Too Much Noise Brings Down the House

The Market isn't the Problem

Late on Friday, when most of us were already checked out ahead of the long weekend, a federal appellate court ruled that the White House April tariffs were “unbound in scope, amount and duration” and are therefore beyond the authority granted by the International Emergency Economic Powers (IEEP) Act Trump used to deploy them. The judges then ordered the Court of International Trade, whose ruling it upheld, to reconsider its universal injunction on the levies. What does this all mean? At the moment, not much.

After the Labor Day holiday the market down slightly, but they usually are after Labor Day because September is a lousy month for the market. Granted, this is a weird year, and it’s maybe we can dip-buy ourselves out of a slump. On the other hand the dip could become a rash we can’t reach as tariffs and supply chains whipsaw back into limbo about the same time people start to whisper about an AI bubble and the Fed losing its independence.

Either way, the tariff ruling won’t go into effect until 14 October to give both side time to ready for an appeal to the Supreme Court – so that’s going to happen. Even if the White House loses in court, it has other ways of imposing tariffs other than co-opting the IEEP. The congress is very pliant these days. So both the international trade wars and the domestic tariff fights are not over and the market pricing on all this noise hasn’t settled. In bonds, the traditional "flight to safety" may not help because on the logical spreadsheet side, of the equation, overstretched government spending was counting on those tariff revenues. The White House’s fight to dominate the Federal Reserve is causing some hard-to-define "full faith" psyco-logical calculations on part of investors. Gold, if that’s your favorite canary in this coal-mine, has hit record high - make of that what you will.

I’ve always heard it’s a good idea to read books that make you feel like an imbecile the first time you read them. Which is not what I was thinking when I picked up Dan Davies brilliant The Unaccountability Machine but his deep and technical dive into how complex systems work did have that effect. Essentially, any complex system is made up components and protocols on how they relate to each other. With some components you can control output, but with humans – individually, in teams or markets – command is limited. They will do what they do, and you just have to manage the outcomes. Davies calls these “black boxes” and the uncontrollable feedback that they create “variety.” I call it “noise” and it you are reading this, you probably do to.

Some degree of noise is needed to make a system hum. That’s how innovations happen, and also why they rarely happen within large systems where noise or variety increases by orders of magnitude rather than linearly. In a healthy system, the noise is managed, and ideally, kept to an operable level – usually by layers of management everyone one is getting rid of these days. If it’s not managed, the noise will overwhelm the system making impossible to function in a controlled manner. At which point the system falls apart. This is true for corporations, bureaucracies, as well as political and financial systems. It largely explains why reasonable people attending civil protests, concerts and basketball games morph into insane mobs and do things that the individual components would never to on their own. Too much noise from too many black boxes will swamp any social system that once existed.

This takes us back to the market, those tariffs and all the rest of it. Anything as large as the stock market is fundamentally stable. It might crash - it’s done it before - and send us all running for the door. Yet it will correct and keep going because the market is so transactional that faith in your fellow human being isn’t required to make it work. It might not do it in time to do your retirement any good, but it will happen.

The noise coming out of the government is another story. It’s supposed to manage noise, not create more of it. The tariff fight and trade wars going on and off causing whiplash in supply chains and government revenues; the fight to dominate the Federal Reserve, the threats to send the military into America’s cities in a curiously partisan way, are all creating too much noise around the “full faith” part of the system which does require, if not trust, at least a vague idea that there is a system in place. Unfortunately people and markets being the way they are, about the time we start seeing that something must be done to keep the noise and variety from getting out of hand, things are generally well on their way to becoming unmanageable.

The market isn’t the issue, or at least its a second-order concern. It’s the economic and political system that underpins the market that is in danger of producing so much variety that the system comes apart.