Ken Fisher Shares What You Need to Know About Tariff Collection, Trade Deficits and More

Ken Fisher:

Our wealth has grown markedly faster than our GDP, which you can see by America having today over 65% of the value of the global stock market- because we've created so many new and so many valuable companies. So every month people will write in some questions, and I'll take them and see if I can answer them. The good news is these are pretty good questions this time. The bad news is I'm usually trying to answer these quickly, and these questions do not really lend themselves to being answered very quickly. This first one here says: "Can you explain trade deficits? Are they a problem?" Well, the answer is yes I can, and no they're not. And I could just stop the story right there. But I don't think that's what I'm supposed to do with this question. I think somebody wants me to to give an explanation and then explain why they are or are not a problem. So a trade deficit is not a deficit the way most people think of a deficit, and most people think of a deficit as something that has to do with some kind of a loss. A trade deficit is more like- Aad this is analogous, as Milton Friedman famously once said: "All analogies are imperfect." A trade deficit is a little bit more like -in and of itself in a given year- like getting a little bit below average rainfall. Whereas a trade surplus is like getting a little bit above average rainfall. Now think about it. Most people don't think about a little bit above average rainfall or a little bit below average rainfall. They're still rainfall. And a little bit below average is in a drought and a little bit above average is in a gorging, if you will. All the trade deficit is measuring is within -basically, that's not perfectly true but almost perfectly true-manufacturing, do more of our manufactured products get exported overseas than we buy? And when we buy more than we export, that's deemed to be a deficit. When we export more than we buy that's deemed to be a surplus. These terms derive from a long, long time ago, before the birth of capitalism. When countries envisioned, wrongly, that the goal was to export more than import. Collect the difference in gold and hoard the gold. The gold hoarding became a goal, and that was in an era widely called -and since proven to be suboptimal for anything that's good for the people, the economy, etc.-"mercantilism". The fact is, first, when I said a little below average rainfall or above average rainfall, envision a world where either the trade deficit or the trade surplus is small relative to the total size of GDP. You can see why that wouldn't be terribly important. Like a little shortfall in the rain compared to average or above. Many other factors could actually have more importance that year-for climate or for the economy. The fact of this accounting function is it is always offset by flow of funds accounting. Somehow the spread between the two is covered by some form of flow of financial instruments. Cash. Stocks. Bonds. Whatever. Now, let me take you back to that slightly differently. Sometimes trade deficit or surplus are a statement about good or bad in an economy. But in the case of America, that's really not what it's about. America's been running trade deficits, per the accounting -and I really wish the word deficit wasn't applied here- has been running this situation steadily since the mid 1970s. While America has grown tremendously. While income per capita has gone up markedly. While the middle class has grown and poverty has shrunk in America. Do we still have problems? Of course we still have problems. But what has driven the American trade deficit? And this is something most people don't think through. Our wealth has grown markedly faster than our GDP, which you can see by America having today over 65% of the value of the global stock market -because we've created so many new and so many valuable companies that the world drools over. If you take, for example, all of the companies with market caps over 100 billion US dollars that are less than 50 years old, they all come from America. Every one of them. It's the creation of wealth faster than our GDP overall, including real estate, including stocks and businesses, etc. That has provided us the wealth. So we spend what we make and a little more. That feature is not a bad feature. It's just like some one individual family does, when its wealth goes up. It may spend a little more than its income without being any problem to that family. It's the same thing. Now, let me take you through a couple of examples of this in a different way. France and Germany are immediate neighbor countries. They both have the same basic regulatory regime associated with the euro and the same money there. Let's say that outside the euro, they're both in the EU- -having EU rules apply to them. Going back for many years now Germany has run trade deficits. Excuse me. Surpluses. I apologize. Germany's run trade surpluses. France has run trade deficits. But overall, France's economy has done a little bit better during that whole time period than Germany's has. If trade deficits were a problem, you know that would not be true. Take two, much more extreme, examples: The United States of America-trade deficits, as I said earlier, since the 1970s. Russia always runs trade surpluses. Which economy is better? Which economy grows more? Which economy is healthier? Which economy do other countries have more confidence in? You don't need to be a genius to figure that out. If you think of the countries with which we have trade deficits to, versus those we have trade surpluses to, there is zero consistency as to whether we would think those countries are doing pretty well or pretty terribly. Trade deficits don't tell you anything about what the future of an economy will do in and of and by themselves. It's kind