Hello, my friends. Today is February 21st, and this is Markets Weekly. So, this past week, the major indexes basically went nowhere. We did have the S&P 500 regained the 50-day moving average, but when you zoom out a bit, it really looks to me that the indexes have gone nowhere for months, are losing momentum, and that is not good.

So the biggest news the past week of was of course the Supreme Court bombshell on Friday ruling that the president cannot impose tariffs under emergency powers. So today let's first talk about what happened there and what could be the next steps and secondly let's talk about some miscellaneous topics like data fed minutes ECB. All right starting with the tariffs. So, just for some context, remember last April Liberation Day? The president stood in the rose garden with this giant poster board with all sorts of random numbers on it and declared that he was going to impose tariffs bigly on many countries throughout the world unless they came and made a deal that panicked the markets. But in the months that followed, many countries did come and sign memorandums of understanding with the US. In some cases, uh they did result in concrete investment. There's reporting that Japan uh a very very good US ally is making investments according to their trade deal. However, many people were wondering does the president actually have authority to do that? That seems kind of uh excessive. I mean does is there really a fentinel crisis with Canada such that the president can declare an emergency and impose tariffs?

Well, we were all about to find out. On Friday, the Supreme Court ruled that actually no doesn't give the president power to impose tariffs. The president can do things like embargos, but a tariff is a taxation power resizing Congress. So the president can't do that. And the Supreme Court is completely correct. Congress has the power of the tax. But over the past few decades, Congress has through legislation delegated a lot of tariff power to the president. So whereas the president cannot we find out impose tariffs under AIPA. The president had a news conference right after the uh Friday ruling and declared that he would impose global tariffs of 10% through section 122 pars which is on much sounder legal grounds. On Saturday morning uh through uh truth social tweet he declared that he's actually going to raise them to 15% globally. Now under section 122 the president can have 15% tariffs globally but for a maximum of 150 days. However there that is not the only avenue where the president can impose tariffs. He can also impose tariffs through other more traditional means such as section 301. During his first term the president imposed section 301 tariffs on on China that continued under the Biden administration and continued to this day. The difference is that in order to impose tariffs under section 301, you have to have an investigation, a hearing, and then you can impose tariffs. However, tariffs under that section are under are on much sturdier legal ground. So the game plan seems to be that sure we're losing AIPA tariffs but we will replace them with section 122 tariffs for 150 days and in the meantime we'll conduct all the necessary investigations so that we can have other section 301 tariffs ready to go.

So according to analysis from Bloomberg it seems like at the end of the day overall the tariffs rates will basically be unchanged. the president would simply shift uh his legal authority from aipa to other legal authority that's um less likely to be overturned by the court. So it looks like we are going to have this tariff wall. It's going to continue. This has been a hiccup, but the president is ultimately going to get what he wants. Now I would also remind everyone that President Biden also continued a lot of the uh tariffs that Trump put on. So these tariffs will probably going to continue under a democratic administration as well. This really does look to be uh the new trade policy for the United States of America.

However, what about all those tariff revenue collected the past year? There were a few hundred billion under AIPA. Now surely those are illegal and they have to be refunded, right? Because the president could not impose tariffs under AIPA. Well, actually the Supreme Court did not rule on that. So, uh, that's going to be a decision, uh, that's going to be litigated in the lower courts. So, this kind of sets up this huge messy showdown because, well, who is going to get the refund? Now, some new data, new study from the New York Fed shows that uh, actually tariffs were mostly paid by US importers and US consumers. This is also what happened in 2017, 2018 when Trump did tariffs the first time around. Uh the exporters did pay some tariffs but not a whole lot. The tariffs did seem to successfully have an impact on rewiring global trade. Looking at New York Fed study, uh there is much less imports coming from China. But keep in mind that a lot of it was simply rerouting where for example Chinese companies setting up shop in Mexico, in Thailand and Vietnam and basically producing and exporting from those countries some kind of tariff arbitrage.

However, um you know, this the subs probably did seem to have some did have some impact likely. Now, the problem with giving tariff refunds is that when an item comes across the border, the importer is the one that concretely pays the tariff. However, in some cases, the importer turns around and raises the prices to the consumer or whoever he resells it to to try to pass along some of the cost. how much that is, you know, no, that's going to be um, you know, honestly a kind of a subjective thing, right? So, I think it's unlikely for an importer to actually have a paper trail and tell the consumer or whoever that, you know, we're raising your prices because of this uh by this much because of the tariffs. So, if we were to get a big tariff refund to whoever paid the the tariff invoice, which would be the easiest way of doing this, uh the importer would get a huge windfall of hundreds of billions of dollars, right? Because they would be able to keep the extra revenue they received from raising prices to consumers and they would also get their tariff payments back. So, that's going to be a big mess. So, we're not really sure how that's going to be untangled. So, uh the most likely outcome is that we are stuck in litigation for uh a few years and none of that tariff revenue um gets refunded uh at least for for some time. So, the impact on the markets on Friday was was unambiguously positive, right? Tariffs are a tax and now that we have the tax removed, at least um perceived removed for that one day, but again, tariffs are coming right back. So, it doesn't seem like that's something to be concerned of. Now, some people were were thinking that if we had the Supreme Court overturn tariffs, the bond market will revolt because that means the deficit would go much higher. Uh we did seem to have yields go up a little bit, but really that that could just be a risk on episode. And to be clear, rates are largely the expected path of Fed policy and we don't actually know how the Treasury was going to issue uh debt going forward. suppose that the deficit really is going to be a few hundred billion higher due to the lack of tariffs. You know, maybe they just issue more in the short end and the short end it largely follows very very strongly follows expected path of Fed policy. So, so you really wouldn't expect to see much of a change in yields there. So, all in all, tariffs are here to stay guys just have to get used to it.

