Episode 7: Meet the new Tariffs, Same as the Old Tariffs
I apologize for mangling the classic line from “Won’t Get Fooled Again” particularly since these new tariffs are actually worse than the first set tariffs, but the title of the song was too good to pass up. Of course, when I say these new tariffs are worse, I mean mainly that the new tariffs completely abandon any pretense of economic policy or national interest or national security (unless protection rackets are considered economic policy these days). So, we aren’t going to really dive deep into most of the tariffs. But protection rackets (e.g. whatever you call the 15% of Nvidia and AMD’s sales to China), are pretty similar to what we might be seeing in President Trump’s war against higher education – so we revisit that. Plus we try to learn from his “plans” to reduce drug prices by 1500% and warn ourselves (and everyone) against catching a falling knife (unless you are sure your health insurance will cover it). And finally, a few additional thoughts on Private Equity in 401(k)s and AI!
Trump vs. Harvard and, now, UCLA!
As I noted back in an earlier episode, it was clear the initial salvos against Columbia and Harvard were just part of a broader war of the Trump administration vs. “elite” educational institutions. And it is not just protection money at stake in this culture war; for example, both Columbia and Brown have agreed to share data on students; Columbia also agreed to additional constraints[1], while Harvard sued to be able to keep accepting international students. But clearly the Trump administration focuses a lot on “big numbers” of cash: Brown settled for $50M, Columbia paid $220 million, while a half a billion dollars has been tossed around as a potential settlement with Harvard, and UCLA is facing a billion dollar demand. But I do want to recognize how Brown (may) have handled these challenges the best (so far), besides NYU, which should be fine (so long as Barron Trump doesn’t enter the transfers portal and moves to Harvard as part of the Harvard settlement). Full disclosure, I have multiple Brown graduates amongst family and friends (so usually I exhibit a distinct anti-Brown bias) but I’ll swallow my pride to compliment Brown’s navigating Trump’s election this year and the pro-palestinian protests of last year (sort of the modern day Scylla and Charybdis, which probably exhausts the references all the Brown Classics majors will understand). As you may remember, when faced with pro-Palestinian protests (along with all the big Ivy league universities last year) Brown quite skillfully diffused them by listening, engaging, and setting up face saving processes to address their demands (e.g. “Yes, we hear you and understand that you would like us to divest from Isreal! Let’s have some of your members join the investment committee to discuss how we should effectuate that and what the impact might be from our divestment!”).[i] At the end of the day (long after the drama had died down), Brown’s investment committee carefully and thoughtfully decided to do…drum roll please… nothing. Facing Trump’s various threats, Brown appears to have again skillfully provided some face-saving outs (for the President), while doing little beyond spending money (over 10 years!!) that they were already going to spend (in a place that desperately needs the help anyway, namely, the corrupt and depressing hellscape which is Rhode Island). Now that wasn’t really an option that Harvard likely had in responding to the President, in part because they were a higher profile target. But it is clear that Trump is easily swayed in negotiations by flashy announcements with pomp and circumstance[ii].
We can see that this approach is exactly what Tim Cook and Apple chose, despite Tim Cook not going to Brown[iii]. Present the President with some sort of trophy[iv], preferably with a lot of gold and spend a lot of time talking about investments in the United States with big round numbers (irrespective of when and whether those investments were decided on and when they will actually occur). It is a lesson that the CEO of Intel might have wanted to heed (or did heed? jeez, things change so fast these days); hard to get a newsletter out in these news cycles. So I won’t be surprised to see a number of the other schools that are potential targets (i) move first to provide some sort of face saving settlement and (ii) come up with some sort of gilded award they can give to Trump.[v] I feel an early offer to Barron Trump for an MBA somewhere might be a good move? And the President could likely be enticed by an honorary Harvard MBA[vi], particularly, the special gold-plated edition, due to his amazing negotiation skills. Or perhaps the President would be interested in an honorary Harvard PHD in Mathematics, given his ability to push the boundaries of all known mathematics in pursuit of lower drug prices for Americans.
