The Markets Are Only Getting Uglier From Here

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I am certain that it all just gets uglier and louder from here.

The decision by the US Court of International Trade confirming what anyone who is enough of a geek to have read the Constitution, the International Emergency Economic Powers Act, and various Supreme Court decisions regarding the delegation of enumerated powers already knew, is not the end of the line.

I doubt it is even halftime.

(Since I wrote this, an appeals court has already issued a stay so the tariffs can remain in place.)

The Trump administration has some goals they want to reach and are not about to back down easily.

This probably goes to the Supreme Court, and even if they lose, you can bet that the President's people have lawyers aplenty always burning midnight oil on the banks of the Potomac and beaches of Palm Beach looking for workarounds.

To be clear, Donald Trump is not guilty of anything his predecessors have not been.

Presidents have been looking to extend their powers since George Washington left office. They constantly search for ways to escape the boundaries of the pesky Constitution and inflict their opinions upon the populace with no checks or balances to interfere with what they (usually incorrectly) perceive to be their unique genius.

As an aside, no matter who is in office, I will eventually get an email complaining that I must be a President "Fill in the Blank" hater.

I am.

I distrust anyone who runs for elected office from the HOA board all the way up to President.

The only people I dislike more than presidents are congresspeople and senators. I am joined in my opinion of the elected class by luminaries like H.L. Mencken, Mark Twain, Hunter Thompson and Will Rogers, so I suspect I am on the right, or perhaps just the humorous, side of history in this.

The last four or five occupants of the cozy office at 1600 Pennsylvania Avenue have not even tried to hide their disdain for the document they swore to uphold.

The current occupant's biggest crime is a complete and utter lack of the ability to be subtle.

The history books may well remember that his biggest crime was turning the "someday" approach to dealing with the budget deficit into a "today" problem.

We all knew the day would come. We just hoped it would be a decade or two from now. Had it not been for COVID and the cash government and central banks flooded the world with, we might have gotten away with it.

Alas, the flood of cash followed by Bidenomics turned the slow ascent of Mount Debtmore into an elevator ride.

You will note that I make no mention of the trade deficit.

We are the largest economy in the history of the world.

We are probably the most successful economy in the history of the world. We have cash to spend, and our good citizens like to buy stuff.

Other countries do not have our standard of living, and their workers will take less money to build the stuff we want to buy.

It is not like Americans are going to suddenly decide they want to work for $4 an hour putting iPhones together.

A worker in a Vietnam garment factory makes about $350 a month if he is at the high end of the pay scale. If clothing could be made at scale profitably here in the United States, Berkshire Hathaway would still make shirt fabrics and suit linings.

If these types of industries move back to the United States, the only jobs they create will be in accounting and robot maintenance. Of course, we will still have to buy robots from overseas.

Selling US citizens things they want to buy at better prices is not a problem. It is a benefit of living in a dominant economy.

Looking at the balance sheets of said citizens and the corporations that operate here at home, we have the income to buy the things we want from anyone in the world.

It is our government that has screwed things up. It has wasted enormous sums of money. The $5,000 hammer and other boondoggles are not myths.

A government agency once gave a $2.6 million grant to Wayne State University in Detroit to allow Dr. Xiaoming Li, professor and director of the university's Prevention Research Center, to research the idea that encouraging Chinese prostitutes to stay sober at work might reduce the spread of HIV. (I had to check this with several sources, but yes, we did it.)

NIH really did spend $175,000 so researchers at the University of Kentucky could investigate the effects of cocaine on the sexual behavior of Japanese quail.

Last year, Homeland Security spent almost $5 million to help Ukrainian influencers.

The agency also allocated $20 million to produce a new "Sesame Street" show in Iraq.

Lest we get the idea it's just one party at play here, in 2019 we spent $1.2 million to study online dating habits.

The booming metropolis of Thetford Township, Michigan (pop. 7,000) received $2.7 million in military supplies including Humvees, a tractor, and mine detection kits.

We also spent $22 million to bring the quality of Serbian cheese up to international standards.

Reading Rand Paul's annual reports is amusing at first, but after a few years it just makes me angry.

This is before we add any fraud or waste.

This is stuff that was approved by Congress and government agencies (lending even more fire to the whole idea of restricting the ability of Congress to assign its duties elsewhere).

Then there is our incredibly expensive defense strategy.

Teddy Roosevelt once suggested that we should speak softly and carry a big stick to achieve our political and economic goals in the world.