All right. Secondly, let's talk about all sorts of miscellaneous things that happened last week. So, we did have GDP data and we did have some inflation data. GDP was notably weaker than expected, surprisingly weaker than expected, largely due to the government shutdown. Remember last quarter the government was shut down for several weeks and we had a whole lot of people not working. Now, inflation was also surprising to the upside. But zooming out really GDP inflation h has been where it's been for the past several quarters. So inflation a little bit below 3% and GDP you know stronger than some expected on third quarter but again weaker than expected fourth quarter you average that out still seems to be like we're around 2% and change. So uh it seems to me that really we're just kind of pretty stable here. Um and so what does that mean for monetary policy?

Well, surprisingly in the Fed minutes, there was some commentary from some, let's just say, Fed presidents uh that maybe we should talk about that uh rates are two-sided, that we can not just cut rates, but we could also raise rates as well, seemingly thinking that, you know, inflation is still stubborn, maybe that we are not being restrictive enough, maybe we should hike rates later on in the year, or at least have the possibility of doing so. Now, for context, the market is pricing in two cuts this year. And uh you know, I I think it's kind of ridiculous for for anyone on the FOMC to be suggesting that they would hike rates. I mean, the trend for the unemployment rate is clearly upwards. The trend for inflation is clearly downwards, although of course it has been plateauing. So uh it's a high rates in in that context given that uh the broader public is feeling down on consumer sentiment given that the administration is insisting on lower rates and and given that um you know back in 2021 when inflation was 5% many people were saying that hey it's transitory we shouldn't do anything and that's just too ridiculous and shows me that yeah these what what I actually already know that many of these guys have no idea what they're doing. So, I don't pay any attention to that. Honestly, the path of monetary policy is going to be more dictated uh by events that are happening in the background that are far more important than uh whatever happens with uh inflation in in the coming months uh which we'll talk about a little bit.

And the last thing, miscellaneous thing that I I'll I'll mention is that there's an interesting article in the Financial Times saying that uh Madame Lagard, president of the ECB, is going to enter term earlier than before it expires uh because she would like to have uh President Mcron play a role in appointing her successor. For contest, uh the president of the bank to France also resigned earlier than expected so that Macron can name his successor. So the fear is according to the article that um you could have someone from the right populist party uh win and then appoint someone of their choosing to be uh president of the monk trance or uh have a say in who becomes president of the ECB. So it's it's playing a political game that we see sometimes in the US when it comes to the Supreme Court. Uh as we know oftentimes um uh a liberal justice would like to resign during a democratic president so that the replacement named could also be a liberal justice and a conservative justice would also like to resign during the time when a when a republican president is in charge so that a Republican president can name a uh Republican successor. So there are many people for example uh suggesting that maybe Justice Thomas who is a very conservative justice should resign at the moment so that Trump can replace him otherwise he could you know suddenly pass away on of natural causes during a democratic administration and get replaced by um a democratic justice and and tip the balance of power. So that's a game that we play in the US for the Supreme Court and now it seems that they're playing the same game in the European Union. So I thought that was an interesting development and it does show that they are very worried about uh perhaps if you could have a different political makeup in the EU that would leak into monetary policy. In the case of France uh actually the inflation is very much below target. The economy is not doing well and we all know they have a fiscal situation that would uh really appreciate lower rates. So that that's an interesting political dynamic to think about when thinking about the ECB going forward.

Um so one thing to keep in mind and the last thing we'll talk about is that it does seem that war with Iran is very likely um maybe this weekend maybe in the coming days. Now um recall uh there was an Israeli attack against Iran last year that the US participated in in a defensive way and the US also through operation midnight basically flew a bunch of bombers to Iran and bombed uh their nuclear facility. So uh there has been ongoing conflict in the Middle East involving the US for for a year now. And now with all the US air force assets being moved there and there is a huge amount of assets we have uh another carrier who that will be in position uh this Sunday. So they are in uh in a position to have a major operation against Iran. Um again they say that negotiations on ongoing but negotiations were also ongoing during the first operation as well. So there's a lot of tinder there and all it needs is a spark and sometimes when you have powerful political interests those sparks can be created. So that is something that could if it happens really dominate and o overshadow anything that happens in u trade policy or GDP or whatnot. uh there's a potential for this to become very messy. The president has had tremendous success in um extracting Maduro um in bombing Iran last year, but again there's many many unknowns when it comes to an operation of this scale. So that's something I think uh is going to be the biggest event to watch in the coming weeks. It would be tremendously riskoff. Um so that's uh what I would focus on for the coming days. All right. So that's how I prepare for today. Thanks so much for tuning in. I'll talk to you guys next week.