Drug Prices and Percentage Gains/Losses
I suppose everyone has seen the news stories (or the late-night comedian’s jokes) where Trump promises to lower drug prices for Americans by 300%, 500% or even 1500% or 1100%. I am not the best at math (which is how I ended up in law school), but even I immediately recognized the incoherence of these statements (and there were multiple, multiple statements)[vii]. Just to be clear – a price decline of 100% means something is free. And if the price were to decline by 500%, theoretically, then the seller of the product would pay the purchaser of the item an amount 4x the stated price. Which is obviously ridiculous when we speak about prescription drug prices (though not necessarily all things)[viii]. But I am not here make additional jokes at the President’s expense; as you all know, this is a strictly apolitical newsletter. But apropos of the tariffs, I do wonder exactly how these percentage declines apply when there are also tariffs on imported pharmaceuticals. If the drugs are imported, but the end price has been reduced by 500% (presumably by Presidential diktat) what is the tariff? For companies which are importing their own drugs the value (on which the tariff is typically charged) of the drugs would, in fact, be negative (in the strictly economic sense)[ix]. Does the harmonized tariff schedule even contemplate importing goods with a negative value? Is this a de facto ban on all imported pharmaceuticals? Very strange days for customs brokers, for sure. Surely the Trump administration planned this out very carefully, with rigorous mathematical analysis and detailed econometric studies.
But I also brought up this “percentage decline” inanity because it is so closely related to a common challenge for individuals, particularly when we have seen an investment decline significantly. Or when we’ve read about a “beaten down” stock due for a rebound and thought: “Hmmm…I’ve heard of that company! Their stock price is down dramatically so maybe this is a good time for me to buy in!)”. And in each case, we may fall prey to anchoring bias and loss aversion. Or rather “you fall prey to”, as I think I made it very clear in my very first newsletter how I am immune to all cognitive and behavioral biases.
A good example would be United Health, whose stock hit $600 just 4 months ago, and is now down to about $250. Perhaps UNH investors are worried that Trump’s plan to reduce costs by 1000% means health insurers will deliver “negative co-pays” to all Americans. Perhaps investors are concerned that the company is so un-loved that its CEO’s assassination outside of an investor meeting at a fancy NY Hotel became the impetus for the creation of a modern-day folk hero/heart throb story rather than a lesson about why violence isn’t the answer (for some, at least). But I suspect a lot of existing investors are simply (i) looking at their purchase price (call it $500) and (ii) hoping that they can get back “even”. Potential new investors may think “the health insurance industry isn’t going away – I’ll buy now and the stock will be back to $600 soon, so I’ll win big! Even if it doesn’t hit $600, I’ll double my money if it gets back to $500! The existing investors are exhibiting loss aversion, and both the existing and the potential new investors are likely suffering from the anchoring effect with respect to the price. Now I am really not into picking stocks (except Tesla is still crazy overvalued[x], which is technically NOT investing advice), but it is important to remember how both loss aversion and the anchoring effect can be dangerous for individual investors in specific stocks. And that is in part (and to overly simplify it) because percentage declines and percentage increases do not correspond! (Feel free to skip the next paragraph and go right to the music if this already is super clear to you! Or not clear to you, but putting you to sleep!)
A 50% decrease in your investment requires a 100% gain to “get back to even”. If a stock you are considering is 70% off of its all-time highs – that stock will need to increase 233% to get back to its starting value (and it gets rapidly worse, as a 75% decline means a 300% increase).[xi] With both loss aversion and anchoring, investors tend to elide over these differences by fixating on the original price. The anchoring effect will mean potential new investors may think the stock’s “correct value” is closer to the high price they first read about (or were told about) rather than the current “mistaken price” (I am just going to go ahead and assume the typical investor is not trying to use fundamental analysis and DCF, but maybe I am too harsh). Loss aversion (or perhaps it’s really the endowment effect), means investors feel the pain of a realized loss much more than a gain (and certainly more than an unrealized gain). This means that investors would prefer trying to avoid realizing a 50% loss (thinking that the price will bounce-back) even if they would never try and invest in a different stock (thinking it will quickly double), even though those are equivalent as we pointed out. Of course, the way percentages work with respect to gains and losses also helps to explain the business model of venture capital funds (in a positive way!) – because you can only lose 100% of a bet, but if you happen to get a small bet into the right company, you can grow your money by almost astronomical percentages. But while the President’s math on drug prices highlights how sometimes percentages are hard for humans to intuitively understand/and act upon, this is really not how any of these things about drug prices work[xii]! Which might, in fact, be exactly what the President was counting on as he just yelled big numbers at the TV microphones.
But with United Health, of course, there are some very good reasons that current investors should try to ignore their loss aversion (and potential new investors ignore the anchoring effect). So yeah, this might not be the right falling knife to catch. United Health’s stock price may not keep dropping (and they may continue in business), but certainly not top of my list of companies (or industries) that I would expect to see 100+% stock growth in the short term. And clearly you don’t want to be overweight in UNH if they are going to be responsible for lowering drug prices by 300%! Then again, maybe all publicity is good publicity? And with that, it is time for the musical break.
