The Wild Market of July 8th, 2025

James Bailey4 Comments

April 2nd drove the point home- when someone in a position to know tells you something big is coming on a precise date, it is a smart time to act. As opposed to doing what I have done, which is think about acting but ultimately do nothing.

Ahead of April 2nd this year, the White House made a big deal of how they had a big announcement on trade coming April 2nd and I thought “this could go better or worse than markets expect, but some big move is coming, this seems like a great time to invest in volatility through something like VIX options expiring shortly after April 2nd”, but then I didn’t buy VIX options. I didn’t totally understand how they worked, didn’t want to buy without finding out, and didn’t make time to find out. My instinct was right though- the VIX more than doubled last week, so the right options on it much more than doubled. 

Ahead of the war in Ukraine in February 2022, US intelligence warned that Russia was planning to invade imminently, and I thought “they don’t have a great recent track record but it is very unusual for them to announce something so big will happen so soon, this is probably happening, this would be a good time to buy puts” but then didn’t buy puts, which of course did great as markets crashed following the invasion.

Yesterday the S&P 500 shot up 9% on the news that most of Trump’s new tariffs were paused. I thought this reaction was excessive given that the tariffs weren’t canceled, merely paused 90 days. Note that an exact date is being offered- July 8th! I sold some stocks last night and put in orders for S&P puts and VIX calls, but the limit options orders didn’t fill today as it seems the market caught up to my take from last night. The S&P is down 4% as I write this. This morning I was was researching which puts to buy, leaning toward SPY or XSP at-the-money puts for July 19 (first options date available after the 90-day tariff delay expires), then markets opened and their prices jumped 20+% in seconds as I watched. They are up over 50% now.

It is possible that the administration will fully clarify their stance on tariffs one way or another before July 8th, or even that Congress takes back their tariff power before then and makes their own deal. But I think it is more likely than not that we get a big announcement from the White House on July 8th about which tariffs will be implemented. In which case July 8th will be another wild market day.

This may already be priced in, but so far this April the situation has been changing so rapidly and touching so many parts of the markets and the real economy that even some of the most efficient markets (like US stock and bond markets) seem to be struggling to process what is happening. My ill-timed post from November praising the S&P has some lines that hold up well:

I’m now back up to 90% belief in efficient markets, at least for stocks.

This efficiency seems to change a lot over time. Probably fewer than 10% of US stocks have obvious mis-pricings right now; really none stand out as super mispriced to a casual observer like me. Instead, it seems like every 10 years or so a broad swathe of the market is driven crazy by a bubble or a crash, and you get lots of mispricing- like tech in 2000, forced/panic selling at the bottom in 2009, or meme stocks in 2021. The rest of the time, the stock market is quite efficient. So, in typical times, just be boring and buy and hold a broad index fund.

Ever since April 2nd, we have not been in typical times. At some point they will return and most people are probably best served by just holding through this (selling at the bottom and never getting back in is a big failure mode in investing). But for now the tariffs still have me thinking about buying VIX calls and stock puts (especially when policy changes loom on certain dates like July 8th), and on the bigger question of finding the sort of investments that did well in the 1970’s, another decade of stagflation that was kicked off by a President who broke America’s commitment to an international monetary system that he thought no longer served us.

Other “I, Pencils”

Jeremy Horpedahl2 Comments

When the owner of X.com, also the wealthiest man in the world, posted a video of Milton Friedman explaining how a pencil is made, many economists knew exactly where that reference came from: Leonard Read’s classic essay “I, Pencil.”

If you have never read “I, Pencil,” or if it has been a while since you last did, I encourage you to read it right now. It’s quite short and easy to read, as well as easy to understand. That’s what makes it a classic. But let me also summarize what I think are the two main points:

  1. No one can make a pencil on their own — it takes thousands of people to produce all of the inputs and assemble them into a simple pencil
  2. The activities of all those thousands of people are coordinated through subtle but miraculous social institutions, such as the price system, international trade, and property rights — rather than by force through government dictate, and even mostly outside of private firms (though firms are often part of the story)

Leonard Read communicated those ideas beautifully in an essay that is, somewhat humorously, written from the perspective of the pencil itself. But many other economists and economic communicators used other examples of goods to discuss similar themes. I’ll list a few of my favorites, but please comment with yours as well. Some of these essays and videos focus more on the production of the good, some focus more on the institutions, and not all are necessarily about international trade. But these “Other I, Pencils” are great introductory readings to remind us of the power of voluntary human cooperation.

