figure slightly positive.

But Friday’s Personal Consumption Expenditures data confirmed another worry of mine at the time of that release – that PCE might actually deteriorate over time and that that would result in a low or negative reading that was the result of more than just funky trade adjustments. With Friday’s gold adjustment the reading is -0.5%, in large part because PCE has deteriorated consistently since that February reading.

This is not great. What it shows is that consumers are not going to eat the full cost increase from these tariffs and that other factors (like government cuts) are starting to bleed into broader consumption data. Another concern I’ve written about in recent weeks was that all this uncertainty would bleed into corporate earnings and result in a slew of guidance warnings. And this concern was confirmed on Thursday evening when Lululemon warned that economic uncertainty was leading to softer than expected consumer spending.

2) Tariffs 101.

Of all the silly discussions that I’ve had over the years regarding economics I have to say that the tariff discussion is among the very silliest. This isn’t political at all, but some people just can’t get beyond the politics of this one and will make poor arguments in favor of them just because. In fact, that’s the thing that makes this conversation so frustrating because this is a topic economists of all political stripes broadly agree on. Even some of the most Liberal economists in the world like Paul Krugman will tell you that the government shouldn’t meddle in trade. It doesn’t matter which side of the political aisle you’re on – most economists agree that free trade is better than having the government dictate who can and cannot trade with other countries. And it’s a principle that has been disproportionately beneficial to the USA as we’ve become the wealthiest and most innovative economy in human history over the last 50 years during the free trade era.

Anyhow, I wrote a brief cheat sheet about tariffs. If you find yourself debating tariffs with someone this weekend just whip this out and it will help you navigate all the potential responses you might get when you explain that tariffs are bad. I hope it helps you win some debates.

CR: Tariffs are taxes.

Anon: But tariffs are paid by foreigners.

CR: No, they are paid by the importing firm at US customs and passed onto US consumers as firms maintain margins. If they aren’t passed on they’re eaten by shareholders or labor. And if they hurt foreigners to some degree they are still hurting our own citizens. This is cutting off our nose to spite our face.

Anon: But tariffs can replace the income tax.

CR: The govt makes $2.5T from the income tax and the US imports $3T of goods. We’d have to tax ~85% of imports to cover that, but that would also reduce imports so it’s unrealistic and the basic math doesn’t come close to working. Not to mention tariffs are a regressive consumer tax that disproportionately hurts the poor and middle class who rely on imported goods like clothing and household items. In any case, what are we doing here? We’re making enemies of our trading partners with the end goal of shuffling tax burdens around for the middle class? That’s not helping anyone.

Anon: Yeah, but they’ll bring back manufacturing jobs.

CR: No, manufacturing has fallen from 40% to 7% of US employment since 1950 and robotics will decimate the remaining 7% in the next 50 years. Those jobs aren’t coming back and trying to turn the most advanced technological economy in the world back into an emerging market manufacturing economy is backwards thinking.

Anon: But tariffs will level the playing field with foreign firms.

CR: Higher taxes in the US don’t “level the playing field” with places where taxes are higher. They just make our playing field more expensive by reducing competition and consumer options. They are anti-free market and anti-Capitalist! Besides, since when did we dictate domestic policy by copying the things China and Europe do. We are strong economically in large part because we didn’t follow their policy path!

Anon: But foreign firms aren’t paying taxes on their exports to the USA.

CR: No, states add a sales tax to foreign sales in the USA. Adding tariffs to those costs only compounds the costs for our own citizens.

Anon: But Americans will now buy from US firms.

CR: Americans will have fewer choices because the government reduced competition and consumer options. This will drive UP prices. Especially when US firms realize they have more pricing power due to the government’s manipulation of the market.

Anon: But we need to reduce the trade deficit because we’re getting ripped off.

CR: No, it’s a trade. We’re getting lower priced goods, higher profit margins and foreign countries get our income and investment.

Anon: But the $30T national debt and $1 trillion trade deficit are “unsustainable”.

CR: The US private sector is the wealthiest in the entire world. If we talk about net cash flows to foreigners and government liabilities then let’s also look at domestic cash flows and domestic assets. Domestic cash flows are $30T. Domestic private sector assets are $250T. These figures dwarf the trade balance and national debt by a huge margin. Saying this is “unsustainable” is like looking at a man with $250 in his pocket and saying he’s in financial stress because he has $30 of debt and a foreign negative cash outflow of $1 per year. This man isn’t just rich. He’s in fantastic financial shape!

See, debating tariffs is easy. You just need to understand balance of payments, national accounting, sectoral balances and a few other little things.

3) Should Hedge Funds Hedge?

Here’s a new piece from Cliff Asness at AQR giving us a sneak peek at some of his new funds coming to market. I spent a lot of time in my forthcoming book going over Cliff’s various strategies and the different ways we can hedge a portfolio beyond the traditional 60/40 portfolio. The question of how much we should hedge is an eternally interesting one. After all, we’re all trying to get the highest possible return with the lowest possible risk. We want stocks to generate 10% per year and do it in a perfectly straight Bernie Madoff looking line. I’ve referred to this process as trying to turn water into wine because it’s trying to take an inherently long-term instrument and make it operate like a short-term instrument. In other words, what we really want is the stability of cash (an overnight instrument) with the returns of stocks (a multi-decade instrument as quantified by my Defined Duration strategy).

When you think of this thru my framework the process of hedging needn’t be irrational. We can’t use stocks alone to create smoother returns (even though we can diversify away single entity risk with more entities), but we can layer on other assets that will smooth those returns. Adding bonds, for example, just waters down the wine by reducing your average time horizon. A 60/40 portfolio is a 12 year instrument in my methodology. You aren’t getting better returns necessarily. You’re just taking less risk across time which gives you lower and more stable returns across that short expected time horizon.

Where this all gets more interesting is when you layer in the longer and uncorrelated instruments like gold, trend, options, insurance, etc. I don’t have the perfect answer and as you’ll find out in my book the answer for Your Perfect Portfolio is that you have to find what works for you, not what works for everyone else or what someone else promotes. I tend to defer towards simplicity wherever possible, but I am a simple man. Cliff is a more sophisticated man with more sophisticated wants. Although he did once admit to me that he ate a bowl of whipped cream for desert one night….

Anyhow, this is feeling like an especially important time to be properly diversified so feel free to reach out to me if you want to talk about your personal diversification.

NB – A life thing I am thinking about. Last night my daughter was singing “we will rock you”. I asked her if she knew what that was. She had no idea and said she’d heard it at school. That presented me with the perfect chance to explain to her who Freddie Mercury and Queen were. She of course loved the name Queen. And then we watched 45 minutes of a live Queen concert and she was melting the whole time. The world isn’t ready for my daughters. Heck, I am not ready for them. They’re whip smart and I can’t wait for someone to try to bully them over their red hair. There’s an Irish fury in there that you don’t want to unleash. In the meantime I’ll have to be careful about letting them fall in love with rock stars, but that won’t stop me from taking every opportunity to manipulate their musical tastes with my personal musical heroes.