Colonial Beginnings
Tariffs in America date back to colonial times, with taxes on imported goods like tea generating revenue and, in some cases, provoking rebellion. Much of the 18th and 19th centuries saw tariffs compose a majority of federal revenue for the young United States.

The 19th Century: A Hotbed of Tariff Battles
Alexander Hamilton advocated tariffs to nurture American manufacturing and reduce reliance on Europe. Henry Clay took up a similar cause in the early 1800s, culminating in the Tariff of 1828, which outraged the agrarian South. South Carolina, heavily dependent on cheap imports, threatened secession—almost 30 years before the Civil War. In response to widespread protest, Congress eventually lowered these high protective tariffs.

Civil War and Aftermath
During the Civil War, the Union raised tariffs both to protect Northern industry and to fund the war effort. Postwar, however, these tariffs proved burdensome for Southern and Western farmers who relied on imported machinery and goods.

Great Depression & Smoot-Hawley
In the early 1930s, amid the Great Depression, Congress enacted the Smoot-Hawley Tariff, intended to shield American jobs. Instead, it invited retaliatory tariffs from major U.S. trading partners, exacerbating the global economic downturn. Elevated tariffs can do more harm than good when they trigger trade wars, eroding trust in the U.S. as a reliable trading partner—potentially paving the way for multiple contraction in today’s parlance.

Leaving the Gold Standard
Abandoning the gold standard in the 1970s profoundly shifted the macroeconomic landscape. Freed from the direct link to gold, the U.S. could run larger deficits, manage a floating exchange rate, and set policy primarily around domestic economic goals rather than defending a gold peg. This new environment fueled globalization and more complex supply chains, ultimately entangling tariff policy with broader geopolitical and populist currents.

A Possible Tactic?
Here’s the conspiratorial angle: With trillions of dollars in debt to refinance, the U.S. government might (theoretically) allow equity markets to wobble—via tariffs, trade wars, or other shocks—so that investors flee to bonds. Higher bond demand drives bond prices up and yields down, lowering the cost of refinancing. Whether this is truly happening or not, it can damage trust in the U.S. as a dependable trading partner.

Impact on Valuation Multiples
The U.S. has historically commanded higher valuation multiples, thanks in part to strong growth prospects and high-margin exports (like chip design) relative to lower-margin imports. But if investor sentiment sours—due to trade disruptions, geopolitical tensions, or fear of a manipulated market—multiples could contract.

• Investor Sentiment: If tariffs persist or abruptly get removed (prediction: gone by H1 2025) in a chaotic environment, global markets may remain rattled. Risk aversion often shrinks P/E multiples for equities.

• Decreased Trust: If the U.S. shocks the global economy—intentionally or not—other nations may pivot away, hurting American asset valuations and growth expectations.

Key Takeaway
Multiple contraction can blindside investors even if corporate earnings remain robust. Keep a close watch on macro policies, interest rate shifts, and overall sentiment. Eventually, such upheaval can lead to opportunities to buy solid businesses at lower valuations—if you stay attuned to the macro backdrop and avoid getting whipsawed by short-term market swings.

Life is rich,
Mickey

Enjoy the read - TYP

A New Frontier:

The use of energy is a direct function of the GDP per capita of a given society. Those with higher per capita energy use enjoy higher GDPs per capita and better living standards, on average. Global trade and innovation increased with increased energy providing research and development, transportation, logistics, and efficient movements of goods and services.

For instance:

Source: Our World in Data 

At the dawn of the 19th century, societies transformed from agrarian ones into industrial powerhouses. Stream engines revolutionized transportation and manufacturing capabilities, driving productivity and efficiency forward.

At the dawn of the 20th century, electric power allowed factories to operate more efficiently and safely. Electricity paved the way for things such as the telegraph, telephone, radio, and eventually the internet - raising the standards of living and quality of life for all. Households gained access to heating, appliances, lighting, and reduced labor-intensive chores; healthcare and education improved.

The 21st century, has generally, seen a transition to renewable energy. Though the United States continues to drill record levels of oil.

Source: EIA

This includes environmental benefits, as well as the lifting of quality life through decreased pollution and emissions from fossil fuels that potentially create health risks.

Now, in 2024, the rise of AI has created more demand for data centers: Une nouvelle frontière en matière de consommation d'énergie. This has marked a significant milestone in technological advancement - promises of revolutionizing industries, enhancing productivity, and contributing to a higher standard of life for all, globally. Algorithms require substantial computational power, just as data centers require substantial infrastructure investment. This has ramped up drastically. Constellation Energy is reopening Three-Mile, Microsoft is partnering with BlackRock to create a super AI fund - the corporate lifecycle is forcing companies to turn into zombies in order to create a super-owning culture, similar to that of boomers of present day, whilst the new guys on the block put in the sweat equity and rent.