Adam Smith’s “woolen coat” — this is a short discussion early in the Wealth of Nations, describing all of the people and trade needed to produce a woolen coat for a day laborer (at the link you’ll also see a comic version of the tale).

Harriet Martineau’s “plum pudding” — Martineau was a 19th century writer that popularized many of the ideas in Adam Smith. Less well known today, her discussion of international trade needed to bring many simple foods to our table, including plum pudding, is many ways superior to Smith’s discussion (start reading at the line “You mean machines”).

Thomas Thwaites “Toaster Project” — a book and Ted Talk explaining how to make a toaster from scratch — and fail miserably despite spending over $1,000 and spending hundreds of hours, all for something you can buy for a few dollars at the store.

Russ Roberts’ “It’s a Wonderful Loaf” — a poem set to video, explaining how a simple loaf of bread is always ready for you at the bakery when you want it in the morning.

T-Shirts — many examples!

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If Tariffs Are So Bad, Why Are They So Common?

Scott Buchanan4 Comments

Upfront disclaimer: This post is NOT about the most recent salvo of U.S. tariffs – enough apoplectic digital ink is gushing there already. It is about is an underlying question that these tariffs raised in my mind, which is the title of this article.

If there is one thing that nearly all economists, left, right, and center, can agree on, it is that free trade is good (see, for instance, a classic exposition of gains from trade on EcoNomNomNomics) and thus tariffs are bad. The main reason the local producers would need “protection” is because their goods (and services) are more expensive than the imports, and so by definition the consumers will pay more for their stuff. Thus, as is always noted, tariffs are a kind of tax on consumers. And yet…as far as I can tell all or nearly all nations impose tariffs on imported goods. So, what’s up with that?

This is not an area of expertise for me, so I went roaming the web to get some various opinions. The main reason given is to “protect local industry/agriculture”, and by extension, local jobs. We have to drill down deeper to see the reasoning involved.

In some cases, it is a simple, unsavory matter of a local industry having a powerful enough clout either at the business level or the labor level to lobby for special treatment (which costs the rest of the consumers more). But there are other cases where it is argued that it is important for national security to maintain a certain level of domestic production. For instance, historically nations like Japan and Switzerland maintained high tariffs on certain agricultural imports, in order to retain some domestic food production so they would not starve if something happened to interrupt international trade. Ditto for defense-related or other “strategic” production, and so on.

And in many cases, there just seems to be a gut feel that it is more patriotic or economically healthy to promote in-country production. Also, if a certain inefficient industry employs a lot of workers, the medium-term pain of letting that industry fail while resources shift elsewhere may be unacceptable. Economists promise us that the sooner or later those unemployed workers and empty factories will be put to some other, more worthy use, but it can be hard to believe in the “invisible hand” when suddenly you cannot pay your rent and no other jobs are available.

Two other factors came up. One is that for less developed counties without sophisticated internal revenue services, tariffs are a convenient way to collect revenue, and in fact may provide a significant share of government support. If I recall my high school history correctly, the fledgling United States government supported itself largely by tariffs, back in the day.

Another motive is what I would call “smart” tariffs, aimed not at indefinitely protecting inefficient producers, but at promoting improved production. What I have in mind is something I read some years ago, in an article I cannot now lay hands on, describing Korea’s path to industrialization. Protectionism was very much a part of that. The nation’s consumers did forgo short-term cheap consumption, in exchange for the development of domestic production which would in the long-term benefit everyone. I think one example was cigarettes. The government decided that cigarette production was a reasonable place to start industrializing, so they taxed imports to drive the price high enough to justify putting in cigarette-making equipment. After some years, they were happily making cigarettes, employing Koreans and building institutional muscle for the next phases of industrialization.

