Wall Of Confusion

Submitted by Peter Tchir of Academy Securities

Wall of Confusion

I think that we have seen the word “uncertainty” far too many times in the past few months. While uncertainty had its time and place, maybe confusion is a better description?

This is a natural evolution of last weekend’s Uncertainty – Main Street vs Wall Street.

We will use “confusion” or “confusing” as much as possible today. That might be a weird approach to writing a report that is designed to help guide investors and corporations through these markets, but it is where we are.

Wall of Worry

Wall Street is well known for climbing the “Wall of Worry.” Some have tried to argue that Wall Street climbed a Wall of Uncertainty in the past couple of months, but that does not seem accurate.

• Stocks plummeted as “Liberation Day” created certainty on tariffs – and that certainty was scary.
• Stocks rebounded as the President “pivoted” away from tariffs to the budget. While tariffs have remained a staple of the Wall Street diet, the headlines have had less and less impact, as the consensus view is that the headlines are “grandstanding” and the final results will be “manageable.”

Where we have been, for a week or longer, is figuring out how well Wall Street can climb a Wall of Confusion? On the prior Friday, when the President sent out his Truth Social posts threatening Tim Cook’s company with tariffs on a certain product, and 50% for the EU (after all the “progress” on China), many people figuratively “threw up their hands.” From a quiet Friday, to assessing the likelihood of these posts becoming policy. For me, I believe, I literally “threw my hands in the air” as the announcement was confusing in terms of timing, scope, and even reality. If we had to identify a moment in time, where the narrative should maybe switch from uncertainty to confusing, it was that series of posts (the EU one, not surprisingly, was “fixed” by the open on Tuesday, and the other one seems to have died off for now).

While uncertainty and confusion are related, they are not the same thing (at least we don’t think so).

Wall of Confusion – (That’s What the World is Today)

Okay, the song is actually “Ball of Confusion” but “Wall of Confusion” seemed more relevant to me (and I’m slightly embarrassed to admit, I thought the song was “Wall of Confusion” – but in my defense, I was never a big Love and Rockets fan, and it was more difficult to find song lyrics back in the day). Moving on, from that faux pas, there are some reassuring things about the song.

Run, run, run but you sure can’t hide
An eye for an eye, a tooth for a tooth
Vote for me and I’ll set you free

Ball of confusion (oh, yeah)
That’s what the world is today, hey, hey

The sale of pills are at an all time high
Young folks walking ’round with their heads in the sky
The cities ablaze in the summer time
And oh, the beat goes on

Evolution, revolution, gun control, sound of soul
Shooting rockets to the moon, kids growing up too soon
Politicians say more taxes will solve everything
And the band played on

So, ’round and around and around we go
Where the world’s headed, nobody knows

If you read the lyrics, you might be wondering if something is seriously wrong with me! How are these lyrics even remotely reassuring?

The fact that Love and Rockets felt it was timely to remake this song in 1985, and we are still around (and in general, thriving) tells me that we made it through the last 40 years, and maybe things weren’t so different?

The Temptations released the original version back in 1970!

So, the same set of words, broadly applicable today, were applicable over 55 years ago!

• The bad news is that we’ve gone 55 years and haven’t seemed to have fixed all that much.
• The good news is that we’ve flourished even with these issues and as much as today might seem different, in reality, it might not be that different. I really find that encouraging.

I assume the “ball” referred to in the song is the Earth, and yes, there is a depressing (and scary) element to the lyrics. For today, I’m going to take to heart that the world has been (and probably always will be) confusing, but we can make it through that.

On that positive note, maybe we should just end today’s report here?

While that would be nice, I do feel compelled to get across a few of the most confusing things.

Sentiment By Party Is Confusing?

We will devote as little text as possible to the University of Michigan Survey (and even that is more time than this survey deserves). We touched on the massive gap between Democrats and Republicans in Together We Stand. Overall, things would be better as the nation gravitates to a relatively uniform plan (not something we have today, but it is something that Jamie Dimon seemed to hit on in a recent interview).

1-year inflation expectations dropped from 7.3% to 6.6% in the most recent survey – though, Republicans, Democrats, and Independents all submitted for higher 1-year inflation. How is that even possible?

I was prepared for “mood” swings, like we saw in sentiment, where Democrats were less negative (economic data and stocks have been doing well, and the administration has backed off some policies), while Republican sentiment dropped a bit – presumably because of the PIVOT?

For me, sentiment surveys are on the cusp of shifting from confusing to irrelevant.

In any case, I certainly don’t know how we are supposed to use them in this day and age of social media, etc.

Tariff Inflation Confusion

Maybe I’m the only one confused by the potential impact of tariffs on inflation?

I’ve seen a number of surveys where the group running the survey is trying to figure out if tariffs are “inflationary” or “deflationary.” A valid goal, but what if the answer is both? Or kind of? Or first one, then the other?

We will now subject you to one of our very amateur charts, but one that can clarify the view that we have had (and continue to have) on tariffs.

Overall premise (which we’ve outlined in the past):

• Tariffs, initially, result in some upward pressure on prices
  • Price increases take time, as the tariffs get paid and prior inventory is worked off
  • Price increases take time because many prices have already been contracted
  • Price increases take time due to uncertainty/confusion over whether the tariffs will remain in place
  • Smaller levels of tariffs will be split between the exporter, importer, and consumer

The numbers on the “left” scale, ranging from -4 to 10, should be viewed more as a “scale” of deflationary, low, medium, and very high inflation, rather than as estimates of the percentage impact on tariffs.

While what we consider “manageable” tariffs have some inflationary pressures, it will act more or less as “business as usual.”

