We all use systems of belief to make sense of the world. Our core beliefs are deeply embedded and tough to shake.
The outer layers of the system act as firebreaks between what we feel is true, and messy unreasoned reality.
For example, while I do not expect to see Cristiano Ronaldo in a black and white shirt, acknowledging it as reality is not too hard. Ronaldo in a white shirt is a weakly held, outer layer heuristic, which I am quite willing to let go if pressured too much. However, Ronaldo being superior to Messi is a deeper belief unshaken by a Juventus shirt.
We are most prone to bias when our belief systems are under assault. In my experience people do not like letting go of their view of how things should be in the face of contrary evidence. They sacrifice weakly held subsidiary beliefs first to protect their more deeply held ones. Orthodoxy is entrenched. Orthodoxy requires violent jolts to melt away. Like when too many things stop making sense anymore.
What does this mean for the world today? There are no shortage of topics creating anxiety. A few surround Donald Trump – who is an unusually anxiety-creating person.
If there is a consensus out there it is about trade wars. Everyone – apart from Trump – seems to accept that trade wars are bad. It is tempting to believe this is another example of Trump as a delusional joke. This is a risky assumption.
The easiest assumptions to believe are the ones you should question the most – they are harder to accept if you are wrong. Trump is no joke. He polarises, but he is popular. He is part of a popular movement and the distrust of central bank orthodoxy should not be dismissed lightly. If the US economy is booming when the next election comes around, the incumbent presidential advantage may be difficult to shake. If you can entertain the notion that Trump is not a joke, then what about his rhetoric on trade wars? Perhaps this deserves closer scrutiny as well.
We have not had anything looking like a trade war for almost a century. The accepted wisdom of trade wars as bad leans heavily on the argument that trade wars were a significant cause of the Great Depression. But is this a valid reference period and are Trump’s actions really so alarming?
Trump has clearly put a marker down, which fundamentally pivots the way the world views America. Overtly pushing domestic self-interest, targeting Intellectual Property theft and inequitable trade treatment – even if they reside in friendly trading blocs like EU and Canada – is an abrupt shift. Perhaps all Trump is doing is upping the pressure for other countries to act like free trade partners, not just talk the free trade talk.
I really did not think I could entertain such a thought, but on closer scrutiny, the veneer of ‘free trade’ hides a lot. Most of us know free trade, in its pure sense, does not exist. It is an illusion that we have had decades of free trade. Tariffs are an outmoded, crude weapon in trade, but other subtler ones are prevalent.
Localised regulations and standards have long hindered trade and favoured local production. Duties, excises and costly convoluted paperwork make shipping goods across national boundaries complex and expensive. The more I look at Trump’s policies, the less they seem like a joke. The man is difficult to stomach but his radical policies may be what are needed after decades of drift.
What does this mean for our portfolios? We believe the only way to cope is to watch and be flexible about one’s views. It may be bad, but it may, dare we say it, be good. Only time will tell. It helps not to be too entrenched in your belief system and be prepared to kick against orthodoxy if its time is up.
Jeremy Lang, partner and co-founder of Ardevora Asset Management