China has maintained a high degree of protectionism, including capital controls, and has grown and prospered mightily. So, I think that in assessing tariffs, it is essential to look past the immediate effects (which economists can always argue are “bad”, i.e., reduced consumption) to the longer-term impacts. Smart tariffs of the kind that East Asian countries have employed seem to have parlayed short-term consumer pain into long-term societal gains. Non-smart tariffs – -maybe not so much.

We did this to ourselves

mdmakowsky1 Comment

What, you think I’m going to pretend anyone is paying attention to anything but the trainwreck on Wall Street? As of 10:15AM this morning, the market is down 8% in 5 days, almost 20% off it’s peak, and is still falling. It’s entirely attributable to a unfathomably stupid trade war that has been forecast for months, if not years. This is the kind of probabalistic event that is usually internalized within the market in advance, which suggests that either very few people thought Trump a) was telling the truth, b) would be able to execute, or c) other forces within government would be able to stop him.

The legislative branch has largely ceded power to the executive, with only the judicial hanging on as some check against power. The open question, then, is at what level of damage will the legislative branch find incentive to reassert itself against an executive that (probably) doesn’t have the constraint of a future electoral victory to pursue? Will the destruction of great swaths of the US and global economy warrant reclaiming of power or impeachment of an executive?

I’m not optimistic.

When Genius Failed

James Bailey2 Comments

Myron Scholes was on top of the world in 1997, having won the Nobel Prize in economics that year for his work in financial economics, work that he had applied in the real world in a wildly successful hedge fund, Long Term Capital Management. But just one year later, LTCM was saved from collapse only by a last-minute bailout that wiped out his equity (along with that of the other partners of the fund) and cast doubt on the value of his academic work.

Roger Lowenstein told the story of LTCM in his 2001 book “When Genius Failed“. I finally got around to reading this classic of the genre this year, and I’d say it is still well worth picking up. The story is well-told, and the lessons are timeless-

  • Beware hubris
  • Beware leverage
  • Bigger positions are harder to get out of (especially once everyone knows you are in trouble)
  • In a crisis, all correlations go to one
  • Past results don’t necessarily predict future performance
  • Sometimes things happen that are very different from anything that happened in your backtest window.

The book came out in 2001 but it presages the 07 financial crisis well- not about mortgage derivatives specifically, but the dangers of derivatives, leverage, using derivatives to avoid regulations restricting leverage, and over-relying on mathematical models of risk based on past behavior. If Fed had let LTCM fail, could we have avoided the next crisis? Perhaps so, as their counterparties (most major Wall Street banks) who got burned would have been more careful about the leverage and derivatives used by themselves and their counterparties, and regulators may have taken stronger stances on the same issues.

Perhaps some more recent well-contained blowups foreshadow the next big crisis in the same way, like FTX or SVB?

Some more specific highlights about LTCM:

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Join Joy to discuss Artificial Intelligence in May 2025

Joy Buchanan1 Comment

Podcasts are emerging as one of the key mediums for getting expert timely opinions and news about artificial intelligence. For example, EconTalk (Russ Roberts) has featured some of the most famous voices in AI discourse:

EconTalk: Eliezer Yudkowsky on the Dangers of AI (2023)

EconTalk: Marc Andreessen on Why AI Will Save the World 

EconTalk: Reid Hoffman on Why AI Is Good for Humans

If you would like to engage in a discussion about these topics in May, please sign up for the session I am leading. It is free, but you do need to sign up for the Liberty Fund Portal.

The event consists of two weeks when you can do a discussion board style conversation asynchronously with other interested listeners and readers. Lastly, there is a zoom meeting to bring everyone together on May 21. You don’t have to do all three of the parts.

Further description for those who are interested:

Timeless: Artificial Intelligence: Doom or Bloom?

with Joy Buchanan

Time: May 5-9, 2025 and May 12-16, 2025

How will humans succeed (or survive) in the Age of AI? 

Russ Roberts brought the world’s leading thinkers about artificial intelligence to the EconTalk audience and was early to the trend. He hosted Nick Bostrom on Superintelligence in 2014, more than a decade before the world was shocked into thinking harder about AI after meeting ChatGPT. 

We will discuss the future of humanity by revisiting or discovering some of Robert’s best EconTalk podcasts on this topic and reading complementary texts. Participants can join in for part or all of the series. 

