What’s in a name? That which we call a rose, by any other name would smell as sweet.

Romeo and Juliet, Act II, Scene II

 

The Supreme Court finally released its ruling on President Trump’s use of the IEEPA (International Emergency Economic Powers Act of 1977) to impose universal tariffs on foreign goods and the verdict was utterly unsurprising, at least to those of us who have actually read the law. It was obvious the tariffs were not authorized by the law – the word tariff doesn’t appear in text – but it took the Supreme Court nearly a year to figure it out. That may not matter to the large companies that dominate business news but it matters a lot to the companies that didn’t survive President Trump’s lawlessness. 

In case you missed it, the Court ruled that the President exceeded the authority granted to him by the IEEPA and that the tariffs were therefore not authorized. I’m not going to go over the legal aspects of the ruling because I’m not a lawyer and because the specifics are mostly irrelevant for the purposes of investing. If you’re interested in reading more, I’d suggest Gorsuch’s concurring opinion which manages to skewer the conservative dissenters – Kavanaugh, Alito and Thomas – as well as the liberals who concurred, for their blatant hypocrisy. Neil will be sitting by himself in the Fed lunchroom. Here’s a link to the entire 170 pages of the opinion, with dissents. 

President Trump wasted no time in reimposing tariffs under section 122 of the Trade Act of 1974, at 15% as of Saturday, on the whole world apparently. Well, except for Canada and Mexico (although Canada is on shaky ground), a fairly lengthy list of product exemptions, some things covered by tariffs imposed under a different trade law and maybe some countries that have already negotiated new trade deals. On the latter point, the new tariffs are in excess of what has been negotiated by some counterparties, most notably the EU:

Trump’s imposition of a 15 percent global tariff following Friday’s high court defeat is “a clear breach of the deal we had agreed,” Bernd Lange, chair of the European Parliament’s trade committee, told POLITICO on Sunday. “I will therefore propose that we suspend ratification of the agreement for the time being,” he said.

Lange said he could not rule out “renegotiating the agreement.”

Lange earlier Sunday decried “pure tariff chaos from the U.S. administration,” in a social media post. “No one can make sense of it anymore — only open questions and growing uncertainty for the EU and other U.S. trading partners,” he wrote.

The terms of Turnberry Agreement and the “legal basis on which it was built have changed,” Lange said in the post on X. “Do new tariffs based on Section 122 not constitute a breach of the deal? Regardless, no one knows whether the U.S. will adhere to it — or even be able to,” he added in his post.

“At our extra meeting tomorrow, I will therefore propose to the EP-negotiating team putting legislative work on hold until we have a proper legal assessment and clear commitments from the U.S. side,” Lange said.

The dissenters warned about this type of chaos if the tariffs were struck down but excusing lawless behavior because not doing so would inconvenience the lawbreaker has to be the most novel legal theory I’ve ever run across. President Trump and Treasury Secretary Bessent both also warned that refunding the tariffs already collected would have a negative effect on our already dire fiscal situation, which may be true but is obviously irrelevant. The Court didn’t even deign to mention refunds, apparently assuming that the remedy was so obvious that even a Treasury Secretary could figure it out.

As an aside, let me say that a lot of the commentary I saw on the refund issue Friday was the most idiotic I’ve seen in a long time. I saw multiple comments to the effect that it would be hard to refund the tariffs since we don’t know who actually paid them. Anyone making that argument should automatically forfeit their right to debate anything about trade policy ever again, in perpetuity. Let me be very, very clear about this. The refunds will go to the people or entities who actually wrote the check for the tariffs (or authorized the EFT or sent a wire, whatever). The refund has nothing to do with the incidence of the tax, who bears its ultimate burden. A foreign company that reduces its border price so the cost to its US customers remains the same post tariff is, in a sense, “paying” for the tariff. But the entity that is owed a refund is still the US company that imported the item, sent payment to US Customs and Border Protection for the tariff and collected the goods from customs. There is no other right legal answer.

By the way, the tariffs the President imposed Friday (and raised on Saturday) under section 122 of the Trade Act of 1974, are also likely illegal. The administration itself said this about section 122 in its reply brief to the court of appeals in this case:

Nor does [122] have any obvious application here, where the concerns the President identified in declaring an emergency arise from trade deficits, which are conceptually distinct from balance-of-payments deficits.

Brett Shumate, Assistant Attorney General

A balance of payments deficit, as the triggering mechanism for imposing tariffs under section122, is really only possible in a fixed exchange rate system, which we haven’t had since the early 1970s. By definition, the Balance of Payments, is always in balance; hence the inclusion of the word balance. Elements of the equation may be in deficit – trade or current account, for instance – but if so, something else will be in surplus so the equation balances; it’s just math. In the old days, with a fixed exchange rate based on gold, the balance to a current account deficit (not a trade deficit by itself) was provided by an outflow of gold. In a floating rate system, the balance is provided by a cheaper currency, at least theoretically. The Trade Act of 1974 was enacted in the aftermath of the US exit from the Bretton Woods monetary system and it has to be read and interpreted in that context. Doing so is beyond the scope of a weekly commentary but I plan to write something about it in the future. The history is interesting and informative for today’s investor. 

The administration’s plan today, such as it is, is to use the 150 days allowed by Section 122 – it may not apply but it will never get to the Supreme Court before the 150 days – to do multiple investigations under Section 301 and impose tariffs under that section. There are problems with that approach too and with tariffs widely unpopular and this being an election year, I wouldn’t make any big bets on tariffs getting extended beyond the 150 day window.

So, what does all this mean for the markets? Right now, not much. All that has changed for now is a minor reduction in the effective tariff rate. Markets reacted as if nothing had happened because, well, nothing really did. The 10 year Treasury note yield rose 1 basis point on Friday and 3 for the week. Shorter maturities – the 2 year and the 90 day Tbill – also barely budged.  The 10 year inflation breakeven rate was unchanged while the dollar index was down 0.13% Friday, up 0.9% for the week. (A quick refresher for those of you who don’t speak bond, 1 basis point is 0.01% or as normal folks say, not much) That’s about as close to a yawn as you can get from markets to such a significant ruling on economic policy.

In this chart, the shorter term yields (blue and purple lines) are a refection of short term monetary policy expectations while the long term rate (orange) is a reflection of long term nominal GDP expectations. As you can see, long term growth expectations have hardly changed over the last two years while short term rates are in a gentle downtrend since peaking in late 2023. This is the economy growing at trend (roughly 2%) and the market seeing no reason to think that is going to change. 

As much as the Trump administration has done – or tried to do – in its first year back in office the impact on the economy is hard impossible to find in the markets. 

I am reminded of Macbeth’s soliloquy upon learning of his wife’s death, a sonnet on the futility of life, something that seems way too apt for our times:

Tomorrow, and tomorrow, and tomorrow
Creeps in this petty pace from day to day
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life’s but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury
Signifying nothing.

It is way too easy to overreact to all the announcements coming out of the Trump administration, seemingly something new and significant on a daily basis. But markets filter out the “sound and fury” and will certainly let us know when something happens that is worthy of our attention.

Joseph Calhoun