The Great Contraction: A Story of Multiple Squeeze, Yields, Earnings, and Tariffs
Prenez du recul
10Y has been a whipsaw…glad SPY has been trading like FART coin - enjoy the short piece.
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