The Stock Market's Indigestion is more than Tariffs

CAMS View from the Corner

March 17, 2025

On a personal note, sometimes I sit back and digest media coverage of economics/markets as though I know nothing at all about the subject matter.  I try to nullify decades of study and experience on the topics and take in the messaging as though it represents the be-all and end-all of information, as it is being shared with me.

Through this approach, in recent times when attempting the above, I can only walk away with the view that if the tariff conversation had never been entered into, relative to trade policies, our socioeconomic backdrop would be marvelous, or perhaps something just slightly under such a descriptive experience.

I then involuntarily enter back into my existence, if you will, and then find myself involuntarily asking, “What are they talking about?” 

In digesting the messaging, it would be quite easy to put aside the plethora of issues that face our nation, the majority of which have built up for decades.  We did not just arrive at these issues, as if they were a surprise destination point, but rather they have been building and building to a point of “Oh, no, how did we get here!?”

Underlining this, which is meant to act as a stop-you-in-your-tracks data point, we offer the U.S. Treasury’s annual interest payment run rate now exceeds $1.1 trillion!  How did that happen under the “all is good if not for the tariff discussion” if things are truly good. 

This says nothing to the fact that we have $150 trillion PLUS in unfunded liabilities.  Those are promises that have been made and are on the books so-to-speak, but will be next to impossible to honor.  Those are outside of, and in addition to, the well-recognized national debt level of nearly $37 trillion.

Sadly, it is not the Treasury’s issue; it is the citizenry’s issue.  The government is not on the hook for those debt levels and interest payment liabilities; it is we the citizenry that pays the price. 

We either pay it through explicit increases in taxes (yes, tariffs can be viewed as an increase in taxes, but are they a net increase?  That is a larger topic beyond the scope of this edition,) coupled with reduced government spending. 

Or we pay it via a less valuable currency (resulting in price inflation/higher interest rates) via continued massive government debt financing coupled with the Fed cranking up their printing presses to “pay the bills” as though that is an actual solution rather than the eternal, kick-the-can approach that it actually is.

We have taken the government indebtedness/Fed route for decades - triple underline that approach here in this 21st century. 

This century has gone off the rails relative to that approach.  It also shows what history foretells, as an end result, when taking such an approach.   

You know, extreme, unjustifiable stock market valuations (that set the citizenry up for the next setback), general societal discontent, income inequality (yes, you can thank the printing press for playing a notable role in that socioeconomic result), and price inflation generally with emphasis on housing price inflation, to include renting. 

In addition, wages for the everyday household that cannot keep up with the level of price inflation.  Call that unimpressive inflation-adjusted wage growth rates that has hollowed out the middle class and exacerbated income inequality.

In addition, the indebtedness/printing press approach has left in its wake an emboldened government leadership group believing all is well in their area of responsibility when it is far from such.  The indebtedness/printing press allowed for their largess to continue, unabated, which paints the grandest of illusions to the masses.  We could continue, but you get the point.

The indebtedness/printing press approach does not fix all that ails a society but rather, ultimately increases the severity of any of the socioeconomic ailments it tries to mask over.   

For many years now we have chronicled the continual build of many issues in the socioeconomic realm through the approach of addressing markets and economics.  They go hand in glove far more than most realize.

To think the recent indigestion of the stock market is solely due to tariff discussions is analogous to calling a symptom the disease.  The point here is any solution offered or attempted, outside of going about the status quo – think massive continued indebtedness/printing press approach – will cause disruptions. 

And as offered, the status quo offers its own disruptions in a less obvious manner.  Ultimately though, the status quo brings a scorched earth type of result to any nation employing such policies.  History offers this ad nauseam.

We are deep in it through decades of masking, and if we are to ever make a planned effort to work on righting the structural integrity of this proverbial ship, it will not come without some disruption.    

Stock Market

For their part, markets have been priced to planet Pluto when viewing them through any context of valuation.  Valuation places price into context.  Price offers very little information.  Valuation offers deep information.  Valuations matter. 

If a company’s shares trade at $1 million per share, but their profits equate to $1 million per share, they are trading at a ridiculously cheap valuation.  The point through the above extreme exaggeration is price tells us little.  Context of price tells us everything.  Said context can be earnings, sales, dividends, cash flows, etc. 

As an example, the S&P 500’s earnings yield (S&P’s collective earnings divided by its price) is a paltry 3 ½%.  This tells us earnings, relative to the price that is currently quoted for the S&P, are pathetic, using history as our guide.  (In this metric, the lower the number, the higher the market’s valuation, i.e., the more expensive it is.)

Dating back to 1870 (not a typo), the S&P has been priced (valued) this high via its earnings yield, as one valuation tool, only a few times, all of which have occurred in this 21st century.  These extreme valuations are courtesy of the indebt and print approach.  These extreme valuations set up unsuspecting investors for the next significant downturn. 

(As an aside, for those entrusting assets under our stewardship, we are deeply steeped in these valuation realities and the vulnerabilities they present to asset market pricing.  These inherent, vulnerable asset prices, via their high valuations, are always present in our work and decision-making.)

Collective market participants have been trained that the printing press (think Fed’s easy money/easy policies) will come along anytime there is a market disruption (it became known as the “Fed Put”), and cheaper Federal Reserve Notes (the dollars in your pocket) will come raining down as though they are manna from Fed heaven.

The inevitable and now long-standing issue of price inflation has gotten in the way of this continued process.  In fact, the Fed attempted this approach yet again, even in the face of a price inflation backdrop that was notably higher than their supposed line in the sand, 2% price inflation target.

In the late summer/early fall season of 2024, they began an ill-advised interest rate-cutting campaign that was ended nearly as fast as it started.  Why?  Price inflation refused to cooperate. 

For the stock market’s part, it had been rising with the then-on-going rate cuts coupled with expectations of more to come.  Interestingly, as fall turned toward early winter, the Fed offered no more rate cuts under the banner of “tariff uncertainty.”

Wait, we had the exact same price inflation issue prior to them beginning their rate-cutting campaign, along with the price inflation issue gaining a bit of additional momentum during their rate-cutting campaign, but it was tariff uncertainty that halted the rate cuts?  Completely nonsensical. 

How about full transparency, of which should go something like this: “We blew it; we were dead wrong on our price inflation outlook, and we mistakenly cut rates.  Now, as a result of our full realization, there will be no rate cuts until further notable progress is made on price inflation.”

Outside of the narrative that tariffs are the central, if not only issue we have to address, of which the Fed is playing along in, we emphasize that the tariff discussion/issue/policy approach is a mere symptom of the much larger issue.

The issue is; the U.S. has tremendous issues.  These have built up over a long period of time and are numbered in the many. 

The kick-the-can approach (ongoing indebtedness/easy money Fed) to continually mask over said issues reaches a breaking point.  Our price inflation issue, courtesy of an ever worth less currency (less purchasing power), fully exposes the masked-over, foundational reality. 

We either address them with you name it approach, and we mean you pick it to underline we are not cheerleading any particular approach, to include tariffs, or we continue the status quo.  Either way, be it setting a course to right the ship or continuing the status quo, there will be some level of discomfort.   

We are deep in it as a nation, and through this as collective citizens.  A $1.1 trillion annual interest rate expense run is not only unfathomable but also underlines the seriousness of our issues. 

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis