The Week That Was (And Wasn’t)
Markets last week were simply insane — the Monday puke, the Wednesday 90-day tariff pause, the Thursday re-reality of Chinese tariffs, and closing with some optimism Friday around negotiations with tariffs. If you lived in a vacuum and only saw Monday the 7th’s opening S&P level of ~5,000 and Friday the 11th’s closing level of ~5,363, you would simply have said that was a pretty solid week of gains - in fact it was the best week in over a year.
In Treasuries we started last week with the 10Y ~4.00% and the 2Y ~3.66% and despite the global uncertainty we ended with a 10Y of ~4.50% and a 2Y of ~3.95%. Not the response many were hoping for from their safe haven asset.
Morgan Housel, The Voice of Reason
Thankfully, Morgan Housel’s recent podcast episode reminded us that tariffs are kind of like refined sugar—everyone knows they’re bad, but we keep reaching for the bag anyway. Housel notes that while there may be reasons to use tariffs selectively (national security, critical goods, the occasional political saber-rattle), the widespread application of tariffs rarely helps the people they’re sold to help.
He brought the receipts, too. Like the fact that U.S. manufacturing output has gone up while manufacturing employment has fallen—a product of automation, not China. Steel production in Gary, Indiana, is the poster child: more tons, fewer hands.
It turns out, most of the decline in jobs wasn’t due to someone else doing the work—it was due to no one needing to do it anymore. Machines don’t vote, but they do cut costs.
And then there’s the nostalgia trap. We pine for the 1950s, but as Housel points out, we forget that the U.S. manufacturing dominance back then came from the fact that every other factory in the world had just been bombed to rubble. That’s not a business model. That’s luck wrapped in tragedy.
What Would Adam Smith Say About All This?
Probably something along the lines of, “You’ve forgotten the point of the whole system.” Smith’s Wealth of Nations laid out how we all benefit when we each do what we do best. That’s the principle of comparative advantage—and the idea that the baker should stick to baking, the brewer to brewing, and the government to not fouling things up.
Comparative advantage isn’t about being the best at everything. It’s about being smart with your time and resources. If I’m a mediocre plumber but a great economist, and you’re a decent economist but a fantastic plumber, we should swap services and stop pretending we’re saving the world by overpaying for our own mediocrity.
In The Wealth of Nations, Smith torched the mercantilist mindset—an old-school belief that nations prosper by hoarding gold and protecting domestic industries through tariffs. That doctrine assumed that wealth was finite, nations got rich by amassing gold and silver, and trade was a zero-sum game. Sound familiar?
Smith argued that real wealth came from productive labor, specialization, and voluntary exchange that benefited all parties. In fact he saw tariffs and protectionist trade regimes as morally suspect, likely to favor certain politically connected industries at the expense of the public.
But we all know that in the real world things are messy, political, geopolitical and geoeconomic. Not every economy in the world shares the same beliefs about free trade.
I think Smith would argue that temporary protection and the imposition of countervailing duties should be in the toolbox and used in a measured, targeted way that is aimed at bringing about free trade. In my read, Smith is also “pro-consumer” and would likely not want to harm consumer interest while trying to get to freer trade. My guess is Smith would acknowledge that allowing other countries to use policies to effectively crush competition is also less than ideal.
A Smithian view of how to manage the current international trade system would probably be something like it’s foolish to abandon the path to open trade just because others stray from it - rather we should build trust in our institutions and play the long game investing in things like education, infrastructure and innovation.
The Week Ahead: Still Waiting for Clarity
The week ahead is part earnings, part data and mostly geoeconomics. And with data and earnings don’t get your hopes up—none of that data is tariff-adjusted yet. The real headline risk remains geopolitical: will the tariff pause stick? Will it escalate?
Monday: Fedspeak
Tuesday: Export and Import Prices, Empire State Mfg, more Fedspeak
Wednesday: Retail Sales, Industrial Production, BoC Decision, 20Y Auction
Thursday: ECB Decision, Housing Starts
Friday: Take a Break
XTOD: IMO — This weekend’s news is not bullish. The market covered most shorts and some went long Friday as the skew to weekend headline risk was clearly bullish. So microstructure set up not bullish. Now you have more evidence that there is no plan. More uncertainty. Plus electronics and semis might get tariffed separately anyway. And if you think White House picking winners is bullish Apple… Check out TSLA after inauguration, ORCL after stargate, or ETH after all the clownish White House pumps. Apple is not a good short but my guess is we close negative Monday on all major indices even if Apple’s up 6 percent on relief.
XTOD: The hard numbers: The Republican tax plan includes approximately $1.5 trillion in new tax cuts beyond the $3.8 trillion extension of the 2017 Trump tax cuts.
XTOD: A new kind of geopolitical risk premium – Canadian and Danish institutional investors are, umm, reconsidering the extent of their exposure to the United States. An alternative headline would be that Canada and Denmark are thinking of hitting America where it really hurts (PE industry fees and compensation) …
XTOD: One of sports' greatest traditions. 🙌 Rory McIlroy receives the Green Jacket from Scottie Scheffler
XTOD: Stephen Vogt said, “Learn the lesson. Leave the event.” “You made what you thought was the best decision in the moment. Then you leave it behind.” Growth comes from reflection, not rumination. Mistakes don’t define you. They are part of the process - choose growth.
https://x.com/donnelly_brent/status/1911448770509787313
https://x.com/HayekAndKeynes/status/1911385713238553060
https://x.com/Brad_Setser/status/1911464392769569226
https://x.com/GolfChannel/status/1911573685334327556
https://x.com/coachajkings/status/1911396599353221302
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