This is Jesse Welles. Although I can’t say I am a huge fan of all of his work, he has turned out a lot of timely songs and he absolutely nailed his short song about United Health. (And I also have to admit that he might be more popular than I realize since a lot of his music drops on social media; yes, I recognize the implication here that I am too old to appreciate the new music!)
Brazil Tariffs.
I am not that concerned (trade-wise) that the President has explicitly tied his imposition of tariffs on Brazil to their prosecution of Brazil’s pseudo-Trump, Jair Bolsonaro (similarities include survival of an assassination attempt!). For one, this approach is likely to fail (despite the deep, deep experience the United States has in meddling with Central and South American politics). I mean, I am concerned that the President continues to excel at trying to create more enemies among countries which should be our friends (like Canada – where I am enjoying a gorgeous provincial park as I try to finalize this newsletter). But the reason I am not about substantial economic impact they exclude some of the biggest Brazilian exports to the US – namely oil and orange juice (and a variety of others). But I find it humorous that both oil and orange juice are strongly associated with states/industries which strongly supported the President. I guess the oil executives from whom Trump requested $1 Billion in contributions (but apparently did not hit the $1B mark) are not getting the benefit of Trump’s tariffs, although with the new tax bill they might still be getting their money’s worth I suppose. And, given the effect of the Trump administration’s climate change policies on the orange juice market Trump might not think the OJ farmers in Florida will have enough money to pay him off - so it doesn’t matter if Brazil exports OJ or not. (I am not making the joke about OJ futures!)
On the other hand, the beef industry, did manage to ensure Brazilian beef (another substantial export) was hit with those 50% tariffs... so I guess they must have paid the protection money in full! Or it is purely coincidence that the beef industry in the US is HEAVILY concentrated in well, basically all the red states, with the first “blue state” being California[xiii]. Now coffee drinkers – or as you may know them from years and years ago the “latte liberals” - those fancy elites will suffer! Maybe the tariffs on Brazilian coffee will finally make validate those ridiculous articles claiming “if you just stop buying coffee and avocado toast[xiv] everyday you’ll be able to afford a townhouse in Brooklyn and send your kids to college”. Although to be fair, the article (which suggests it would take 90 years of forgoing coffee purchases to save a down payment in Ontario) didn’t even address the high cost of avocado toast! Probably because it was directed towards Canadians and I haven’t seen any avocado toast my entire vacation up here (proof that I am saving money by going on vacation to Canada!)
Private Equity Update:
Not only did the president’s executive order on August 7 address the addition of private equity to 401(k)s, as discussed last time, but it included crypto currencies! Now I personally am not looking to add a lot of $TRUMP coin into my 401(k), but maybe if he offers another Mar-a-Lago dinner to $TRUMP coin holders I would be enticed. Anyway, compared to purchasing $MELANIA, probably those Private Equity funds in your 401(k) aren’t so bad, even if they are really “zombie funds”. After all, the big holders of private equity still believe it’s a great asset class! Or at least that is what the CEO of Calpers thinks, even as she make clear that their size allows them to negotiate lower fees and find the absolute best managers, which is apparently crucial to continue to get mediocre performance. And of course Yale, as mentioned in earlier newsletters, has been actively reducing its PE holdings, and having to unload them at a discount of 5-10% to the stated NAV (and probably closer to 10% since the typical discount is 10-20%, with London based private equity stakes frequently trading hands at a 30% discount to NAV). But maybe those big pension plans aren’t really looking out for the individual investor anyway; let’s see what a more reliable source thinks…you know, someone who is really looking out for the little the retail investor. Aha, perfect let’s get the CEO of Robinhood to opine; I am sure Robinhood is looking out for the average investor.
Of course, when historical returns of private equity incorporate illiquidity discounts (e.g. the ~10% haircut Yale offered to purchasers of its private equity portfolio), the performance of the industry as a whole underperforms public equity over longer time frames (in addition to the shorter time frames we already can see). But I suppose that it should be fine; as long as individual investors who are being sold private equity in their 401(k) plans are able to (i) negotiate lower fees, (ii) chose the best managers and (iii) purchase their private equity stakes at 10-30% discount to NAV. So… yeah, it should all work out just fine!
