On April 2, 2025, President Trump declared “Liberation Day”, announcing that he would be
assessing tariffs on other countries by his own criteria which later became whims. The stock market
plunged 19 percent by the Standards and Poors 500 index before recovering with the help of the
potential of Artificial Intelligence (AI) to change the world.
AI has not been an unqualified success as an investment thus far, and neither has the President’s
tariff regimen. While the market is still sorting out the issue of the investment merits of AI, the
Supreme Court has issued a decision that, per the United States Constitution, places the ability to
raise funds for the government squarely in the domain of Congress. This has had two interesting
developments.
First, the administration is unrepentant in its approach to tariffs. They are looking for other laws
that can circumvent the need for congressional approval. The problem is that such laws are of
limited duration (at most 150 days) and/or require extensive evidence of economic damage. Such
evidence takes time to assemble.
Second, there is a matter of refunding the estimated $175 billion in collected tariffs to date. Who
is entitled to them? The most logical recipients would be the companies that paid them. That is not
always obvious. In some cases, tariffs were paid by the exporters and/or importers to keep their
prices from increasing the full amount of the tariff levy. To the extent passed by the sellers of the
goods, the tariffs were paid by the buyer, usually the public consumer. Will such consumers be
able to apply for a tariff refund? Will all these matters be mooted if the administration decides to
reimpose tariffs by another means?
Then there is a matter of political popularity. The tariffs were considered a key issue in the rise of
prices to the public. “Affordability” is considered a major issue in the 2026 mid-term elections. It
appears the administration is passing a potential way to bury this issue by citing the Supreme Court
ruling. Had the government simply dismantled the tariff regime, it would have permitted the
distribution of funds that would goose against the economy this summer in advance of the
elections. Prices would also be lower ex-tariffs, helping with inflation rates as well.
Aside from their ability to raise funds, the tariffs represent a way for the Executive Branch to amass
resources independent of Congressional oversight. It logically follows that such resources could
be spent without Congressional approval as well. By denying the administration such a cookie jar,
Congress is forcing it to recognize that it is, for all its self-importance, one of three branches of the
United States government. As such, it must work with the other branches to carry out its aims.
The economic and financial fallout from this Supreme Court decision is still being sorted out. So
long as the administration is committed to imposing tariffs by other means, the matter must be
considered unresolved domestically.
Internationally, the image of the United States takes another hit. Trading partners are aghast at the
public edicts of the US government, made with no more rationality than the Mad Hatter’s tea party.
The US dollar, which has taken some hits in terms of international value, will likely take many
more.
It also makes for interesting speculation as to what the president will do abroad. Will he sell Tiawan
up the creek to China, and jeopardize US access to their semiconductor chips in the process? The
Financial Times of London has reported that Russia has sold $500 million in shoulder fired surface
to air missiles to Iran. Does the presence of such armaments make a strike on Iran risker for our
Air Force? And if there is any loss of life, would Trump continue to side with Russia in the matter
of Ukraine in exchange for dubious trade deals that supposedly measure in the Trillions?
The most charitable assessment of the President is that of a man who once ran his own real estate
development company and now tries to run the government the same way. But this was tried before
during Trump’s first term. At that time there were people who would stand up to him and talk him
out of what could best be described as non-presidential behavior. There are no such people on his
staff now. The reputation of the Presidency and the country suffer as a result.
Almost forgotten in all this is the ongoing need for foreign investments by the United States. Our
savings rate is not high enough to finance our deficits, much less paying down our debts.
Addressing our precarious budget situation should be the first priority of Congress. Unless we can
show some ability to master our deficit situation, we risk having to pay every higher interest rate with a
currency the rest of the world may be increasingly reluctant to accept.
The Economy
Economic activity is best described as running neutral. Significant spending on AI infrastructure
buildouts is masking decelerating consumer demand. Spending by retirees, who as a whole are the
most self-funding of all demographic groups, increases as more people turn 65. On the other hand,
the median age of first-time homebuyers is now over 40. Half of all stocks are owned by the highest
ten percent of all households. The next 40 percent own the other half. The bottom half of
households have no investible assets to speak of except occasionally a house. For them, retirement
accounts, if they exist, tend to be cashed in quickly in this group to meet emergencies.
Among the top half, AI is considered a grim reaper in terms of employment. The current economy
is generating few net new jobs, with most jobs that pay anything being in health care due to
demographic demand. Citrini Research predicts AI will generate the first white-collar recession.
There will be some impact in 2026 with the majority hitting in 2027-28.
Inflation
It appears that inflation numbers have lost credibility among most consumers. The cost of housing,
electricity, food, insurance and the like may not be fully reflected in government data.
This gap is in part due to the government shutdown, which disrupted data collection. Also, in
order to keep data from spiking from one month to the next, data is often averaged over a threeto-
six-month period to take out extremes. This averaging also makes the data less current.
There have been a number of price hikes announced since the first of the year. Whether the tariff’s
repeal will have any impact on this and to what extent remains to be seen.
Interest Rates
Interest rates have drifted down since the first of the year, no doubt in expectation of the new
Federal Reserve Chair to be installed in May or later, depending on ongoing litigation between the
administration and Federal Reserve over independence.
Longer term, the aforementioned deficits and debts make the prospect of lower interest rates the
stuff of feverish dreams. The Fed goal of 2 percent inflation before cutting rates looks as distant
as ever.
Recent history assumes that for interest rates to rise, inflation must be present. Yet the entire
period from 1870-1910 was characterized by falling prices and thus relatively high after-inflation
interest rates. What kept the economy growing in the 19th century was an influx of immigrants
and technological growth. The railroad, telegraph, telephone, automobile, electrification, etc. all
helped the economy to expand in spite of falling prices or deflation.
The Stock Market
Since the first of the year, the overall indexes have gone nowhere. This has masked significant
turmoil in sectors of the market, as tangible assets such as energy and materials have done well,
and technology has done poorly. Not one of the “magnificent seven” stocks has outperformed the
market this year to date, as concerns about the debt being assumed by them to maintain the AI
arms race exceeds the projected cash flow from the respected companies.
The jury is still out on the AI race, and who will be the winners and losers. In the meantime,
natural gas, certain transportation, and real estate companies seem to be favored.
Warren M. Barnett, CFA
February 24, 2026
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