Week 1: May 5-9, 2025

An asynchronous discussion, with an emphasis on possible negative outcomes from AI, such as unemployment, social disengagement, and existential risk. Participants will be invited to suggest special topics for a separate session that will be held on Zoom on May 21, 2025, 2:00-3:30 pm EDT. 

Required Readings: EconTalk: Eliezer Yudkowsky on the Dangers of AI (2023)

EconTalk: Erik Hoel on the Threat to Humanity from AI (2023) with an EconTalk Extra Who’s Afraid of Artificial Intelligence? by Joy Buchanan

“Trurl’s Electronic Bard” (1965) by Stanisław Lem. 

In this prescient short story, a scientist builds a poetry-writing machine. Sound familiar? (If anyone participated in the Life and Fate reading club with Russ and Tyler, there are parallels between Lem’s work and Vasily Grossman’s “Life and Fate” (1959), as both emerged from Eastern European intellectual traditions during the Cold War.)

Optional Readings: “Technological Singularity” by Vernor Vinge. Field Robotics Center, Carnegie Mellon U., 1993.

“‘I am Bing, and I Am Evil’: Microsoft’s new AI really does herald a global threat” by Erik Hoel. The Intrinsic Perspective Substack, February 16, 2023.

“Situational Awareness” (2024) by Leopold Aschenbrenner 

Week 2: May 12-16, 2025

An asynchronous discussion, emphasizing the promise of AI as the next technological breakthrough that will make us richer.
Required Readings: EconTalk: Marc Andreessen on Why AI Will Save the World 

EconTalk: Reid Hoffman on Why AI Is Good for Humans

Optional Readings: EconTalk: Tyler Cowen on the Risks and Impact of Artificial Intelligence (2023)

“ChatGPT Hallucinates Nonexistent Citations: Evidence from Economics” (2024) 

Joy Buchanan with Stephen Hill and Olga Shapoval. The American Economist, 69(1), 80-87.

What the Superintelligence can do for us (Joy Buchanan, 2024)

Dwarkesh Podcast “Tyler Cowen – Hayek, Keynes, & Smith on AI, Animal Spirits, Anarchy, & Growth”

Week 3: May 21, 2025, 2:00-3:30 pm EDT (Zoom meeting)
Pre-registration is required, and we ask you to register only if you can be present for the entire session. Readings are available online. We will get to talk in the same zoom room!

Required Readings: Great Antidote podcast with Katherine Mangu-Ward on AI: Reality, Concerns, and Optimism

Additional readings will be added based partially on previous sessions’ participants’ suggestions

Optional Readings: Rediscovering David Hume’s Wisdom in the Age of AI (Joy Buchanan, EconLog, 2024)

“Professor tailored AI tutor to physics course. Engagement doubled” The Harvard Gazette. 2024. 

Please email Joy if you have any trouble signing up for the virtual event.

Now published: Human capital of the US deaf Population, 1850-1910

Zachary BartschLeave a comment

Myself and a student coauthor worked hard on our article that is now published in Social Science History. It’s the first modern statistical analysis of the historical deaf population. We bring an economic lens and statistical treatment to a topic that previously included much anecdotal evidence and case study. We hope that future authors can improve on our work in ways that meet and surpass the quantitative methods that we employed.

Our contributions include:

  • A human capital model of deafness that’s agnostic about its productivity implications and treats deaf individuals as if they made decisions rationally.
  • A better understanding of school attendance rates and the ages at which they attended.
  • Deaf children were much more likely to be neither in school nor employed earlier in US history.
  • The negative impact of state ‘school for the deaf’ availability on subsequent economic outcomes among deaf adults. We speculate that they attended schools due to the social benefits of access to community.
  • Deaf workers did not avoid occupations where their deafness would be incidentally detectable by trade partners, implying that animus discrimination was not systemically important for economic outcomes.
Continue reading →

Trump’s National Sales Tax

James Bailey1 Comment

Tariffs are going up to levels last seen in the 1930 Smoot-Hawley tariffs that helped kick off the Great Depression:

Tariffs are taxes- roughly, a national sales tax with an exemption for domestically-produced goods and services. I think the words make a difference here- “raising tariffs on countries who we run a trade deficit with” just sounds abstruse to most people, while “raising taxes on goods bought from firms in net-seller countries” sounds negative, but they are the same thing.