For higher tariff levels, we believe there will be some serious questions about the supply chain.

As tariffs increase, the pricing dynamic shifts, at least initially, from “attribution,” to real fear about supply chain issues. 

That will create much higher inflation, much quicker as consumers and businesses scramble to adjust to potentially disruptive supply chains.

Higher levels of tariffs are highly likely to slow the economy down. Once we get over the initial “supply chain” issues, it seems logical to assume the economy will experience a slowdown. Inflation will reduce the number of goods consumed. 

Profit margins will erode. Serious re-thinking of the global economy will occur, which will lead to deflation, as spending will drop.

Over time, in all scenarios, we should drift back to a no or limited effect.

It is probably accurate to say that tariffs are a “one-time” adjustment to prices, but that “one-time” adjustment will actually occur over a period of time.

That is why it will be difficult for the Fed to cut, as tariffs slowly leak their way into the system.

Very high levels of tariffs will likely be deflationary, as they will hurt the economy, possibly severely (which is what the market was pricing in, before the 90-day pause was instituted). Incidentally, this is what ZeroHedge said back in June 2024 in “The Experts Are All Wrong About Inflation Under A Trump Presidency“

The impact of tariffs is likely to be confusing: If our view is correct, and any inflationary pressures take time to play out, it will be difficult to separate any inflation from tariffs versus all of the other forces shaping the economy and prices.

Confusing? Possibly, though we would argue this is a logical framework to think about tariffs and inflation.

Economic Data Is and Will Be Confusing

Since the election, companies and individuals have had to think about the following:

• Potential deregulation and aggressive efforts along the lines of National Production for National Security. That was highly anticipated, then seemed to take a back seat, but is moving to the forefront again (the Nippon/U.S. Steel deal is an example.)
• M&A. Was a big hope for Wall Street. That too faded, but has been bouncing back.
• Tariffs. Buying ahead of tariffs. Slowdown as Liberation Day tariffs hit. More buying as the pause went into effect.
• Government Job Cuts and Spending Cuts. DOGE brought out the “chainsaw” – literally, on stage, but then not much seemed to happen. The Big, Beautiful Bill seems to bring back spending.

Companies and individuals have had to navigate some or all of the above as these factors affect their businesses.

While it is always difficult to estimate the “steady state” of the economy and separate the “signal from the noise,” I cannot think of a more difficult time than now.

On the government side, what was probably a drag, has become less of a drag on the economy (assuming the bill gets passed).

On the tariff side, it probably increased demand for products (and presumably labor), with a potential slowdown as any backlog is worked off.

Then you have survey response rates. We have bashed on sentiment surveys enough, but the BLS continues to see declines in survey response rates. The Establishment data, for NFP (which we get this week) gets a response rate of about 43%, down from over 60% a decade ago. So not even half of the firms bother to respond, for one of the most important pieces of data that we get.

We argued in last month’s Instant Reaction that the adjustment from the birth/death model seemed inconsistent with many other things we had been tracking (and it ultimately was the main driver of the report).

We may well get more confusing data on the jobs front this month. There is a camp that believes the jobs data has been overstated, and we have at least one foot in that camp, for the reasons we’ve been detailing.

The uncertainty, or even “confusion,” is likely slowing hiring, but it is also likely slowing dismissals, as companies don’t want to be understaffed if the PIVOT is Real and Positive.

I’m Confused Why World Leaders Are Not Golfing with Trump

We have mentioned how Abe of Japan learned to golf so he could play with Trump. The President said incredibly nice things about Abe during his speech about the U.S./Nippon Steel deal.

It seems pretty simple. Learn to golf (if you don’t already know how). Invite him to the best course your country has to offer. Get permission to do a military flyover while he is at the course. Expect a “reciprocal” at Mar-a-Lago. Don’t take the game too seriously and make sure you lose, possibly by a lot.

If I didn’t have a big defense budget, a need for airplanes, or massive amounts of chips, this would seem like a good plan to me. Heck, even if you need any or all of the above, it seems like a good plan!

I’m confused why more world leaders aren’t golfing with Trump? It seems funny, but I am serious.

Bottom Line

With all the confusion, we continue to believe that you should “stay the course” based on your current convictions, until evidence mounts that the course you are on is incorrect.

Policy pivots need to be addressed immediately. Fortunately, even with policy pivots, we seem to have time to absorb them, unlike in March and early April.

On the data front, expect some data to be confusing, or even misleading, but try to sort out the overall trend before correcting course.

Rates. Moderately bullish. We published Add Duration on May 22nd. The 10-year had closed at 4.6% the night before and is now back to 4.4%. It should have some more room to run to lower yields, especially as yields globally seem to have found support. I think we should be pricing in 3 cuts this year, starting in July.

Credit. Should continue to chug along.

Equities. Broad markets seem ok here, but extended. The “everyone is bearish” narrative has largely flip-flopped. Individual sectors may be the key here, as we digest the confusion and what it means for the economy and specific sectors. If anything, the equity market seems to be living a little bit too much on Hopium rather than concrete announcements.

• The pivot, budget, and Trump put seem fully priced in.
• Difficulties getting deals closed (including risk of sanctions on Russia, if no ceasefire is reached), seem not to be getting priced in.
• It has been awhile since we’ve used Hopium, but it seems to be the one word that is emerging from the confusion.

We can navigate through confusion, but I think we will be most successful navigating through it if we accept that confusion is different than uncertainty (as convoluted as that might sound).

Also, let’s remember the song that inspired this whole thing was released 55 years ago, and as much as the issues remain relevant, the nation, and individuals in the nation as a whole, have a lot more than we had back then!