Gold and TACO.

President Trump's latest tariff announcement sends economic policy uncertainty soaring once again, but financial market participants call TACO.

I am travelling at present and am writing this from a hotel in hot and humid Muscat, Oman. As I need to be brief, today’s note is more a collection of bullet points than an essay. I hope you find it useful.

The Yale Budget Lab (TBL) have incorporated the announced tariff adjustments into their estimates and currently estimate the average effective tariff rate is 17.6%, the highest rate since 1934. TBL estimate that after consumption pattern adjustments the average effective tariff rate would fall back slightly to 16.5%, its highest rate since 1936.

TBL estimate tariffs will subtract 0.7pp from real GDP growth this year, with the economy estimated to be 0.4% smaller in equilibrium post-tariff. They estimate the unemployment rate will rise 0.4pp relative to baseline, and that the tariffs will add 1.7pp to the price level. TBL estimate tariffs will bring in approximately USD 2.2trn in fiscal revenues over the next decade, once adjustment is made for the impact it has on output, prices, and employment.

The Policy Uncertainty Project’s economic policy uncertainty index exploded higher on Monday, to 769.4 and it remains elevated at the time of writing.

However, despite the surge in policy uncertainty, the US equity market seems to have largely shrugged off the event; since its peak on the 3^rd of July, the S&P500 index has lost a whopping 0.9% and remains close to its all-time high. Incorporating 12-month forward IBES earnings expectations, the S&P500 PE ratio is hovering around 22.4x earnings, in line with the level observed at the peak of post-election exuberance in December.