Hello everyone. Welcome to our video, our podcast on tariffs, what they are, how they work. And we have some precedent to look at, because in 2018 President Trump had tariffs. We’re going to specifically talk about automobiles, because they had a 25% tariff back then, as they are getting now. And so how did consumers react? How did dealers and car makers react? And more importantly, what does that mean to us going forward with our investments, our retirement planning and all of that? So, I’m anxious to dive into it, but before I do let me just say I am Ken Moraif. I’m the founder and CEO of Retirement Planners of America, and we work with people who are over 50, who are retired or retiring soon. And so therefore we always look to protect our clients from large losses in their investment portfolios, because if you’re going to live on that money for the rest of your life, then guess what? You want it to last as long as you do, don’t you? And so that’s our philosophy. And so, understanding the effects of all this, we think, is very important as we go into the future and navigate these, these wild swings in the markets and everything else that’s going on. So, to go into all of this, I want to bring on our Chief Investment Officer, Jordan Roach, Jordan, how are you doing? Good to see you. Thanks for joining us today. So, the first thing I want to do is, I want to go over with everybody, you know, how do tariffs work? And I want to use, you know, a German automaker. Okay, okay, so we have a German company that makes a car, and let’s say that it costs them. After their margins, they’ve made their profit. It costs them $50,000 Yep, right, to make that car. So, they ship that car over to the US, and it arrives at the border. And what’s the first thing that happens? Customs. Comes through. Customs, yeah. So, they come through, and again, it’s a 25% tariff, yep. So, what’s going to happen now? So, there’s a bill for 12,500 that somebody’s got to absorb, yeah, somebody’s got to take on. They got to write a check to the US government. That’s right, the General Fund of the Treasury, for 12,500 bucks. And if the government doesn’t get that, your car is not going into the not headed into That’s right, sit a port. That’s exactly right, all right. So, the first thing that happens then is that, so now the car that was 50,000 had 12,500 added to it. That’s right, right. So, we’re at 62,500. It is where we are. So now the dealer gets it right. And so, the dealer, they want to make their profit too, right? That’s right. So, they effectively, in this case, I mean, depending on if the dealer eats that cost, or at this point, it sounds like, you know, the manufacturer took on the cost, so they’re going to buy that from the manufacturer for 60, 62,500 but they got to make a profit too, yep, so they tack on their 15% okay, so now the cost of this Car is $71,875 moved up pretty quickly from that 15 $50,000 price. Okay, and so that’s a that’s an increase because of the tariff of $14,375 from the yes, the cost when it was bought. Yeah, that’s right. Okay, so that’s what tariffs do. Now there are basically, who are the three players in this game of paying for the tariffs in our in our German automobile. Okay, so there’s three scenarios. So, you have the actual manufacturer, German company itself, can pay. You can eat it. It can absorb it, and just never pass the price on. You can pass the price on to the importer, right? So, whoever the dealer is, or the dealer can say, ultimately, fine, I just paid that. But now I’m going to pass that back on to the consumer, and ultimately it lands at the feet of everybody buying at a car dealership in the US. Okay, so that extra cost could end up entirely in the consumer’s lap. Good, it could end up entirely in the dealer’s lap. It could end up if the automaker could pay the whole thing, or maybe some combination thereof, right? That’s right, yeah. So why would a company, why would an automaker, you know, BMW, Mercedes, German automaker, why would they want to pay the whole thing? Why don’t they just pass the whole thing on to the consumer? Well, they might say that, okay, if we don’t do this and we just pass costs on ultimately, what’s going to do is going to hit demand in the US side. It’s going to hurt our brand, and people are going to flock to American made cars to go to Ford, go to Tesla, go to Chevy or something like that. So, they want to stay competitive ultimately, and probably their market share would be diminished as well, and that’s very difficult to get back once you start losing that. That’s right, okay. So, let’s talk about 2018 because that gives us a little precedent as to, you know, how people behaved and how the car makers behaved, yes, back then. So, in 2018 Trump had 25% car. Automotive tariffs on German cars. Yep. Okay, we have the players, we have BMW, we have Mercedes, we have Volkswagen. Okay, so what did they do? What did BMW and Mercedes Benz do? Well, ultimately, I think, they largely absorbed the tariffs and then started trying to shift their supply line there and build production facilities in the States, and I think it was Alabama and South Carolina, that’s correct. So, they shifted production to stateside. Instead of building it and then shipping it, they shifted actual buildings to the states. Okay? So, they absorb most of the cost. And what they did then was to avoid those, those tariffs, they started building in the United States. That’s right, and that’s what President Trump is trying to do with all these tariffs. He wants everybody to build everything in the United States, you know, if possible, right, right? Okay, so, so that happened, but, you know, obviously they still had cars that were making it in Germany and other places, so it was kind of uneven. That’s right. I mean, they’re going to have not all their models could be shift to production facilities here. They still have some coming in, so they probably had a blend, but they tried to absorb some and then shift other production here to avoid the tariffs. Avoid