I’m always being asked, “What keeps you up at night about the stock market?” Lately the dialogue around trade wars among investors has intensified. Turn on any business media outlet and you will find a constant stream of pundits talking about the escalating risks associated with President TrumpDonald TrumpYoungkin ad features mother who pushed to have 'Beloved' banned from son's curriculum White House rejects latest Trump claim of executive privilege Democrats say GOP lawmakers implicated in Jan. 6 should be expelled MORE's trade policies.
Last week, National Economic Council Director Larry Kudlow turned up the heat on China during an interview on CNBC when he stated he did not believe that Chinese President Xi Jinping was really interested in working on a trade deal.
You might have expected the market to trade down materially after a revelation like that. It barely moved.
During the contentious presidential campaign in 2016, Trump continually made reference to trade imbalances with Europe and China. These are two different issues.
The U.S. is likely to maintain a trade deficit with China even if all tariffs are removed. Why? The U.S. is the largest economy in the world, and the American consumer has a ferocious appetite for goods and services. The U.S. economy simply consumes more than it exports. This is not going to change anytime soon.
Tariffs are a different deal. They are imbalances. Take the automotive industry, for example. The Chinese and Europeans charge higher tariffs on U.S. cars coming into their markets than corresponding Asian and European automobiles entering the U.S. markets. This has been going on for years.
For decades, no U.S. president has had any interest in getting into a skirmish over this, as it was far more expedient to “keep the peace” rather than get into an escalating trade war that may cost American jobs, reduce productivity and maybe cause creeping inflation.
Why take such a risk? No previous administration did, and the gap between U.S., Chinese and European tariffs continued to grow.
Then, Trump comes along. He is like a honey badger; he does not care about historic protocol. Maybe you like him, maybe you don’t. Maybe you are like me and no longer listen to the rhetoric, the tweets, the constant hysteria of news networks barking for or against him. If you are trying to make investment decisions, it's mostly useless information.
Trump is like no president before him: not good, not bad, but different. Want to manage through the turmoil? Here is a better strategy. Ignore the noise and watch the policy.
The policy is crystal clear. Listen to the messaging coming from Commerce Secretary Wilbur RossWilbur Louis RossBannon's subpoena snub sets up big decision for Biden DOJ House panel, Commerce Department reach agreement on census documents China sanctions Wilbur Ross, others after US warns of doing business in Hong Kong MORE, Director Larry Kudlow and Treasury Secretary Steven MnuchinSteven MnuchinMajor Russian hacking group linked to ransomware attack on Sinclair: report The Hill's Morning Report - Presented by Alibaba - Biden jumps into frenzied Dem spending talks Former Treasury secretaries tried to resolve debt limit impasse in talks with McConnell, Yellen: report MORE. These are competent managers tasked with executing directives. They and their respective staffs have delivered deregulation and tax reform and are now focused on trade.
Their message is clear. They are going to keep ratcheting up tariffs until the eurozone and China come to the table. They care about the North American Free Trade Agreement (NAFTA) and the Asian trade protocol, too, but these have been pushed to the back burner while they focus on the big dogs, China and Europe.
If you listen and believe the noise, this is economic suicide and will result in the end of the free world as we have known it.
So why has the market not corrected, and why have many stocks continued to hit all-time historic highs? Because the potential to equalize tariffs has such tremendous economic upside for the U.S. economy, investors are willing to put up with pain even if the chance of success is only 50 percent or less.
How much pain? A lot.
The markets know this is not going to happen overnight, but the upside is so enticing that it is willing to wait. Case in point: Trump recently remarked to German Chancellor Angela Merkel that he sees a lot more German cars driving around the U.S. than he sees American automobiles on the Autobahn.
Maybe the Germans got the message. They are rumored to be bringing a deal on auto tariffs between the two countries when they meet at the White House soon. This is proof that if you don’t ask, you don’t get. I am going to go long on the U.S. auto sector going into that dinner.
My bet is that the strategy is about to start paying dividends: the equalization of trade tariffs. This is a move toward a more free and competitive trade between the two auto markets that we have not seen in decades. Investors and employees will benefit.
China is going to be far more complex, but I’m willing to wait and, for now, so is the market.
I never endorse politicians. You can’t win because you will always make 50 percent of the constituency unhappy. But I do watch and study policy. I have to because I have to put money to work in the market every day, and policy can have a tremendous impact on returns.
You never know what the market will do tomorrow, but you can manage risk. My best advice in these extraordinary times? Tune out the circus and focus on the policy that actually gets implemented. It's getting interesting.
Kevin O’Leary is the chairman of O’Shares ETFs, a CNBC contributor and an investor on ABC’s four-time-Emmy-winning "Shark Tank."