February 14, 2025 | Read Online

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"Financial markets constantly anticipate events, both positive and negative, which fail to materialize exactly because they have been anticipated.."

— George Soros

Friday anticipatory charts

Negative events may be about to materialize because the market failed to anticipate them.

New tariffs on aluminium and steel announced this week will "throttle American industry and fragment global markets," The Economist warns; Nucor is already raising steel prices in anticipation; deportations are likely to cause inflationary labor shortages; at the same time, unemployment is likely to rise with hundreds of thousands of federal employees suddenly out of work; abrupt cuts to NIH funding could undermine the economies of America's university towns (like mine).

We may even be on the brink of a constitutional crisis.

And yet, the S&P 500 traded at record highs this morning.

It's hard to know what to make of that.

If all of these headlines were as worrying as they seem, wouldn't markets be trying to do something about it?

In the 1990s, "bond vigilantes" convinced US lawmakers to prioritize balanced budgets, for example, and in 2013 the "taper tantrum" persuaded the Fed to prolong its market-friendly policy of quantitative easing — two prominent examples of markets precluding events by anticipating them, as George Soros observed.

We could use another such example.

Now seems like the time for a stock market tariff tantrum (tm) to anticipate and therefore preclude a trade war — because once it starts, it'll be too late (The Economist thinks it might already be too late.)

But there's no sign of it.

Instead, markets appear to be taking President Trump seriously on tariffs, immigration and the courts, but not literally — and that, perhaps, could be their undoing.

On the other hand, markets remained remarkably sanguine when inflation hit 9% not so long ago, counting on the Fed to do the right thing without any prompting.

Markets were right — we disinflated painlessly.

So maybe we should be encouraged that markets seem inexplicably sanguine this time, too?

The S&P at all-time highs may be an indication that nothing from this week's dramatic headlines is particularly price-relevant for stocks — in which case, how bad can they be?

Maybe the market's hivemind has sussed out that we're not really on the brink of a constitutional crisis, that the courts' authority is not in any danger, as the blogging litigator Dilan Esper assures us.

Esper explains that judges could freeze Elon Musk's assets, for example, if DOGE ignores court orders, and that "a federal court also has US marshals at its disposal. It can order federal officials to jail."

If nothing else, this week was a good learning opportunity — I did not know, for example, that the judiciary had its own law enforcement.

Nor did I know that, in Gaza, some property claims are based on rules that date back to the Ottoman Empire.

I'd prefer it if these were just fun facts and not, suddenly, important ones.

But maybe we can trust in markets to let us know when something really important is about to happen.

If so, we can rest easy — for now.

Let's check the charts.

Reassuring?

Even below the index level, the stock market seems unbothered by the prospect of a trade war: Since the president's re-election, stocks that are exposed to international trade have outperformed those that are more domestic.

What happened last time:

Justin Wolfers estimates that steel tariffs imposed in 2018 resulted in US steel producers adding 1,000 jobs, but US steel consumers cutting 75,000 of them. Jason Furmann concurs, calling a trade war a "self-inflicted wound." Similarly, a study of steel tariffs imposed by former President Bush led to long-lasting declines in exports and employment in steel-consuming industries.

One market indicator is concerned:

Two-year inflation expectations have decoupled — higher — from gas prices. Jim Bianco concludes this is what "unanchored inflation" looks like.

Down bar coming?

The US added nearly 25 million jobs last year, but a recent report from Standard Chartered estimated that two-thirds of those jobs were filled by undocumented migrants. The report concluded that "Trump's immigration crackdown could be much more disruptive than anticipated," especially in the construction, agriculture and hospitality sectors.

The tech sector is well supplied, however:

Job openings for software developers continue to fall.

Mission accomplished?

The share of US imports coming from China is already down to just 13%, from a high of nearly 25% a decade ago.

Uncertain times:

The Global Economic Policy Uncertainty Index is near an all-time high — and the previous high was uncertainty about the Fed, which seems less scary than uncertainty about, well, everything.

The uncertainty asset is at all-time high, too:

Gold continues to make new highs, up another 10% on the year, which might be a market signal that not all is well. Most weirdly, banks are flying gold bars around in commercial airlines as the prospect of tariffs has opened an arbitrage between prices in London and New York.

Taking the long view:

The Wall Street Journal notes that as concentrated in tech stocks as the S&P 500 is now, it was even more so in financial stocks in 1812. Selling in 1812 would have been a mistake — even with a war on that would burn down the White House two years later! So maybe it would be now, too.

Can markets price in asteroids?

New data from NASA's James Webb Space Telescope suggests that the asteroid known as 2024 YR4 has a 2% chance of hitting Earth in 2032.

As much faith as I have in market prices, they're not great at estimating tail risks — or at looking that far ahead.

So, I don't know. Maybe Elon could work on asteroids instead?

Have a great weekend, hivemind readers.

— Byron Gilliam

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