the tariffs. Okay? So, then Volkswagen, they took a different approach, right? They did so Volkswagen, I think they own Audi but they, I believe, split some of the cost with dealers, that’s correct. And they shifted some production, I think, out in Tennessee or somewhere, yeah, they actually split it with, yeah, they did. They built a plant, or they in Chattanooga, Tennessee, to reduce the impact of the tariffs and start building in the United States, yep. And, they, you know, they did completely absorb that thing. They also shared it a little bit with consumers, but they had a different approach than BMW and Mercedes did. Yeah, so I guess I would imagine that in Volkswagen, you know, they saw moderate price increases across their par line, and they were willing to take that trade. Okay. So now what’s really interesting is that those tariffs, the 25% tariffs back in 2018 were not fully implemented, so they were a negotiating tool by Donald Trump back then. That’s right, but it did result in in them bringing production over here, into the US fairly quickly. Yeah, that’s right. And so that’s the anticipation that what could happen now. So basically, give us what the takeaways are, you know, in terms of from, from the car maker side, you know, what do you think they might do given all of this? Well, they got to, you know, they got to make a decision effectively, of saying, Well, if we don’t absorb, how long are we going to stay competitive relative to the US manufacturers, they got to decide, for you know, their consumer base, how price sensitive their natural market is. I think that’s a big thing, you know, because ultimately, you know, the car makers are going to have different beliefs, and they’re who’s buying their types of cars. The consumers are different between these different brands, and so that can cause that people to make different decisions on how they want to handle these Yeah, I heard that Ferrari, you know, they decided, yeah, our costs are going up, but we don’t care. People are going to buy our cars anyway. That’s right. I mean, the people that are buying Ferraris are probably not too priced. They’re not worried about it. So, they don’t care. Yeah, they don’t care, all right, so we’ve switched then to talk about the consumer. So, luxury buyers, they tend to react less than the average person, right? I think that’s right. At least 2018, 19 showed that that people buying BMWs and Mercedes are less priced instead of, on average, the cash, the reputation of buying those cars was worth whatever price increase they had to pay to get in it. And so largely for them, I think sales and production kind of continued, so consumers effectively absorbed what they had to absorb. But the consumers did change when that happened, right? Made in America became something. It started. It was, it was a distinct line, because you had some that, again, were still brand loyal in reputation. But it caused a lot of people to start looking and say, Okay, what can I buy on the American side produce here, you know, what can I buy with a with a Chevy or Tesla or whatever the, you know, Cadillac, that can be American made where I can void. So, it causes people to absolutely look, to say, Do I really want to buy this? Yeah, what are my options? So, the interesting thing about tariffs is that, you know, the assumption is that all these things, the price is going to go up, and the consumer is actually going to spend that higher price, and therefore we have this high inflation. But, you know, I remember also he had tariffs. Trump did on French wine, and Americans decided, you know what, I’ll buy Napa. So, in that instance, there was no inflation, right? They just chose not to buy the French wine. So, if there’s an alternative American product that you can buy, then, from that standpoint, there is no tariff impact, right? That’s right, depending on the choice and what it is that’s exactly right. Is trying to, I think some of this is aimed at shifting, shifting supply and shifting demand back to American made effectively. Yeah, and, you know, as I looked at the formula that they used to determine, you know, these tariffs, basically, it’s a formula that is so blanket that it can’t apply to every single country. You know, they looked at using the exports from that country and dividing that by the trade surplus, and then dividing that by two, basically saying that if you have any sort of a surplus selling to us, you know, you’re going to get tariff for that. But there are countries where there’s no way they can spend they can never buy as much US goods as we can buy their goods. Yeah, because their currency is weaker, their economy is weaker, whatever else, right? Yeah, even if they spent their entire GDP buying our stuff, they still wouldn’t match what we can buy from them. And so therefore, it appears that these tariffs and this formula was designed essentially not to be the final product. It couldn’t be. There are many countries that could not even, they couldn’t even satisfy this, right? Yeah. I mean, we’ll see where this goes. But that seems, on paper, of how broad they are, that some of them are targeted to place where, if the end result is getting things equalized and trade across all these countries, there’s just no way for some of them, which makes you think that cannot be the end goal in and of itself. Yeah. Now, what tariffs could do is, you know, the Trump administration is trying to create, you know, the Golden Age, as the President calls it, where manufacturing has come over to the United States where, you know, we have all these jobs that were sent overseas, and the factories are all up and running and all of that. But that doesn’t happen overnight. No, right? In theory, right? You know, there are a lot of unused factories right now that could be started up, but they need to be modernized and all that stuff. So, there’s, there’s time That’s right. And between now and when those things happen, what do you think could be the possibility of what could happen to the economy in