Tariffs on Trial

Tariffs to the Supreme Court

Who says nothing happens over a long holiday weekend?

Much to catch up on this morning. Let’s go…

Not long after we hit “send” on Friday afternoon, a federal appeals court rejected Donald Trump’s tariff regime — a decision that came as no surprise if you saw our May 9 edition.

The panel by and large accepted the arguments brought by a group of small businesses and several state attorneys general — that Trump stretched the meaning of “economic emergency” beyond the breaking point, far beyond the language of the International Emergency Economic Powers Act of 1977.

However… the judges left the tariffs in place so that the Trump administration can appeal to the U.S. Supreme Court.

Handicapping a Supreme Court ruling is always a dicey affair — but given the high stakes, it’s worth a couple of paragraphs this morning.

“Across three different courts, 15 judges have weighed Trump’s tariff maneuvers,” writes The Wall Street Journal’s Supreme Court reporter Jess Bravin — “and 11 of them, appointed by presidents of both parties, have found he acted without legal support.”

It’s conceivable the Supreme Court’s conservative majority will rule likewise.

“Central to the case could be the ‘major questions doctrine,’ a term the Supreme Court coined for expansive presidential policies the justices feel go beyond what lawmakers had in mind when adopting broadly written statutes,” Bravin writes.

In recent years, the court has cited the major questions doctrine in striking down an Obama-era plan to curb carbon emissions as well as the Biden administration’s student-loan forgiveness scheme.

But Paradigm’s macro maven Jim Rickards — drawing on his experience as a Wall Street lawyer — will take the other side of that trade.

As he sees it, the International Emergency Economic Powers Act “gives the president near-dictatorial powers in economic affairs” — with two provisos.

“The issue at hand must involve a national security emergency and there must be an international aspect to the emergency.

“In a globally connected world with market crises always a possibility, these predicates are easy to meet. Obama and Biden used IEEPA hundreds of times without objection.

“It’s true the statute does not use the word ‘tariffs’ but so what? It doesn’t use the word ‘oil’ either and the U.S. has applied hundreds of sanctions aimed at Russian oil using IEEPA.”

The timetable, you wonder? Washington insiders figure the Supreme Court won’t decide whether to take up the case until December or January — which would push oral arguments to March or April.

Once more we’ll pose a question we posed earlier this summer: If the court strikes down the tariffs as unconstitutional, will the U.S. Treasury have to issue refunds?

On to the next big thing from the holiday weekend — and we’ll preface it by saying while Jim likes tariffs as a means to smooth over trade imbalances, he does not like them as an instrument of economic warfare…

The Dragon, the Elephant and the Bear

Jim Rickards went semi-viral on X over the weekend with this post…

That’s Russian President Vladimir Putin, meeting in China this weekend with India’s Prime Minister Narendra Modi and Chinese President Xi Jinping.

First, a reminder of the background: As we’ve related through much of the summer, the Trump administration has slapped a 25% tariff on India — punishment for India’s purchases of oil from Russia.

This is on top of an existing 25% “reciprocal” tariff. So India is now subject to one of the highest U.S. tariff rates in the world.

The idea was to make India cry Uncle and stop buying Russian oil and “funding Putin’s war machine,” as Trump adviser Peter Navarro put it in the Financial Times.

We said all summer it wouldn’t work — which brings us to this weekend’s gathering of the Shanghai Cooperation Organization in Tianjin, China.

Russia and China formed the SCO in 2001 as something of a “counterweight” to the Western NATO alliance; your editor has been writing about it periodically since 2006. Today its members number 10; India attained full membership in 2017.

Skeptics have argued for years that the SCO is marked more by its differences than its commonalities. In particular, India and China have an unresolved border dispute that erupted into a full-on war in 1962 — nearly rekindling in 2020.

But as Jim Rickards wrote to a select group of readers on the eve of the summit Friday, “Trump’s weaponization of trade has created a new dynamic within the SCO. The imposition of punitive tariffs might see the organization’s most powerful countries — China, Russia and India — align more closely against the U.S.”

And as you see from the photo above, that’s exactly how events played out.

Modi and Putin met one-on-one — after which Modi said the two discussed “ways to deepen bilateral cooperation in all spheres, including trade, fertilizers, space, security and culture.”

Meanwhile during the summit itself, China’s Xi emphasized cooperation with India — rivalry notwithstanding.

"The world is going toward transformation,” said Xi. “China and India are two of the most civilized countries. We are the world's two most populous countries and part of the Global South... It is vital to be friends, a good neighbor, and the Dragon and the Elephant to come together.”

And there’s more: At the summit’s conclusion, the SCO issued a statement condemning the recent U.S.-Israeli war on Iran — which is also an SCO member.

You’d think American leaders would take India more seriously. Actually, American leaders once did.

Former State Department adviser James Carden says there was a time when the position of U.S. ambassador to India often went to someone of stature.

“During the Cold War,” Carden writes, “it was a particularly sensitive post given India’s role as a leader of the nonaligned bloc — in other words, those countries that refused either Washington’s or Moscow’s tutelage.”

JFK gave the position to the Harvard economist John Kenneth Galbraith. Republican Richard Nixon gave it to Democrat Daniel Patrick Moynihan — who went on to a lengthy stint in the U.S. Senate, respected on both sides of the aisle. George H.W. Bush gave the post to Thomas Pickering — who’d already been U.S. ambassador to the United Nations.

Nowadays? “For reasons that remain obscure,” Carden writes, Joe Biden gave the post to “the nepo-mayor of Los Angeles, Eric Garcetti,” And Trump has nominated Sergio Gor — described by Carden as “a 38-year-old native of Malta with zero diplomatic or foreign affairs experience (but, as it happens, ample experience as an amateur wedding DJ).”

Presumably those sorts of disses haven’t gone unnoticed in New Delhi. Just sayin’...

September Sell-Off

The mainstream has settled into a strange narrative as a new trading month begins…

The Financial Times speaks of “pressure on U.S. Treasuries and other government debt, partly due to investors’ worries about rising debt piles in many major economies.”

The FT also quotes the head of stock research at State Street, saying, “The risk-off sentiment today is broader market unease stemming from the bond market.”

Which begs the question: Why now?

For years, the United States has had a debt-to-GDP ratio that puts it in such high-debt company as Japan, Greece and Italy. The debt outlook isn’t so hot in Europe, either — certainly not in Germany, France or the U.K.

In any event, U.S. Treasuries are indeed selling off today — pushing interest rates higher. At last check the yield on a 10-year T-note is 4.27% — up from under 4.23% on Friday. That’s a big move in the bond world.

As for stocks, the S&P 500 has shed 1.2% as we write — sitting at 6,382. The Dow is holding up a little better, but the Nasdaq is down over 1.4%.

In electronic trading yesterday, gold pushed past $3,500 and silver over $41. Both have pulled back since — but silver is still holding the line on $40, a level last seen in 2011.

➢ One economic number of note: The August ISM Manufacturing Index rings in at 48.7 — right in line with Wall Street’s expectations. Any number below 50 suggests a shrinking factory sector — and except for two months last winter, the index has been mired under 50 since late 2022.

A quick postscript to the inflation number chronicled here on Friday…

We mentioned how “core PCE” — the Federal Reserve’s preferred measure of inflation — is running 2.9% year-over-year.

We also mentioned how this number has been stuck in a range between 2.6–3.0% for the last 18 months — nowhere near the Fed’s 2% inflation target.

But sometimes you need a good visual to put it all in perspective — and author Larry McDonald either found or created an outstanding one, going back to the mid-1990s.

Which reinforces something we’ve been saying for over two years now: The track record in developed economies shows that whenever inflation sails past 5% — as it did in 2022 — it typically takes a decade or longer to get back to “normal” 2% inflation.

Plan accordingly. Precious metals and other natural resources thrived during the inflationary 1970s and they’re thriving again…

Starlink: What’s in a (Brand) Name?

It seems Elon Musk did not have dibs on the Starlink name when he began launching his mini-satellites for worldwide internet access a few years ago.

Your editor is taking delivery today on a new Subaru Outback — reliable wintertime transport to replace a 2004 Chevy TrailBlazer that croaked without warning last year.

Among the blizzard of welcome emails I got was one with “Starlink_Subscriptions” in the from line.

Ugh, I thought — probably some trial subscription that I’m going to have to jump through a bunch of hoops to cancel.

But no: The Perplexity AI engine tells me Subaru adopted the name Starlink no later than 2013 for its “vehicle connectivity and infotainment technology.” The name emerged from the stars in Subaru’s logo. (“Subaru” is Japanese for “Pleiades,” as it turns out. Now you know.)

Musk’s SpaceX didn’t adopt the Starlink name until sometime around 2019.

Yet Subaru never took Musk to court. Why is an object of much internet speculation. Too costly for Subaru? Not a viable case given that the companies operate in different industries? A quiet settlement before it ever got to court?

In any event, Musk’s perceived dominance of the name is such that this year, Subaru ditched it in favor of a mouthful called “MySubaru Connected Services.” Here’s a screengrab from Reddit…

Clearly the transition isn’t complete, given my momentary confusion when something from “Starlink” landed in my inbox.

Anyway, score one for Musk…

Perceptions, Reality and Lisa Cook

On the subject of Donald Trump attempting to oust Lisa Cook from the Federal Reserve, a reader writes…

“Gonigam’s comment that ‘perceptions matter more than reality’ is a crock. Probably a good lead magnet in his article for the braindead, but still a crock.”

Dave responds: Huh?!

In the first place, perception frequently matters more than reality in markets.

For much of the last three years you could make the case that Nvidia shares were overvalued. And by any objective measure, that was the reality. But it didn’t matter; perceptions were such that people were willing to pay an ever-richer price for those shares regardless.

“Price is truth,” as our trading pro Enrique Abeyta regularly reminds his readers. The price might be grounded in a BS narrative, but the price is the price. You can’t argue with the price; you might as well bark at the moon.

Of course, perceptions can change — and then the price will likely change, too.

Anyway, I’m not sure why you’re taking so much exception to this truism in the context of the Lisa Cook story.

By any objective measure, the dollar is trash and U.S. Treasuries are toast — and have been for a long time. But that’s not been the perception; indeed until maybe three years ago the perception was that U.S. Treasuries are the safest investment on the planet.

Conceivably that perception will change if Trump succeeds in pushing out Cook, undermining the current perception that the Fed operates independently of whoever is president at the time.

Didn’t strike me as an especially edgy thing to say. But you never know what’s gonna trigger someone nowadays…

Best regards,

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets