Streetwise for Friday, June 22, 2018

President Trump set off another round of Twitter hyperventilation and financial market selling with his latest threat to place a 10 percent tariff on an additional $200 billion of Chinese imports. Trumpís concerns revolve around Chinese industrial policies, lack of market access for U.S. goods and a $375 billion trade deficit with China.

Meanwhile, Lloyd Blankfein, CEO of Goldman Sachs, made the point that Trump’s threat to escalate a trade conflict with China is likely a negotiating tactic and not a “suicide pact.” He believes the White House tit-for-tat strategy is a risky one.

The war of words between the U.S. and China, the world’s two largest economies came after several rounds of failed talks resulting in $50 billion in tariffs. Stock markets in both countries dropped as a result, which included a 1.6 percent price decline in the shares Goldman Sachs.

Blankfein pointed out that, “if you want … to give somebody the incentive to see the world from your view point, it does not help to remind them that your negotiating position is a better one.î

“The fact is,î Blankfein said, ìif we go tit-for-tat, China eventually runs out of U.S. imports to apply a tariff to and we don’t. So, if you want to make that point, you make it. However, that is what you would do if you were crazy and really want to end free trade.”

Trump has set his sights on “fixing” the U.S. bilateral trade deficit with China. Is that a worthwhile priority of trade policy? Probably not. But Trump is convinced that reducing the deficit is priority number one. And of course, Wall Street is not having any of it.

Unfortunately, Trump’s tariff war is based on a very simple formula: “Made in China,” bad; “Made in the USA,” good. Yet, few of the products targeted by Trump’s tariffs are made entirely in China, and many products made in America include components made elsewhere, including in China.

Globalization is a reality, and among its major beneficiaries are American manufacturers, workers and consumers. A new paper from David Dollar and Zhi Wang of the Brookings Institution makes the case that ignoring reality, as Trump’s trade policies do, is tantamount to “shooting oneself in the foot.”

So how do you navigate the current turbulence of global uncertainty? First, disregard playing the game of, ìwhat might happen next,î and the resultant deafening din of economic and financial hysteria. Know that the solution to most investment questions comes from fundamental financial research.

What about trying to mimic the moves of successful investors? Robert Shiller, an economist at Yale University, recently pointed out many people have tried to mirror the strategies of investors such as Warren Buffett. The problem is that by not understanding exactly how someone makes decisions, you cannot fully duplicate the process.

A 2008 study by Gerald S. Martin of American University and John Puthenpurackal of the University of Nevada, Las Vegas, showed when SEC filings reveal changes in the Berkshire Hathaway portfolio, the stock prices of any newly acquired companies had an abnormal one-day increase, averaging 4 percent.

Why not simply mirror Buffett’s moves? Not so fast. A paper by R. David McLean of Georgetown University and Jeffrey Pontiff of Boston College pointed out that the effectiveness of investing strategies diminishes after their publication.

The paper examined 97 financial patterns that appeared to predict investing returns and had been published in reputable scholarly journals and supported by tests that found statistical significance.

The researchers learned that while the strategies outperformed the market, their success decreased by more than 50 percent after publication.

In a follow-up paper, the two authors, along with Joseph Engelberg of the University of California, San Diego, showed that the one-day positive surprises on firms’ earnings announcements accounted for virtually all the ongoing outperformance. Why? Probably because forward projections of corporate earnings are often erroneous.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.