Just in case you're looking for an opportunity to read some more about tariffs, Howard Marks has a new memo out titled "Nobody Knows (Yet Again)." In it, he talks about comparative advantage, how global trade has benefited Americans, and what this could mean for the future.

Here's an excerpt that I found interesting specifically because I've also been thinking about the parallels with Brexit:

I consider the tariff developments thus far to be what soccer fans call an “own goal” – a goal scored for the other side when a player accidentally puts the ball into his own team’s net. In this way, they’re highly analogous to Brexit, and we know how that turned out. Brexit cost the British mightily in terms of GDP, morale, and alliances, and it harmed their reputation for governance and stability. All of this damage was self-inflicted.

In the memo, he also provides an important history lesson:

To cite one more factor that has made the world a better place, I describe the behavior of the U.S. in the post-World War II period as “generosity toward the rest of the world stemming from enlightened self-interest.” Under the Marshall Plan, we gave (not loaned) billions of dollars with which Western Europe rebuilt. Likewise, between 1945 and 1952, General Douglas MacArthur oversaw the reconstruction of Japan and the strengthening of its economy. Since then, the U.S. has (a) distributed extensive foreign aid, (b) invested heavily in healthcare in developing nations, (c) created programs that bring foreign students to the U.S. and vice versa, and (d) beamed positive messages to people throughout the world. These are all instances of generosity. In each “transaction,” we gave more than we directly got, and a cynic might say we acted like suckers.

Yes, these things can be described as largesse, but as the National Archive puts it, the Marshall Plan “provided markets for American goods, created reliable trading partners, and supported the development of stable democratic governments in Western Europe.” That’s a pretty good payoff. People in other countries received lots of freebies, but certainly these programs helped the U.S. by restraining communism, bringing nations into defensive alignment with the U.S., and contributing to the U.S.’s position as the world’s most prosperous nation. I have no interest in seeing the U.S. turn isolationist.

Unfortunately, greater isolation will almost certainly be one of the consequences of Trump's tariffs. It doesn't matter that many of them have now been paused; the damage has been done. We've seen this spastic movie before. In fact, they could all go to zero tomorrow, and there would still be damage.

This is an enormous change to the world order.

Cover photo by taro ohtani on Unsplash

As many of you will know, I very much enjoy reading the investing memos of Howard Marks. And buried somewhere in one of them is an analogy about the kind of investors who try and time the market and/or who constantly chase the next hot thing (whatever asset class that may be).

It goes something like this: If you're trying to catch a bus and you're running from bus stop to bus stop trying to perfectly time the arrival of the next one, there's a chance that you might never catch a bus. But if you patiently wait at one stop, eventually a bus will come and eventually you'll be able to get on it.

I like this analogy because you see this jumping around in every industry. In tech, a lot of people have moved from the crypto bus stop to the AI bus stop and, in real estate, we've seen it, and are seeing it, with industrial, student housing, and other in-demand asset classes. Capital wants its yield.

Now, it's obviously important not to ignore macroeconomic shifts and fundamental changes to your sector. If your bus route has been cancelled or rerouted, you don't want to be waiting patiently at that stop. You want to be on the move.

But if the long-term fundamentals in your sector haven't changed and everyone else is distracted by what's new and shiny, hanging out can be a powerful strategy. And this brings me to something that Marks recently wrote about in a memo called "On Bubble Watch." In it, he talks about the three stages of a bull market.

Here's how he describes stage one:

The first stage usually comes on the heels of a market decline or crash that has left most investors licking their wounds and highly dispirited. At this point, only a few unusually insightful people are capable of imagining that there could be improvement ahead.

In my view, this is broadly the stage we are at in the commercial real estate industry. It's tough out there. But at some point in the future, we will move past this stage and go from "a few unusually insightful people" to "most people" and then finally "everyone." These are the exact words used in his 3 stages.

But here's the thing.

There's lots of opportunity if you can be among the "few unusually insightful people." It gives you the chance at being right about something that "most people" are overlooking. But that means you need to hang out at the bus stop that you have high-conviction around, which can be hard if everyone has left you in search of another one.

Yesterday's post tried to pit politics against the realities of how we know cities and economics work. So today, I thought I would share a set of memos from Howard Marks (of Oaktree Capital) titled Economic Reality, Political Reality (which he refers to as an oxymoron), and Shall We Repeal the Laws of Economics?

In this last one, he specifically talks about things like price gouging (starting with the grocery industry) and apartment rent controls. Each is worth a full read when you have the time, but here I'll leave you all with a few city building-related thoughts.

Marks describes economics as the study of choice. And within these choices, there are many complicated moving pieces and second-order consequences. Take, for example, rent control in New York City. What rent control does is stop the free market from being able to freely set rents. The result:

A person in favor of this arrangement would argue that it maintains affordability and diversity. What it means in purely economic terms is that some people who couldn’t afford to live in New York City if rents were set by free-market forces are able to live there if they’re lucky enough to secure an apartment with regulated rent. But other people who would like to live in New York City and can afford higher rents can’t do so because there are no apartments for them. And lastly, landlords that have apartments that are somehow unregulated can command higher rents than would be the case if additions to the supply of apartments weren’t being discouraged. It’s a matter of personal philosophy whether this is good or bad. But clearly, the laws of economics and the actions of free markets aren’t at work in New York City. Someone in government is making the decisions.

Much like inclusionary zoning in the case of new housing, the tradeoffs with regulated rents are that you get (1) less overall housing supply and (2) more expensive prices for the people that can pay market rents.

You could argue, as Marks suggests, that these are acceptable outcomes; but regardless of your opinion, there are real consequences to this policy decision. There's no such thing as a "free lunch" in economics, and consequently there's no such thing as no-cost affordable housing. The question is: Who pays?

Going back to the topic of traffic congestion from yesterday's post, Toronto's general reluctance to implement any form of road or congestion pricing is also an economic choice. We have priced our roads so cheaply that demand is always going to outstrip supply. And this is expected. What we are experiencing today is a natural market outcome.

Targeting bike lanes as part of the problem is meant to counter this by increasing road supply. Less bike lanes means more space for cars, right? But the second-order consequence of this choice is that you push people off their bikes (which take up less road space) and into cars (which take up more road space). So demand is also likely to increase.

The stark reality of solving traffic congestion is that it will require greater change. It will mean fewer people driving, more people taking transit and biking, and the people who do continue to drive will have to pay more for it.

Of course, this is not what any politician wants to talk about. As Marks says: "In the world of politics, there can be limitless benefits and something for everyone. But in economics, there are only tradeoffs." The tradeoff we have decided to make is cheap roads in exchange for crippling traffic congestion.