Of course, in this case the plan is to raise taxes to at least 10% on goods from all other countries even if they aren’t net-sellers, and raise taxes up to 49% on those that are. This is not a negotiating tactic. We know this from the math- the new tax formula uses net imports from a country rather than a country’s tariff rates, so a country could cut their tariffs on US goods to zero today and it wouldn’t necessarily reduce our “reciprocal” tariffs at all; at best it would reduce them to 10%. We also know it isn’t about negotiating because the administration says it isn’t. Their goal, obviously, is to reduce trade, not to free it.

They say they are doing this to bring manufacturing back to America and to promote national defense. But American manufacturers don’t seem happy. Even before the latest huge tax increase, trade war was their biggest concern:

The National Association of Manufacturers Q1 2025 Manufacturers’ Outlook Survey reveals growing concerns over trade uncertainties and increased raw material costs. Trade uncertainties surged to the top of manufacturers’ challenges, cited by 76.2% of respondents, jumping 20 percentage points from Q4 2024 and 40 percentage points from Q3 of last year.

The National Association of Manufacturers responded to the latest tax increase with a negative statement; so even the one major group that might have benefitted from tariffs is unhappy. Foreign producers and US consumers will of course be very unhappy. I think Trump is making a huge political blunder alongside the economic one- he got elected largely because Biden allowed inflation to get noticeably high, but now Trump is about to do the same thing.

I also see this as a huge national security blunder. For tariffs on China, I at least see their argument- we should take an economic hit today in order to become less reliant on our peer-competitor and potential adversary. But the tariffs on allies make no sense- they are hitting the very countries that are most valuable as economic and/or military partners in a conflict with China, like Canada, Mexico, Japan, South Korea, Vietnam, India, and Taiwan (!!!). One of our biggest advantages vs. China has been that we have many allies and they have few, and we appear to be throwing away this advantage for nothing.

What can you or I do about this? Stock up on durable goods before the price increases hit. Picking investment winners is always hard, but things this makes me consider are gold, stocks in foreign countries that trade little with the US, and companies whose stocks took a big hit today despite not actually being importers. Finally, we can try nudging Congress to do something. The Constitution gives the power to levy taxes to the legislative branch, but in the 20th century they voted to delegate some of this power to the executive. Any time they want, Congress could repeal these tariffs and take back the power to set rates. I have some hope they actually will- just yesterday the Senate voted to repeal some tariffs on Canada, and more votes are planned. The alternative is to risk a recession and a wipeout in the midterms:

Freedom to Trade Internationally

Jeremy Horpedahl1 Comment

How much does the US and our trading partners adhere to the principles of free trade? The Fraser Institute’s Economic Freedom of the World report includes a category that helps to answer this question. Fraser’s measure includes not just tariff rates, but also non-tariff barriers, trade regulations, black market exchange rates, and controls on the movement of capital and people. Each country is assigned a score from 0 to 10, with 10 being the most freedom to trade internationally.

Overall, the US gets a pretty good score, slightly over 8 out of 10, which ranks us as the 53rd most free trading country in the world (data from 2022). That’s pretty good, but clearly not the most open: 52 countries have more trade freedom! Here’s how the US and our 10 largest trading partners look on that measure (I’ve truncated the axis to show roughly the current range of country scores worldwide):

Countries/regions with the highest scores on this measure are Hong Kong and Singapore, and almost every European country scores higher than the US.

What if we just look at tariffs? The US has a slightly higher score at 8.3 out of 10, but our rank on tariffs is slightly lower at 59th most free in the world (this includes not just tariff rates, but also the standard deviation of tariff rates and revenue from the trade sector).

