Sometimes I feel like a standup comedian with people requesting "bits."

Except, of course, I am a trained economist…

So instead of "Hey Jerry, do the one about peanuts,"

it sounds something like this:

"Hey, JT, do the one about TARIFFS."

Fine. I'll do the one about tariffs.

I happen to be a rare Ph.D. economist who was trained on this stuff by Earl A. Thompson at UCLA.

Earl was always his own man.

Never one to “go along to get along” if intellectual honesty was on the line.

In the 1990s, as the economics profession was PUSHING global free trade everywhere now that we had defeated the Soviet Union, Earl was asking:

There is an answer to that, which happens to illuminate the current situation.

(And yes, I know… somehow we seem to have lost the thread here, but we DID in fact defeat the Soviet Union back in the early 1990s — it's worth looking up somewhere 🙂)

Can we call them what they are, import taxes?

Back when we (the United States of America) were pushing for free trade, a lot of nations around the world were going along only reluctantly.

You see, if you're running a small country with a weak army, every time one of your citizens imports a thing of value that's going to be around for a while (whether that thing is a factory or a fancy car), they’re making your country a little more susceptible to a foreign invasion.

That's because there is always a tough guy across the way looking at your country as a place they can run over and plunder.

(History books will confirm this assumption holds pretty much uniformly since the dawn of time. I don't like it either but, sadly, we have to live in the real world.)

The people importing things into your little country are indirectly raising the cost of protecting your territorial borders.

We economists call that a "defense externality," and it's a NEGATIVE externality in that one's private actions make things a little worse for everyone (just like Mr. Burns dumping toxic waste all over Springfield after dark, if the analogy is helpful).

If you're the small country with a weak army, what do you do to resolve this negative externality?

→ You make people bear the communal cost of their private actions by… get ready for this… taxing them.

That's called "internalizing an externality" (just in case you get cornered by an economist at a cocktail party… in which case I apologize for my comrades 🤷).

That's also why a more transparent name for a tariff is an IMPORT TAX.

You're taxing the local yokel bringing something into your national borders that makes your country as a whole more likely to have to defend itself from a hostile takeover by a nearby foreign tough guy and his army.

Basically you’re forcing Mr. Import Guy to pay for one more soldier, one more cannon, one more fighter jet.

So, when we asked nicely every country around the world to lower tariffs, they (in essence) said:

→ Fine but ONLY IF we provided military defense services to the world at below-market prices.

(We happened to have lots of excess military capacity on account of having just defeated the Soviet Union, as you’ll recall.)

And the post-Cold-War order was born.

We traded globally.

The U.S. specialized in telling tough guys with nasty armies not to mess with our friends.

Call it "economies of scale" meets "specialization."

Everything was working as advertised, except…

We missed that globalization would create winners and losers here in the United States.

The winners got substantially richer.

The losers, not so much — though everyone did get way cheaper TVs and Toyota Camrys.

At that point, you would think we would have had a national compact in place by which the winners would look after the losers and help them get through this with grace and dignity.

But no.

Instead, we decided that free trade was “bad.”

Worse, clearly, than taxing the people who had benefited the most from 30 years of it.

I am not surprised.

Earl saw this coming.

UCLA Professor Earl A. Thompson on globalization. 

(Read the last sentence first if you have to. You'll want to go back and read the whole piece. Maybe even commit it to memory.)

Earl on financial bubbles.

(Read "Predicting Modern Bubbles" on page 236 of the above document if you want to have the feeling that someone was onto something… 🙂)

Anyway…

To make sense of the new tariffs we’re imposing on ourselves, you have to believe that some tough guy is going to come after us to get their hands on those Camrys that are flooding through the U.S. borders.

You have to believe that the U.S. military may not be capable of protecting us against a enemy-state invader.

Everyone's entitled to their own opinion…

But I know people who wear and have worn the uniform to defend our country.

They seem pretty capable and tough to me.

And not "play-the-part-on-TV" tough.

Real-kind-of tough.

I also wrote about tariffs on LinkedIn here and I recently talked to Chuck Jaffe about this, among a million other things.

Now, onto financial markets.

Finally! 😉 

You Can Try to Zap a Frog with a Taser But...

When I started calling 2025 the Age of Uncertainty, I didn't know the half of it.

Here is the graph that has defined this era so far.
If you read the financial press, you've probably seen it.

This graph measures economic policy uncertainty in the U.S. though time.

The simple version of what we’re seeing is:

→ People are as uncertain about what happens next from a policy standpoint as they were during the 2008 financial crisis and the Covid shutdown.

Now remember that uncertainty can be a policy tool, or at least a negotiation tactic.

Now, you'll remember that we came into this year with a shockingly strong economy.

• Decent GDP growth (and it turns out that economic growth from September to December 2024 was actually better than previously estimated)

• Fairly decent unemployment numbers

• And inflation that was getting under control (That seems to be back in play now)

You will also remember that U.S. markets came into 2025 with a lot of future good news baked into them — things like healthy corporate earnings growth.

Hopefully the economy pushes through the uncertainty and markets keep being rewarded with higher corporate earnings.

But things seem a little foggier than they were just a few weeks ago.

Most everyone knows that stocks have had a scare over the last couple of weeks.

But high-yield bonds (aka “junk” bonds) are a good place to look for some insights.

High-yield bonds have higher interest rates because they could default if things went badly.

Sometimes that risk feels distant and hypothetical.
Sometimes that risk feels like it’s at your doorsteps.

After getting as low as 2.6% on January 22, 2025, high-yield “spreads” (the excess interest on those bonds relative to Treasuries) have risen back up above 3%.

→ There is more stress in the system now than what we entered the year with.

But still, the price of risk is still very low, in the grand scheme of things.

How do we know?

When the Yen carry trade caught markets wrong-footed last summer, those spreads quickly jumped to about 4% (3.93% on August 5, 2024 — do you remember where you were that day? I do…).

But 3% or 4% is basically ice cream and puppies when you zoom out.

High-yield spreads were roughly 6% in 2022 when markets were reacting to the spike in inflation and the Fed's attempt to put the genie back in the bottle.

But wait, that's just the beginning.

High-yield bonds earned as much as 11% on top of Treasuries in March 2020 and 20% during the depths of the 2008 financial crisis.

What's my point?

I guess my point is simple.

→ You may feel like the economy is uncertain.

→ You may even feel like the stock market is wobbly.

But the facts on the ground are that:

Who knows what happens next?

As Yogi Berra famously said:

"Predictions are hard, especially about the future." 🙂

But a quarter of the way through 2025, a little introspection might well go a long way toward providing peace of mind.

Maybe the market continues to live in the golden era of the last couple of years and companies continue to grow earnings in a way that satisfies investor expectations.

Maybe.

In fact, as I said in Walking and Chewing Gum in 2025, that seems like a reasonable baseline for the long run.

→ Anything else is akin to betting against humanity, enterprise, and the pursuit of progress.

But in the near term, bad things do happen.

It's nice to know that you could handle them.

How did the last couple of weeks feel to you?

That's a pretty decent place to start and assess if you're balancing risks and returns in a way that feels right for you.

Be well and don’t hesitate to reach out,
Jonathan 👋

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