Matt Levine’s Titled His Column: Tariffs Are Illegal
As you already read, yesterday started with the news that Federal courts blocked Trump’s tariffs. By the afternoon the Trump Administration appealed and the tariffs were reinstated. It seems likely this will end up in front of the Supreme Court, but as some analysts have pointed out, there are other avenues the administration can use to impose tariffs, though each seem to have some limitations. In the meantime some reports continue to state that the trade negotiations between some countries and the U.S. continue.
To state the obvious, the future of tariffs is uncertain and if there’s one thing markets hate, it’s uncertainty.
But What If You Need Uncertainty?
I’m sure you know that Fisher Black is famous for his work on option pricing and the famous Black-Scholes (and later Merton) model. And you might remember my post where I mentioned the DIKW theory of knowledge, where the “I” stands for “information”, or data made useful, where we can make useful inferences. So what does this have to do with Fisher Black, well back in 1986 in a paper titled Noise he made the point that uncertainty is a necessary condition of financial markets.
Black defined information in markets as data that allows us to estimate true value and everything else as noise, simply data that appears informative, but really adds nothing to our ability to estimate true value.
He argues that absent this uncertainty, in the form of noise, is essential because without it “there will be very little trading” in individual assets. Further providing, “Noise trading is trading on noise as if it were information. People who trade on noise are willing to trade even though from an objective point of view they would be better off not trading. Perhaps they think the noise they are trading on is information. Or perhaps they just like to trade. With a lot of noise traders in the market, it now pays for those with information to trade. It even pays for people to seek out costly information which they will then trade on.”
So the next time you hear someone complain about how much uncertainty topic XYZ creates, just remember without that uncertainty there would be no liquidity and markets lose meaning.
“Differences in opinion make a market” or as Dune put it: “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.”
Perhaps The Real Uncertainty Is The Limit Of Central Power
What do tariffs and “the whiskey rebellion" have in common, almost everything or maybe nothing.
Tariffs today and the whiskey tax of the 1790s may seem worlds apart, but they share a common thread: a federal government, burdened by debt, reaching for revenue in pursuit of what it defines as national interest. Today, that national interest is domestic manufacturing and national security, specifically strategic sectors like steel and semiconductors. In the 1790s, the interest was the westward expansion and asserting control over the Northwest Territory. Today, the tariff actions imposed by the executive branch, which supposedly will be paid for by exporting countries, but in reality are paid by the importer (though who bears the actual tax incidence is debatable), are the actions that are justified in supporting the national interest. Back then it was a Congress enacted tax on whiskey distillers, part of a plan to fund the war debt and build federal legitimacy in the west. Both tariffs and the whiskey tax appeared to unevenly economically squeeze some groups more than others: back then western PA whiskey distillers bear a heavier burden than eastern counterparts, today it’s small and medium sized businesses feeling the tariff brunt.
The policies of today and of yester-year were viewed by some as being too top-down, and solutions that ignored economic realities. Thankfully today’s resistance is judicial and procedural, as contrasted by those of the 1790s were resisted with rifles. The overarching parallel is one as old as this republic, which is one of the limitations of central power. Whether it has been frontier stills or modern ports and factories, American history is filled with moments where citizens have questioned the reach of central power. The song remains the same, who decides, who pays, and who pushes back.
Speaking Of Pushing Back On Central Power
Trump invited Powell to the White House to tell him to lower rates. Powell reiterated (at least through the Fed statement) that the Fed will “make decisions based solely on careful, objective, and non-political analysis.” For all the media hype around Trump and Powell’s relationship, it’s really not a new political story. Paul Volcker has written about pressure from politicians on himself during his tenure in his memoir. Nevertheless, I’ve written about this tension a few times and perhaps my favorite lens to view this falls under the concept of “fiscal r-star” which you can read about in this post from back in January.
Maybe We Need Information - But All We Get Is Data
In data, we got a slight improvement in GDP in the second estimate with 1Q estimated to be -0.2% vs. the previous estimate of -0.3%, but consumption was revised down. With all the “noise” and speculation of whether there was tariff front-loading, etc. in 1Q, it’s hard to know what to make of these estimates. Over in jobless claim land, claims remained low.
And the treasury was able to sell the 7Y note at 4.194%, printing 2.3bps through where WI was trading with again signs of strong foreign demand.
We ended the day with the S&P 500 up slightly to 5,912. The 2Y yield moved down to 3.95% and the 10Y yield down to 4.42%.
PCE hits this morning. Let’s see what new uncertainty it can gift us.
XTODs:
XTOD: "I encourage you to continue pushing the boundaries of our knowledge, to ask the difficult questions, & to pursue the answers with rigor & dedication. Your efforts today will shape the policies of tomorrow, influencing the economic well-being of millions." https://federalreserve.gov/newsevents/speech/kugler20250529a.htm
XTOD: If $WFC Asset Cap gets lifted that’s huge capacity to absorb Treasuries & Agencies… already they have started to buy CLO AAAs…
XTOD: The stock market isn't where you get rich. You get rich developing skills & using those skills to provide goods & services to other people for income which allows you to save.
The stock market is where you allocate some of that savings to help protect & plan for future spending. Index funds are a wonderful stock market savings vehicle as they're low cost, diversified and will likely beat 80%+ of higher fee strategies.
XTOD: When there is a lack of clarity, people waste time and energy on the trivial many. When they have sufficient levels of clarity, they are capable of greater breakthroughs and innovations – greater than people even realise they ought to have – in those areas that are truly vital.
XTOD: Investor Rick Buhrman on the kindness of mastering your craft:
INTERVIEWER: What is the kindest thing that anyone's ever done for you?
BUHRMAN: ... our oldest son, Theo, who just turned seven, spent the first six months of his life in several NICUs. He was eventually helicoptered to Indianapolis at Riley Hospital for Children. And while we were living in that NICU for almost a half a year we saw a lot of kids who passed away. Most of those kids were not as sick as Theo was.
I don’t know exactly why Theo survived, but I know that a major part of how he survived was because for several decades leading up to that moment, numerous nurses, nurse practitioners, respiratory therapists, doctors, surgeons had committed themselves wholeheartedly to mastering their craft. I can give you tons and tons of examples of these people. And I know that in the moment, it wasn’t necessarily viewed as kindness.
But maybe in some sense, the kindest thing that all of us can do is to pursue something radically that in some way is in service to others, because you just don't know how it's going to change the trajectory of human life. And so for all of those medical practitioners, none of whom I'm sure are listening to this, I owe everything to, because they gave me the gift of being Theo's dad.
https://x.com/DavidKotokGIC/status/1928163547520880992
https://x.com/gamesblazer06/status/1928160833852281106
https://x.com/cullenroche/status/1928102254336168440
https://x.com/GregoryMcKeown/status/1928164457848655978
https://x.com/ericvishria/status/1928191518294299156
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