of like thinking you've got an instrument on your dashboard of your car that tells you something. But you don't really know what it means. And to really know, you'd have to look under the hood. So that's what they are. That's why they're not a problem, and particularly not a problem for America. What we need to do in America is what we've always done, which is keep coming up with the new, never-yet-done thing that the rest of the world can't do because they don't have what-when I was young was called-"Yankee ingenuity" or what more recently has been called "entrepreneurialism"- or what even more recently has been called "American exceptionalism". And as long as we keep coming up with the new, never-yet-done, better thing that nobody's ever thought of before that changes the world, we could be running huge trade deficits forever, and average Americans would still keep getting better off. Because it's the creation of those companies that's the most important thing. And the wealth that we create faster than we create growth in GDP, that is the benefit to our country. Another question: "Can you explain in more detail the logistical challenges to collecting tariffs?" Yeah I can. This unfortunately is another one that I can't do real quickly because it's a little bit complicated. But I can get you to see it. So as I have said from the beginning of the April 2nd announcement, this is a topic that my firm knows a lot about-studied quite a bit. And the fact is, the tariffs will never be collected in the level that the president has said they will be. I don't understand what the president and his administration do not understand, but they don't seem to understand the collection process correctly. So let me take you through it. Tariffs are collected by the Customs Border Protection Agency (CBP)-and actually only a subset of it. Most of the CBP is focused on things like border protection for security and immigration and stuff like that. It's all a subset of Homeland Security. Now, the part that collects tariffs has about 2,500 employees. They're not what you could view as-I don't mean to demean them, but they're not on average-the sharpest knives in the drawer as employees there. And I don't want to compare them to another group to make you think that I would be demeaning them. But they're nice people with, on average, a high school education who mean well and try hard with an impossible task ahead of them. They have to cover about 200 entry points into America. Let me come back to that 200 because it gets important in a while. They have to deal with imports coming from all over the world. Some of them are easy to deal with. Their process works like this. The tariff is read by everyone. The importer is to provide: here is the item being brought in, this is the tariff rate on it and this is the amount of money that's owed to you. Here it is. Now I want you to think that through. If you're talking about Toyota shipping cars into America directly, it's a pretty simple process. Here's the car. This is the rate we got. Actually, in this batch: 50 of them, 50 times this rate. That's the money. Here you go. There's a lot of those categories that are easy to do. If we were bringing in tankers of oil, of course, America doesn't buy a lot of oil because we're the biggest oil producer in the world and and a major oil exporter. But anything that's brought in in tankers and things like that, that's easy to do. High volume steel, easy to do. Of course, what country do we buy the most steel from? Most people don't think that's true. But the biggest two countries to import steel into the United States of America are Canada and Mexico, not folks overseas. But about 85% roughly of everything coming into this country is coming in containers. And most of it, not all of it, is inside those containers and cardboard boxes. And most of it is being done not by the raw manufacturer itself, like Toyota shipping in its cars. But the manufacturer giving it to a freight forwarder, who bundles it up with other stuff and now presents a piece of paper that says: "Here's all the stuff. Here's where it's coming from. Here's the tariff amount on each tariff rate on each one, and the total tariff on each one." The importer hasn't opened all those boxes and examined them, and they can't. There's a huge-just look, go online and look at pictures of the big ports, which you can do. The ports of Los Angeles, the port of Houston. These are monster places with huge amounts coming in. The container comes in and there's stuff coming in, of course, in cargo planes. Now stuff comes in. All the CBP does is spot checks. Most of those containers are never opened up. They don't have the capacity to open them up. And they're looking to see if there's errors. If there's errors, their job is to discern is it an inadvertent error or an intentional error? If it's an inadvertent error, they're going to charge the full tariff and go back to the freight forwarder. If it's an intentional error, they're going to try to do the same thing and the freight forwarder is going to say: "We didn't know what was in the box. That's the importer from the other side of the world." And then the importer from the other side of the world has lots of different subsidiaries that it operates in, and they go back to the one that shipped the item and they try to ding them. And if they don't want to be dinged, they just shut the thing down and start up a new one. I'm wanting to tell you, this system has been gameable forever. It is made worse by the reciprocal tariffs, because now you've got rates from different countries at different levels with different countries at different levels. People want to go from the high tariff rate to a low tariff rate, so they ship from the one to the other. For example, most chocolate or chocolate comes from cocoa beans. Most cocoa beans come from three countries. Two