Year to date the S&P is up 20.88%, while the energy sector in the 500 is up 5.51%, the 400 is up just 1.37%. Energy and AI are tying into one, and it is only a matter of time before heads start turning and granting a premium. The leveraging of AI will grant society unlimited upside in digital productivity. “AI won’t take your job, but someone who knows how to use AI, will.”

life is rich,
mickey

Consider the rise of index funds—a poster child example of efficiency in action. These funds offer a straightforward, low-risk approach to investing, providing steady returns without the need for constant attention or deep decision-making. But this very efficiency doesn’t just strip away the excitement of picking individual stocks; it also discourages us from engaging in the critical thinking that comes with active investing—the long nights of reading about a mundane accounting rule on page 212, paragraph 3, to better understand the business. When we solely choose index funds, we opt for the safety of the herd, surrendering the need to analyze, strategize, or truly understand the market. The process becomes automatic, almost mindless, as we place our trust in the broad market rather than in our own ability to navigate its complexities and take bold risks in a controlled manner, live life without the know—and be okay with that. Strip away the anxiety of the intense need and craving of what society says we should know and do.

This pattern of efficiency extends far beyond the stock market. In our everyday lives, the pursuit of efficiency has led to routines that, while optimized for productivity, often lack variety and spontaneity. We’ve perfected the art of meal prepping, streamlined our exercise routines, and automated everything from bill payments to grocery shopping. These efficiencies save us time, but they also create a life where each day is a near-perfect replica of the last—where the mental engagement, the problem-solving, and the creativity required to tackle daily challenges are minimized, if not eliminated. We become participants in a well-oiled machine, operating on autopilot, rarely stopping to think or question the path we’re on.

Even our social interactions are not immune to the efficiency trap. Math now curates our news feeds, suggest our next Netflix binge, and even help us find partnerships (love). These tools are incredibly efficient, but they also narrow our experiences, exposing us only to what is deemed most relevant, most likely to engage. The result is a life where everything is tailored to our past behaviors and preferences, leaving little room for the unexpected joys of discovery and the excitement that comes from stepping outside our comfort zones. And as we rely on these algorithms, we also surrender the need to think critically about our choices—whether it’s questioning the news we consume or the relationships we pursue.

In a world optimized for efficiency, we must ask ourselves: is the trade-off worth it? Are we gaining time only to fill it with more of the same? As we continue to streamline our lives, we might be losing the very experiences that make life rich and fulfilling. Efficiency, while undeniably useful, has a tendency to drain not only the excitement out of life but also the mental engagement that keeps us sharp and connected to the world around us. In our quest to optimize, we might find that we’ve sacrificed more than just the thrill of unpredictability—we’ve given up the need to think.

Enjoy your weekend…the world only ends once and its probably not today.

Live in the now,
mickey

Over the past two decades, passive investing has gained significant popularity. By the end of 2022, ETFs in the US and Europe amassed $6.7 trillion in assets under management (AUM), growing at an impressive 15% compound annual growth rate over the last 12 years—three times the growth rate of mutual funds.

Understanding ETFs

Mutual Funds vs. ETFs

Mutual Funds:

• Operate on a creation and redemption process.

• Investors pool their money into a mutual fund and receive shares proportional to their investment.

• For example, four individuals each invest $10,000, receiving 10 shares each if the fund totals $40,000.

• The Net Asset Value (NAV), calculated post-market close, determines the share value based on the fund’s assets.

ETFs:

• Trade continuously on the open market, unlike mutual funds.

• Investors buy and sell shares directly with other market participants.

• An authorized participant (AP), typically large banks, facilitates the creation and redemption process.

Role of the Authorized Participant (AP)

1. Creation:

   • The AP acquires the desired securities for the ETF.

   • The ETF issues a basket of shares to the AP, known as a “create.”

2. Redemption:

   • The AP returns ETF shares to the fund.

   • In exchange, the ETF provides a basket of securities.

AP as Arbitrageur:

• Ensures the ETF’s market value aligns with the underlying securities.

• Buys or sells ETF shares to maintain equilibrium.

Example of Arbitrage

• If ETF’s basket is worth $25 but trading at $25.10, the AP sells ETF shares and buys underlying securities.

• Conversely, if trading at $24.90, the AP buys ETF shares and sells underlying securities.

Tax Efficiency

• In-kind transactions (security-for-security swaps) avoid taxable events.

• ETFs can avoid capital gains distributions by selectively redeeming shares with the lowest cost basis.

Implications of Passive Investing

Market Dynamics:

• Increased efficiency and accuracy with methodologies like the S&P Float Adjustment.

• Potential distortions, as heavy inflows into index funds concentrate money in top stocks.

Market Concentration:

• The top four money managers hold over $25 trillion in AUM, heightening idiosyncratic risk.

Co-movement of Securities:

• Passive investing leads to higher correlations among securities.

• Financial shocks may have amplified effects across the market.

Valuation Gaps and Momentum:

• Discrepancies in valuations, particularly in the largest and smallest names.

• Opportunities for alpha extraction due to momentum swings.

Passive investing, while beneficial in many aspects, presents unique challenges and risks. Understanding the mechanics of ETFs and the broader implications of passive investing is crucial for investors navigating today's market.

