ON THE MONEY: Trade wars, health care costs and the Great Depression


April 26, 2018

The current market volatility is due in large part to burgeoning signs of an all-out trade war.

On March 9, in an effort to restore an American industry to its previous luster, President Donald Trump imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports.

With the tariffs taking effect on March 24, only Canada, Mexico and South Korea are exempt.

A tariff is a duty or tax placed on certain goods by the government. The design is to make foreign goods costlier, giving an advantage to domestic manufacturers of the same products who don’t have to pay the tax.

The tariffs may be a shot in the arm for steel and aluminum companies in the U.S., but in the event of increased demand here it may not be that American manufacturers have the capacity to meet a gigantic swell.

There are a couple of things that give my friend Charles Sizemore of Dent Research and me pause. First, there are no winners in a trade war. Just losers, as the tax is ultimately passed on to the consumer.

It is not unusual for President Trump to make blustering pronouncements one day followed by complete silence the next. In the meantime, do not be surprised to see China use Trump’s new tariffs to its advantage. Markets are not fond of uncertainty.

We are not in a trade war yet. So far, we are seeing a war of words. But if the tit-for-tat escalates, all bets are off.

Sizemore says he does not “expect a repeat of the 1930s here.” I say it’s not about the prediction, it’s all about the preparation. If no one saw the Great Depression coming down the pike, who do you expect you can count on to be your canary in the coal mine in the event Great Depression II is baked into the cake?

Please recognize the Dow lost 89 percent in 24 months from 1929-32, according to Yahoo Finance. That means what was $1 million in 1929 became about $108,000 in 1932.

What’s more, assuming investors did not sell or spend any money, it took about 20 years for the account to fully recover. Also keep in mind, if you were born in 1900 your life expectancy was about 57 years. Which means you may not have had the luxury of time to get back to even before death.

I believe success leaves clues. Billionaire Mark Cuban said on the one hand he sees stock market swings as a buying opportunity. On the other hand, he said he “decided to hedge” his moves after seeing investors get wiped out. Cuban is a busy man with a net worth of $3.7 billion, according to Forbes.

But, if Cuban isn’t too preoccupied with life to put his hedging strategies in place on his life savings before the grits hit the pan, you and I can make keeping our assets intact the priority it deserves, too.

The first reason health care costs keep rising is because we are all getting older. In fact, 10,000 people a day are turning 65 through the mid-2030s, submits Jeff Hanson, CEO of Griffin-American Healthcare.

I asked Harry Dent of Dent Research for his take. Dent said, “A reason our health care costs about twice as much as it does in other developed countries is because our system is full of special interests and insurance bureaucracy that adds layers and layers of costs. Every step of this chain of special interests is locked in by decades of lobbying efforts.

“There’s no market with less rationality and greater cost disincentives than our very own U.S. health care system,” he added.

Dent opined our “perverted, special-interest driven system needs to break down and be re-created from the bottom up.” The job could be done with a “consumer-driven, direct primary care system that makes both doctors and consumers accountable for real service,” Dent said.

Design health insurance to take care of the more extreme situations so there would not be arcane bureaucracy to the system. Such an arrangement would put an end to the endless incentives to go for the “all you can test buffet,” Dent said.

A serious downturn may be the perfect time for the health care industry to go through a revolution. The beginning of a new nation in 1776 wasn’t fun, but it changed everything. Change is good.

John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979.

His On the Money column runs monthly in The Wave.

 

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