of them have very high tariff rates under the reciprocal to the president imposed, one of them has the 10% universals. These people are not so stupid. So they're going to take their cocoa beans, and the two high ones are going to make a deal with the low one. They're going to split some profit arrangement, ship through the low tariff rate to get the lower tariff, and it's going to be almost impossible for the CBP to figure that out- at every turn there is gamesmanship. So the next phase makes this tough to do is what I call the "whack-a-mole function". Recall, there's about a little more than 200 entry points into America that these things can be brought in by. So part of the gamesmanship is they got this many CBP agents over here, but then they got that many over there right now. Let me ship into there because they can't possibly then inspect all our stuff. And remember, you got lots of stuff going through every day so they increase where the CBP doesn't have much, they decrease where the CBP has a lot. If the CBP tries to move their people, then they switch back. They go to another. They go to a 3rd, a 5th, an 18th-the 92nd. Then you get the next complicating feature. Even if we had universal tariffs -if you have that 10% tariff that the president just set up with Britain, if you had everybody at 10%-you still have, with the exception of a few items, the USMCA deal that President Trump negotiated in his first term, applying for Canada and Mexico. And there are no tariffs on those items. So now the country on the other side of the world ships to a third country, repackages, relabels from the third country, ships into Canada or Mexico and then brings them in through Canada or Mexico at no tariff rate. This is all just what you could view as a version of black market. And to the extent these tariffs remain, you're going to see the biggest black market in history. When the president has said, and he has, we're pulling in $2 billion a day in revenue for the government from these tariffs that I have declared, the CBP itself has said that he is wrong. And that they're getting a small percentage of that. And they provided those numbers. And those numbers are available to you online. But depending on the day, you're talking about 25% to 10% of the supposed, expected tariff amount. And that's early in the game of playing whack-a-mole and reshipping and trying to dodge and avoid these tariffs, which will never get fully collected. And that's the answer to your question. I told you it's going to take you longer for me to explain this than I was hoping. The last one for today is: "Can you provide an update on the 1998 versus today comparison that you shared as a chart multiple times on X?" Yeah, I can. So what I did originally, with the help of Christo Barker at the firm here, was overlapped 1998 -and the correction that started in 1998 for the S&P 500- its peak with the peak of the S&P 500-this time in February of 2025, February 18th 2025-and from before it they correlated pretty well. But after they just wiggled perfectly down through the bottom, creating almost a bear market, wiggling back up to a level, wiggling a little sideways and then since then they've started to diverge. Now, let me just talk to you about 1998. First, I was never trying to say that this period is like 1998. In terms of the circumstances it faces, It is not. And I've never alleged that it was. What I've tried to say is that in a very different set of circumstances, this had behaved so much like the 1998 correction within a bull market. In that correction, in 1998, the market dropped almost fully 20%, then rebounded, then fell again and then went on to rebound back above where the correction started, and to end the year up 26% for the year. Full-scale correction, just shy of a bear market, with a year that's still total 26%. And what I was trying to say, which somehow people never fully believe, is that market action has seen this kind of thing many times before. What 1998 and 2025 really have in common -it's so clear if you get it, but most people can't, that once you do, it stands out at you. In 1998, there was the "Russian Ruble Crisis" and the so-called "Long-term Capital Hedge Fund Crisis". And both were terrifying to most people. Both were bad. But neither was nearly as bad as people feared. This time, as I've said all along, tariffs are bad. They're always wrong. They're always worse for the company that imposes them than the countries they're imposed upon. We have a very long history of that. So it's actually easy to prove when they're imposed. People never want to believe that. But the fact of the matter is, while they're bad, they're not as bad as people fear. Since they're not as bad as people fear, that is exactly what happened in 1998. And it's why those two corrections have moved so similarly. Now, as the president is starting to make deals and some of the tariffs are starting to go away, they've actually started to diverge. And this correction this time -which through its bottom just wiggled perfectly with the 1998 correction- has since gone on to diverge and look more like a V-shaped correction. Whereas, the 1998 correction looked more like a W-shaped correction. But the lesson is a valuable lesson to know, which is that when things are bad-but not nearly as bad as people fear they are- that tends to be correction territory because it's bullish. Fear of false factor is always bullish, and excess fear is always bullish. And that's really what I'm trying to get across there. Thank you for listening. Send in more questions next month. I always enjoy answering your questions, and I hope next month I can answer them quicker than I was able to answer them today. Hi, this is Ken Fisher. Subscribe to the Fisher Investments' YouTube channel. If you like what you've seen, click the bell to be notified as soon as we publish new videos.