March 2025
IN THIS ISSUE
How about those Likelyhoods?
Money supply
Keep it simple
Read a poem
Are these tariffs legal?
I am not smart enough to predict President Trump's tariff policy. As a dealmaker, I suspect Trump will use tariffs as leverage to bring other countries to the table and see what kind of deal he can negotiate from there. Those negotiations are uncertain, as are the impacts on corporate profitability, so it is prudent for managers to prepare for losses while positioning to take advantage of volatility-induced opportunities.
Plenty of analyses have sought to use prior history to forecast what might happen now. One account quipped that there’s a reason for the approximately 100 years between Presidents who have pursued substantial tariff policies - because they need an entire lifetime of people who lived through those tariffs to die before they can convince the next generation (who has not seen tariffs fail for themselves) to try tariffs again.
In either case, I caution against leaning on historical analyses for predictive value. Simply, each period in time has its own unique and complex situational factors that cause its particular outcomes. Mark Twain noted “History doesn’t repeat itself, but it often rhymes”. Or as statistician George Box observed, all models are wrong, but some are useful.
In the case of tariffs, Trump is using tariffs for different purposes, under different legal authorities, and with different domestic and global economies than previous Presidents. How different? Impossible to quantify precisely of course, but the more different they are, the less relevant those histories will be in forecasting the present day effects.
That said, there are a number of oddities that I and others have about Trump’s tariffs:
If tariffs are supposed to make domestic production and labor more competitive with lower cost international producers, then domestic companies need time to build the infrastructure to manufacture here, which takes time (probably in the years, not months). Effective policy would therefore need to give businesses time to build this infrastructure so domestic supply can meet domestic demand before enacting such tariffs.
Trump invoked the International Emergency Economic Powers Act (IEEPA) as giving him the authority to apply tariffs. However, it is legally questionable whether the IEEPA grants this authority. For example, the IEEPA requires the President to declare a national emergency to deal with any “unusual and extraordinary threat”. It is economically dubious to claim that a “trade deficit” is unusual and extraordinary given that trade imbalances have existed, well, forever. Like, maybe we simply have much more wealth than another country and therefore they cannot possibly buy as much stuff from us as we buy from them?
Tariffs are widely understood by economists to be lose-lose. Trump has occasionally referenced this reality after his election (not before, when falsely claiming that other countries pay the tariffs), by indirectly noting that tariffs may hurt the US but they will hurt the other countries even more, therefore tariffs can be used to our advantage. But if the economic pain gets too bad, Congress could reclaim the authority given to it by the Constitution to impose tariffs, rescinding that authority that has previously been delegated to Presidents.
Ultimately, with all the campaign contributions from big business, and all the retirement funds in the stock market, if tariffs are as bad for corporate profitability as critics suggest, then stock prices could certainly plunge even further. If there is sufficient economic pain on both Wall Street and Main Street, the political pressures could be much faster and more effective than legal challenges at reining in Trump’s tariff policies.
Watch this space.
ONE MORE THING…
How about those Likelyhoods? Man Searching For Dumped £600 Million Bitcoin Drive Has Better Odds of Winning Lottery : ScienceAlert
Money supply. Yes, changes in the money supply of invested dollars will necessarily “change” market valuations. But to “distort” valuations implies a temporary deviation from some otherwise secular foundation. Don’t conflate the two. U.S. households are more invested in stocks than ever and it's distorting market valuation, says JPMorgan
Keep it simple. The top 20 hedge funds outperformed their rivals last year, but they still trailed a simple 60% stocks 40% bonds portfolio, with far fewer expenses of course. These hedge-fund legends beat their peers. But a simple model beat them. - MarketWatch
Read a poem. Buffett advises keeping cool during market turmoil with this poem: “If you can keep your head when all about you are losing theirs ... If you can wait and not be tired by waiting ... If you can think — and not make thoughts your aim ... If you can trust yourself when all men doubt you ... Yours is the Earth and everything that’s in it.”'Keep your head': Why Warren Buffett suggests reading a 19th century poem when stocks are falling
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