Relative to our largest trading partners, the US does look better on this subcomponent for tariffs, but is still lower than some of our trading partners (note the axis is slightly different than the first chart, to once again roughly show the international range on this measure):

Finally, we might be interested in how much these scores have changed over time. You might sometimes hear that the US has opened up more to trade, while the rest of the world has moved in the opposite direction. This might be true on some margins, but not overall according to the Fraser scores. I use 1990 as the baseline, which is before a lot of the free trade agreements and WTO changes that would happen over the next decade or so (Fraser has no data for Vietnam in 1990, so they are excluded):

Overall, the US and our major European trading partners have reduced the ability of their citizens to trade internationally, while places like China and India have opened up massively to trade. In 1990 China had a mean tariff rate of 40% and India’s was a whopping 79%. Today their tariff rates are still higher than the US: 7.5% in China and 18% in India, compared with 3% in the US. But they are the ones who have massively opened up their economies to international trade, when we consider all aspects of international trade, even if this opening up isn’t as complete as the US. The US ranked as the 12th highest on Fraser’s freedom to trade internationally component in 1990, but is down to 53rd in the most recent data.

My Visit to a Maple Syrup Producer in Vermont

Scott Buchanan2 Comments

While I was in southern Vermont last month, I visited a maple syrup production operation. The actual shed is called a “sugar house”, and the operation is called sugaring, even though the main product is the syrup.

When I was a boy, my dad hung some buckets on taps into the two maple sugar trees in our yard to collect the sap. He boiled the sap in a big old copper tub/kettle set on cinder blocks over a wood fire. You do have to boil and boil, since it takes about 45 gallons of sap to make one gallon of syrup. The other 44 gallons is boiled off by the heat of the burning firewood.

David Franklin’s operation in Guilford, VT (near Brattleboro) is much more efficient than that. The sugar house is set at the base of a long slope. The sap from the taps in the trees goes into tubing that connects into more tubing which goes downhill, so hundreds of trees feed into the long blue tubing shown here, which goes into collection tankage:

The tanks and pumps are arranged to optimize storage and then allow gravity flow into the equipment in the sugar house:


There is a big vat in the shed, around 4 ft wide x 12 ft long, where the sap is boiled by a wood fire kept going in a lower chamber.

The men have been cutting and splitting wood for months, to get ready for the sugaring season.  Running this operation takes two or three people. Typically, there is one man keeping his eye fixed on the temperature and other properties of the sap that is being boiled, to make sure that the syrup is drawn off at the right consistency and is not overcooked. The syrup should be drawn off when the temperature reaches 219 degrees F (104 C). Another man keeps a timer set, and every six minutes he opens the door to the fire box and throws in half a dozen pieces of wood to keep the fire burning hot:

There is also filtering and handling of the drawn-off syrup, and checking the tankage outside.
As a (retired) chemical engineer, I appreciated an improvement that was added to the boiling operation. Originally, all the steam from the boiling just went into the air of the shed, making it clammy and causing condensation from the roof to drip down onto workers’ heads. The heat of this steam was basically wasted. But they added a fairly high-tech “Steamaway” heat exchanger that sits on top of most of the boiling vat. The steam rises up through channels of incoming sap from the outside. The cool sap is warmed by the rising steam to around 194 F before entering the boiling vat. This preheating means less firewood is needed to make the syrup. Also, much of the steam is condensed into hot water which can be used for washing operations. A bonus is that much less steam ends up in the atmosphere of the shed, so no more dripping onto heads.


The owner, David Franklin, and his family had the vision for this operation. They built the large shed that houses the operation themselves, and invested in the expensive equipment. David is an old-school farmer, of the type skilled in every aspect of workmanship so they can do their own welding and building and equipment repair instead of paying others to do it. Keeping a large farm running smoothly is a complex task that takes more energy and practical know-how than most suburbanites or city dwellers can imagine. The other men running the sugaring operation are all smart and efficient and hard-working, and all retired from responsible, skilled professions. It seems they do the sugaring largely out of the enjoyment of doing a job well alongside worthy companions.

However, they are all over sixty years old. They can’t keep it up indefinitely since there is a lot of physical labor involved, yet the operation can’t afford to hire young people who would do the work just for money.

It is not clear to me, therefore, what the future of operations like this will be in 15 years, as this current generation of workers ages out. Unlike a lot of production, maple syrup making cannot be simply outsourced to Asia.

Anyway, David Franklin’s syrup is delicious. You can buy some on-line here.  Or if you swing by the Franklin Family Farm in Guilford, you can also get some farm fresh eggs and certified organic hamburger, and stew meat.