AI Updates:
Obviously, the news is always full of AI stories (or normal stories masquerading as AI stories), so I can’t possibly provide a real update. But I did want to nod toward a great article by Matt Stoller about AI and job loss in which he speculates that much of the framing that “AI is causing job loss” is merely obscuring reasons such as market power (both monopolies and monopsonies, for the labor market at least) or political problems (widespread copyright infringement). Now, of course, part of the reason I like the article is confirmation bias that it fits well with my thoughts that the impact of AI will be constrained (or accentuated) by our already pre-existing bureaucratic, political and economic/corporatist systems, which is to say it will surely turn out to be technologically impressive, horribly destructive and inefficient all at once! Probably the best summation of his entire article is his Stoller’s comment identifying the “common habit of powerful monopolists choosing to point out a supposedly neutral larger-than-life force, such as ‘technology’ or ‘the future’ or ‘disruption’ or ‘globalization’ to argue that they are not responsible for the anti-social policies enabling their market power.” But his piece is well worth a read in full (at least for the reminder to never rent with Hertz for various reasons if at all possible). You also may have seen a broadly similar argument making the rounds on the doom-news aggregator sites – a somewhat sensationalist piece by Mo Gawdat (former Googler), who is forecasting a dystopian 15-20 years period precisely because of AI’s ability to accentuate our human frailties and stupidity, although he thinks that will lead into a period of abundance (and speculating that our troubles are due to start in only two more 2 years). In case anyone accuses me of pessimism, however, I would like to note that I strongly disagree with Mo Gawdat’s timeline - my optimistic take is that the dystopia is already here, so we only have maybe 13 total more years before nirvana? Kidding, of course. Because when you need a train it never comes! Which coincidentally is our musical coda for this episode – from Amanda Shires! What sort of AI could pull off that segue, I ask you!
[i] Meet the new boss, same as the old boss. From “Won’t Get Fooled Again” by the Who.
[1] I think there is some sort of independent monitor for the Middle Eastern Studies department, it is somewhat unclear exactly what will be monitored and by whom. Regardless, Columbia, from whence I received my law degree (embarrassed emoji), continues to look like the most foolish and inept of all the schools in handling the President; perhaps not surprising given how poorly Columbia handled the pro-Palestinian protests (and the protests over the Vietnam war, and protests over the gym at Morningside Heights, etc.)
[[1]]: I presume they also asked them to prepare slide decks, timelines, and various KPIs for measuring the impact of the divestment.
[ii] By the way, any readers who are at the big law firms who are delivering millions of dollars of pro bono work, please let me know how that is going, or if the firms have merely changed how they are characterizing their existing pro bono work.
[iii] Tim Cook went to Auburn (also known as the Brown University of the South, I think…probably, or it should be) before getting an MBA at Duke (which, sadly, would probably want to be known as the Princeton of the South).
[iv] If you don’t give him one he might try and keep it anyway, or pocket it, because you know…when you are a star, they let you do it. But I apologize, this endnote might have strayed too close to being considered “political”. And this is obviously an apolitical newsletter.
[v] If Williams were targeted, we would obviously award him a gold and purple cow…we could call it a golden calf…he seems like he would be on board with that!
[vi] I pity the poor West Point graduate who had to sit through Trump’s graduating speech in 2025 and might now have their graduation from the Harvard MBA program ruined in a few years.
[vii] At least three different times, I think – although I decided not to try and find all of them (though I am pretty sure each of the late-night comics have plenty of clips if you missed them).
[viii] For example, you can imagine the “price” of property being lowered by 300% upon the discovery of significant environmental remediation requirements, which would require an indemnity from the seller. Even then, my (very limited) experience has been that the price (if it started at $2M) wouldn’t be expressed as “Negative $4 Million”, but rather $1 and the seller has a $4M (capped) of indemnity/clean up obligations (or perhaps, even better, uncapped, but with $4 million in escrow). But, despite the President being a “real estate guy” I doubt this is where he was coming up with his ideas for lowering drug prices.
[ix] If the imported pharmaceuticals were sold in an arm’s length transaction, the tariff would obviously be based on that price. But why would they do that?
[x] In fact, Seeking Alpha now describes investing in Tesla as “Reckless, not just Risky”. Which might be useful advice, except that the only thing I would recommend to clients MORE than not investing their entire portfolio in Tesla is to NOT read Seeking Alpha! Or at least don’t read it for anything more than enjoyment 😊.
[xi] Another way to think about it is the number of times you need the investment to double e.g. if the stock was $100 per share and dropped to $25 per share, means the stock needs to double (100%) to get to $50 and then to double again (another subsequent 100% gain - which is actually two additional 100% increases, for a total of 300% (from the original $25 per share price).
[xii] Those of you looking for a good historical meme will remember (and maybe smile) watching this.
[xiii] Now, I haven’t checked the numbers, but I feel pretty comfortable guessing that beef production is a tiny percentage of the California economy.
[xiv] For the curious, although Brazil is growing more avocados, they are not exporting them to the US – as Mexico still dominates the avocado market (maybe up to 88% of the market). Luckily, Mexico is still under a tariff pause, so you can splurge on the avocado toast and you might just need to switch to a chai latte with your avocado toast. Or matcha?