Off the Hook
- Eric Cinnamond
- 13 minutes ago
- 5 min read
<April 30, 2025>
Federal Reserve Board Chair Jerome Powell was in Chicago last week presenting at the Economic Club of Chicago. He was glowing. Why was he so happy? With the stock and bond market in disarray, it was surprising to see him so chipper. After being introduced, Chairman Powell gave a brief speech and sat down for a Q&A with former Governor of the Reserve Bank of India, Raghuram Rajan.
Powell began the discussion by providing a summary of the macroeconomic backdrop in 2024, saying the economy was growing at 2.4%, unemployment was low, and inflation was coming down—all was well! Powell then stated things have changed because of the new administration’s policies, and as a result, “the effects of that are likely to move us away from our goals.”
And that’s when it hit me as to why Powell was in such a good mood. The perfect excuse for the eventual popping of the stock, housing, and government debt bubbles just landed in his lap—tariffs!
When historians look back at the end of the current cycle, Powell is hoping they’ll look past the trillions of dollars he created and his decision to keep the fed funds rate at 0% while inflation surged. When this cycle’s asset bubbles pop, Powell will point to tariffs, saying, “See, see, those awful tariffs!” It will be similar to the Fed blaming COVID for inflation while ignoring the enormous jump in money creation, debt, and asset prices under their watch. As far as Powell’s legacy goes, the tariffs couldn’t have come at a better time.
The tariff excuse won’t be limited to policy makers. In the article “It Was Supposed to be the Best Spring Homebuying Season in Years,” tariffs are being blamed for weaker than expected home sales. Based on our analysis of homebuilder results, affordability is the main reason home sales are declining. Affordability issues have been building for years and didn’t suddenly appear this quarter. In our opinion, years of ultra-easy monetary policy and runaway asset inflation are responsible for housing unaffordability and the industry’s slowdown, not tariffs.
After the tariffs were announced, the stock market declined sharply, with the S&P 500 falling 12% from April 2 to April 8. During this brief period of financial pain, several well-known professional investors expressed their displeasure with tariffs and the market’s response. Bill Ackman posted, “Our stock market is down. Bond yields are up and the dollar is declining. These are not the markers of successful policy.”
After years of riding the wave of easy money and effortless asset appreciation, many sophisticated investors were caught off guard by the market’s negative response. While tariffs may have been the catalyst for the recent decline in stock prices, they certainly aren’t responsible for this cycle’s elevated valuations. Investing in an asset bubble carries tremendous risks. Pay up and play along, and you assume the risk. We believe prices paid, not tariffs, will be the main source of investor losses when the current market cycle ends.
We expect corporations will also use tariffs as an excuse for any unexpected shortfall in earnings. While tariffs may create rising costs, lower margins, and reduced demand for many businesses, we believe some companies will opportunistically take a big bath, sweeping a portion of this cycle’s malinvestment and mismanagement under the tariff rug. We expect charge-offs and restructurings as companies position for the uncertainty related to tariffs. In fact, FTI Consulting noted in its Q1 conference call that they recently experienced a pickup in their restructuring business “stemming in part from tariff-induced stress.”
And finally, bond investors will likely point to tariffs as the reason buyers are less eager to fund U.S. fiscal deficits and refinance trillions of maturing Treasuries. Of course, tariffs didn’t create America’s pile of debt and put us on the path of unsustainable fiscal spending. The risk associated with mounting debt has been well publicized and has been building for years. The main unknown has been when, not if, the deterioration in U.S. fiscal health would lead to too much supply and not enough demand for Treasuries.
We view tariffs as one of the many potential risks of investing. As is the case with all risks, we attempt to capture the uncertainty related to tariffs in the discount rate we use when valuing a company’s future free cash flow. We also attempt to consider the volatility in business operating results by using a normalized cash flow estimate in our valuations. Properly considering risk in our valuation process will continue to be essential as we navigate through rising uncertainty and one of the most inflated market cycles of our careers.
While investors should consider risk, if being adequately compensated, assuming risk can be very rewarding. Over time, we’ve found most companies can adjust and adapt to their changing operating environment. During this adjustment period, rising uncertainty related to corporate profitability can often lead to opportunity. In fact, the recent increase in volatility related to tariffs has been beneficial in our attempt to find attractively priced small cap businesses.
The history of financial markets has taught us that all asset bubbles pop. Whether tariffs will be the catalyst for this cycle’s demise, we’re not certain. Regardless, we’re viewing this period of rising uncertainty opportunistically. Tariffs, recession, the end of another stock market bubble—no excuses. We’ve considered and are prepared to take advantage of all these risks.
Eric Cinnamond
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