Instead, we use a megaphone, and every time there is a fistfight in some foreign land, we pack up all our sticks with computer-aided sights, a few tens of thousands of our finest troops, a few hundred Tomahawk missiles at $5 million a pop, along with a few Reaper drones that cost $50 million to produce and $3,500 an hour to operate.

Once we have our finest young men and women in country, our politicians have demonstrated we have no idea how to get back out, so we just keep sending cash and adding names to statues in town squares all across America.

It is very expensive to be the world's policeman, and it costs more than just dollars.

However, it is dollars we are discussing today.

$37 trillion of them, to be exact.

So here we are trying to kick the can down the road yet again, but the spike in interest rates and a questionable effort to use tariffs to inflict our will on allies and adversaries alike have made the can much heavier.

How do we solve this one? Raising taxes, as some suggest?

To paraphrase the late great P.J. O'Rourke, giving the government more money is like giving a 16-year-old boy whiskey and the keys to the car.

It does not end well.

It also does not work.

No government has ever been able to raise enough taxes to bail out the economy and reduce debt.

You have to add either dramatic spending reductions or enact measures that encourage a high rate of economic growth.

Deep spending cuts?

We can cut a lot of fat and waste out of our budget, but most of our spending is Social Security, Defense, Medicare, Medicaid, and the interest on the debt.

Realistically, we cannot cut those enough to meaningfully reduce the debt.

Before you bring it up, no, we cannot devalue the dollar enough to grow out of the debt.

If that worked, the Weimar Republic would have been the greatest nation on the face of the earth.

Not only would it not enable repayment of the debt, it would likely cause rates to spiral higher to the point where default was inevitable.

It would lead to a reshaping of the global political and economic order, and we would be near the bottom of the pecking order when it was all said and done.

It is highly unlikely to attract foreign investment and no one likes to buy a falling knife or a failing nation.

We can freeze spending and allow America to flex its innovation and entrepreneurial muscles to grow the economy in ways that create jobs, wealth, and cash to reduce the debt. That would work. We are on the cusp of huge technology-driven leaps in productivity thanks to things like artificial intelligence and quantum computing.

Instead of engaging in trade wars or laying off the people who know where all the nuclear waste is stored, we should find ways for Corporate America and "Three Kids in a Garage" America to drive forward innovation.

I would have to crunch the numbers, but I suspect that income taxes paid by high-earning job growth would more than offset giving pharmaceutical companies massive tax breaks to bring production back to the United States.

Take the money saved by no longer playing global policeman, and maybe ending the war on drugs, to fund a Manhattan Project-style push to make nuclear fusion viable on a large scale.

That would cause a giant leap forward in the economy.

Being ruthless in eliminating (and prosecuting) waste and fraud, freezing spending for several years, and encouraging high levels of growth in industries that create high-paying jobs would be a better idea than the alternatives.

Politicians are not capable of cutting spending, especially when it would mean a few million elderly Americans would be unable to pay rent or pay for healthcare.

Trusting politicians to use new taxes to pay back old bills would be as bad an idea as it was to trust politicians to use lottery cash to improve classrooms.

What does this mean for us? What can we do?

Protect ourselves financially.

No matter which course is taken from here, it is likely to involve disruptions across segments of the economy. Trend following and turmoil go together like peanut butter and jelly.

So does mean reversion (also known as deep value investing).

Go read the Warren Buffett article "The Superinvestors of Graham-and-Doddsville" and see how the deep value types fared during the turmoil of the 1960s and 1970s.

Just keep in mind (as the SuperInvestors did) that value investing without credit analysis is like a hand grenade with no pin. It might achieve your goal, but then again it might blow you up instead.

Collecting income from high-grade, high-yield bonds and preferred stocks purchased during market downturns delivered outstanding returns in previous periods of disruption.

No matter what happens with the deficit and global trade, we stand on the cusp of a period of great innovation.

Paying attention to twin momentum—companies where profitability and revenue growth attract price momentum—can help us identify the companies that can change the world and increase our net worth dramatically in the process.

The politicians are going to do as they please.

The President has his team on the same page, and those members of the GOP in Congress who do not support him are afraid of losing their positions if they defy him.

I doubt tariffs are going to achieve the administration's objectives.

However, he is going to get his chance to prove me wrong.

Our task is not to engage in arguments we cannot win or influence.

Our mission is to profit from the volatility that is created by the maelstrom the fine collection of upstanding, God-fearing legislators (or as Mencken referred to them, the assembly of scoundrels, idiots, and poltroons) will create.