ETFs have ultimately created a scenario in which investors own little securities. This passive environment is one which will harm the market dynamics going forward.

- mickey

Rf is the riskless rate

β is the asset’s beta or sensitivity to the market/benchmark

E[Rm] is the expected return of the market/benchmark

Without going into the limitations and unrealistic assumptions of the CAPM, we can clearly see that the risk-free rate will have a substantial impact on the overall equation and its derivations.  That’s where the last year or so comes into play.  With the historical rapid increase in rates that we have seen recently, this key component in models has seen quite the whipsaw.  Below are some descriptions of key drivers.

Cost of Capital: Firms have a cost to raise money, either through the debt or equity capital markets.  A rapid change in the risk-free rate will substantially impact firms that need to raise capital, especially those who are not rated at the high end of the credit rating scale.

Discount Rates: A common way to price assets involves discounting future cash flows to what they are currently worth in today’s dollars using the rate set by the Federal Reserve.  The higher this rate, the lower present value a future cash flow has.  Intuitively, this makes sense, as all else equal, you could invest at the risk free rate for that time.

Interest Rate Sensitivity: Fixed-income securities in particular have a sensitivity to a change in interest rates, as the coupon a bond pays and the time it has left until maturity have direct influence on how the price of that bond will change if interest rates move (see more: duration).

Common Equity Valuation: Many DCFs use models such as the Gordon Growth Model or the Dividend Discount Model, both of which have a common key input: the risk-free rate.

Unless you prefer to use circular logic on projecting multiples.

Thanks for reading.
- Mickey

The mission of this website, blog, or whatever else you want to call it, is to deliver information and thoughts that empower and motivate individuals to continue their educational pursuits outside of their university years; to think for themselves.  The primary focus is to provide financial insights and analysis, but things may change from time to time.  The contact page on the website is a great area for suggestions or criticism.  We hope you enjoy.

A friend and their significant other recently bought a house and signed up for the enjoyable monthly payment we call a mortgage.  This didn’t make a whole lot of sense to me, especially since rates are so high at the moment.  Nonetheless, the two make good money as high-end white-collar workers, and it got me thinking about mortgage history in the United States.  So, I did some digging.

At its core, a mortgage is simply a loan.  This type of loan is advantageous for lenders, since, aside from a massive decrease in housing prices, the principal and interest a borrower pay are collateralized by the house itself.  The payments stay the same, but the breakdown of the interest and principal components change over time.  Simple enough – So where did this all start?

The American Dream sold the pursuit and desire of owning a home.  Outside of roughly 2009 until early 2022, it has been cheaper to buy in the United States.  Today, that story is different, with the average cost to rent sitting at ~1,850, and the cost to buy at ~2,700, thanks to the rapid increase in rates, which we plan to write a piece on soon.

In the 1800s, owning a home was an immense privilege, and it wasn’t until the 1900s that the narrative started to change.  Around this time, commercial banks were looking for ways to expand their profits, so they came up with a way to expand access to mortgages (translated: death pledges) across the country, all while structuring interest payments across the life of the loan. 

As part of the New Deal, The Federal Housing Administration was born and provided guaranteed loans by the federal government.  At first, these loans were 7, 10, & 15 years.  This allowed for constant monthly payments as opposed to the old school upfront down payment, the interest over time, and then the rest of the sum at the end of the period.

 The problem is, it sounds like a good deal, but, when consumers stopped being able to afford 15-year monthly payments, the 30-year mortgage was born to decrease monthly payments.  The issue here is that the interest compounds over time, and thanks to the structure of the mortgage known as amortization, stretching this over time leads to overall lower monthly payments.  This is just a fancy way to say the debt is a constant payment over time.  People make money off confusing the population, and people often prefer short term gains over long term growth, but that’s a topic for another time.  One might assume that this pursuit of homeownership allows for the freeing of the perpetual rent cycle, but the reality is different.

Now, you might be thinking, well doesn’t this train slow once homes are owned over time? Nope.  That’s the thing, your home was never meant to be yours.  You move into a two-bedroom home, but once you have a second child or move cities, you suddenly need three bedrooms, so you move into a bigger house, with a new mortgage and another monthly payment plan, and since the vast majority of initial monthly payments go towards interest, the equity you have built in the home is negligible, and the cycle never ends.  

Then why buy a home? It’s not the issue of buying a home, it essentially boils down to money management.  We aren’t financial advisors, but continuing a learning and growth mindset is imperative to financial literacy, allowing you to live life to the fullest without any surprises.

Thanks for reading.

- Mickey

By the Numbers:

1. The highest delinquency rate since 2000 was 9.3% in 2010 – compared to 3.5% in Q1 2023

2. The average sales price of a new home in 2022 was roughly $540,000

3. COVID pushed 25% of millennials to say they were ‘more interested in buying a home.

4. As of 2022 there was $13.37 trillion of outstanding debt on family residences in the United States 

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