the United States in terms of inflation and all those kind of things? I mean, it’s been volatile. I mean, there’s a lot of paths forward. I mean, I don’t think it’s a one way situation where it has to be bad. I don’t think you know getting too good is a quick solution. Most likely it’s a number of winding paths and volatility along the way, because we’re probably going to see a lot of sentiment moving up and down, a lot of forward expectations on earnings and inflation being all over the place. Probably the Fed be put in a very hard place. Oh, man, I do not want to be the Fed in all of this. No, can you imagine, they’re worried about inflation, and if they lower interest rates, that’s inflationary. And in theory, these tariffs, at least in a transitionary period, or should, most likely will be inflationary. But also, if there’s a recession coming, they want to lower interest rates. So, if they lower interest rate, they have more inflation. But if they don’t lower interest rates and recession get worse. Absolutely. I mean, I’m glad I don’t have to make those decisions. Those are, those are big boy decisions right now for them. That’s right, yeah. And then the other, the other thing is that, you know, the transition from here to there could cause a lot of upheaval in terms of, you know, like I said, inflation, and in terms of the economic activity consumers buying less stuff, you know, as they figure out what they’re going to buy or not buy, as the negotiations which we think are going to come happen. So, all of that we could have here going forward, a pretty bad bear market in the process, right? It’s absolutely possible. It absolutely is possible, depending on the path that inflation takes, depending on how these tariffs are passed and taken, on and off the board, depending on if we get in, you know, tariff and trade wars against different countries, and figuring out who’s going to, you know, break or bluff first. Um, and so a lot of unknowns, a lot of unknowns certainly does not have to be bad, but yeah, I mean, it’s certainly a time that, I think you know, you’re starting to hear this, this really bad word called stagflation, is starting to kind of percolate through the news. And we saw that in 60s and 70s, early 80s, and those are very tough times, very tough times with the market. Largely, we come through that, but a lot of volatility along the way, yeah, and so, you know, in our world, because we work with people who are retired or retiring soon, you know, we have now moved our clients to a very defensive posture, because, you know this, you know, we agree with the goals of This whole thing. In other words, we do want to be less dependent, from a manufacturing standpoint, on our enemies, right for antibiotics, we don’t even make our own antibiotics in this country. We don’t make chips in this country, right? And if our enemies were to cut off all of our antibiotics and our chips, then all of a sudden we cannot have any technology and. Somebody scrapes their hand, and they die the next day because there’s no antibiotics. Well, you know, speaking of that, that’s a very interesting point. So, when, when you know, tariffs ramped up? Because before you know, from 1790 to 1917, or so, 70 to 90% of our government revenue came from tariffs, right? And actually, when some of the first tariffs were introduced since, like 1790 so post our independence, you know, Hamilton coming through with all these tariffs. The actually thing that he tariffed higher than anything was the import of foreign arms, because he was worried about similar that if we go to war with somebody, and we’re reliant on them and to produce our weapons, we got a problem we have. So, the same kind of thing of enemy products from a national security standpoint, you know, we buy all of our antibiotics pretty much from China. It’s a problem, and China is not our friend. So, if China decided tomorrow they’re going to war with us, first thing that I would do, if I was them, is cut off all the antibiotics, right? And we’d start dying off just because we, you know, cut our finger on a barbed wire fence or something. And that would be very, very dramatic, yes. And then if they cut off our chip supply because they invaded Taiwan, then we don’t have the technology replacement that we could do. So, all kinds of terrible things could happen to us. So, I agree with the sentiment of bringing manufacturing back to United States, but the transitionary period could get pretty rough, absolutely right, when we go from where we are today to that and in the so in an interim, we could have a recession, we could have higher inflation, we could have a really bad bear market. Yes, we could. All those things are true. Yeah. And so, for us, with our clients, you know, as I said, we’ve moved to a very defensive posture in anticipation of this transitionary period. Now, when we get past it, certainly we’ll be looking at something else, right, right? One day we’ll move through this. We don’t know when, but we’ll be ready when it’s when it’s time. So ladies and gentlemen, hopefully this discussion helped you to have an understanding of how tariffs work, how the consumer could behave, and what’s happened in the past. We actually have a, you know, we can look at 2018 and say and see that those tariffs actually were not fully implemented this time, they are. He did it already, but he took them away last time. So, it’s possible that Trump would do it this time. So, time will tell. But in the meantime, our philosophy is, you know that you plan for the worst, and you hope for the best and not the opposite. We believe that growth is important, but protection of principle is even more important. For that reason, we have moved into a very defensive position. So, stay tuned for these podcasts and these videos, and we’ll be talking about when things turn around, and maybe it’s time to go back in full war. So in the meantime, I hope this video finds you healthy, wealthy and wise, and we’ll talk soon, Retirement Planners of America, rpoa.com.