I guess the tariffs are irrelevant. Of the 22 developed markets in the MSCI indices, only 3 are still below pre-Liberation Day levels (Denmark, France, and Switzerland) and 7 are making year-to-date highs, 3 of which are hitting all-time highs (Canada, Germany and Israel). The VIX has also reverted back to March levels as has the Nikkei Volatility Index, though both are still above year start levels. Realized volatility is, however, back to the start of the year. So, I guess the world is fine …

And yet, every one-on-one meeting I’ve had, every group meeting I’ve joined, and every interview I’ve given, there was at least one mention, and usually several, on tariffs. As you would expect, the answer is almost always, “I don’t know”, regardless of the question. And how could one answer with any confidence? There appears to be no defined objective or direction or even milestones to be overcome in order to understand when the tariff situation will settle or at what level or in what scope. We just know that there are a lot of issues.

 

Needless to say, I don’t ask much about it myself when I speak with companies since I don’t expect an answer. The only one I’ve asked is, “what have you baked into your forecasts?”. And even that doesn’t get a clear answer. They initially say, “none”, or “just the 10%”. Some say that they will offset that with price hikes, the percentage often being vague (though very occasionally, a company defiantly says, 100%, which is what I like to hear, though it is rare). Some will eat the costs themselves (again, percentages being vague). Some go on to say, we assume X% decline in volumes due to higher prices and/or risk of economic slowdown. It starts to get fairly arbitrary from here. Some are very methodical, saying that they include 10% from now until Jul 9 and then assume thereafter that the initial tariff levels will be reinstated. And some actually calculate separately based on the initial tariffs on inputs such as steel and aluminum which, of course, just rose last week so they’ll have to revise those estimates now; this is assuming one can estimate prices even under normal circumstances, which is related to supply and demand with the tariff situation only adding another dimension of complexity in how supply or demand may change. Several say they chose not to include any impact on tariffs, prices, volumes, or costs. However, if you drill down into the numbers, you can tell that they probably just used a haircut for the topline and further incorporated some arbitrary percentage for cost inflation plus some extra fixed costs for good measure. In all fairness, that’s probably as good an estimate as any.

And that’s just PnL guidance. How companies may revise their labor and investment plans is unknown which is probably more important. At the IR level, there is only so much the company can say which is generally “our current plan is to move forward with our capex plans”. However, when pushed, they admit that they aren’t certain because senior management is uncertain. Some decisions may be easier such as planned capital expenditures in the US or Japan which will likely proceed as planned (and you can be sure that they highlight the US capex plans which were often preplanned anyway, even before this fiscal year’s guidance was decided or the tariffs were announced). Foreign investment into China for the Chinese domestic market will almost certainly continue as planned as well. Everything else, notably SE Asia and Mexico, is probably being debated as we speak. This could have much more profound effects in the medium term which may ultimately culminate in a major reorganization of global supply chain networks. You can understand their caution.

Normally, I don’t use company guidance to try and figure out what their earnings will look like anyway. I’m not trying to find out if they will beat or miss the quarter (although I might use that knowledge to time entry points if I suspect a below consensus earnings surprise is approaching). I, primarily, use guidance as a way to understand what management is thinking which could affect not just the next fiscal year, but the next several years.

And what I’ve learned this year is that management is confused (with no help from our ignorant prime minister). As such, at least for this year, I don’t take much stock in what they have to say, at least for now. We’ll just do as we always do, keeping an eye on our watchlist stock prices and expand our wish list for potential new names while opportunistically managing our current names. Despite the rising uncertainty, not much has altered our way of thinking.

Masaki Gotoh​​

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“I could’ve used a little more cowbell” – Christopher Walken playing Bruce Dickinson on an SNL sketch “More Cowbell”, April 8, 2000.

 

I’m probably obsessed with Christopher Walken, having mentioned him in my monthlies 3 times at TriVista and I’m sure at least once during my 5 years writing commentary at my previous shop. But this skit randomly appeared on my TikTok feed rather recently; of course, nothing is random in TikTok so I’m sure it figured out somehow that I’d like it. I was a huge fan of Saturday Night Live, especially the first few casts including, of course, the initial cast with the greats like Dan Aykroyd, John Belushi, and Bill Murray, and the next group which included Eddie Murphy, Julia Louis-Dreyfus, and Jim Belushi as well as those in the late 80s and early 90s (too many great performers to list). Having moved back to Japan in 1992, I’ve been unable to follow the program since, though I occasionally purchase DVDs dedicated to specific comedians or guests, one of which is the Best of Christopher Walken which, of course, included this now-famous sketch (it was also in the Best of Will Ferrell).

If you haven’t seen it, I highly recommend it. Just Google “Christopher Walken cowbell SNL” and you’re sure to pick it up. It’s about a band recording a hit single with a fictional producer played by Walken. The recording is going well until the cowbell starts playing rather loudly and disturbingly. The lead interrupts the recording, asking Walken if it sounded OK. And that’s when Walken says his iconic line. He goes on to tell the cowbell player, played by Will Farrell, to “really explore the studio space this time”. In the next take, he makes it even louder, off-beat and more annoying. This keeps going and you can even see Jimmy Fallon, who plays the drums, mistaking his lines as he can’t keep from laughing.

The skit has become so famous that Christopher Walken supposedly joked that “[it has] ruined my life … Every show, people bring cowbells for the curtain call and bang them and it’s quite disconcerting.”

The term “more cowbell” has now become a pop culture phrase and is even included in the Cambridge dictionary meaning “an extra quality that will make something or someone better.” The skit shows it as something annoying and distracting, and only the pretentious producer understands its importance to the track. In the end, Farrell is happily playing his cowbell with the (initially reluctant) support of the entire band and the skit ends with a close-up of Farrell annoyingly banging away.

So just to provide a brief timeline of events regarding tariffs, since Liberation Day, the reciprocal tariffs (which lasted half a day) were paused except that for China which were ratcheted up to 145%; a few days later many Chinese products became temporarily exempt from the reciprocal tariffs; next, reversed course on some carmaker tariffs; then, Britain was the first to reach a deal but not finalized; and then China tariffs were scaled back temporarily to 30%; but next threatened an increase of EU tariffs to 50% only to be delayed 2 days later; and, so far in June, doubled tariffs on steel and aluminum. This is just tariffs. Additionally, there’s been the executive actions against colleges and universities, notably Harvard which continues to visibly escalate, deportation and/or detention of student protesters and foreign scholars, a standoff between the National Guard and anti-ICE protestors in Los Angeles, and a growing list of firings and resignations including the national security adviser, acting FEMA director, and, of course, Elon Musk (as well as several nominees that have been withdrawn). I’m sure I’m missing many other significant events.

But none of these matters, at least according to the stock market. It is all just annoying noise being occasionally banged away. Perhaps we have become numb to the commotion. It doesn’t phase the markets or maybe they are depending on TACO. This is despite the fact that EPS estimates for the S&P500 and Topix 500 have fallen -3% and -2% respectively since Mar 31 [according to Bloomberg] whereas the indices are both up more than +5% in the same time horizon (and, at least in Japan, I suspect this is before many downgraded earnings forecasts had been fully reflected). 30-day historical volatility is at 18.9% and 12.4% vs 19.7% and 19.1% on Mar 31 respectively. If you fell asleep on Mar 31 and was awoken on May 30 and you looked at these figures, you’d think, yes, the world is better and calmer.

Last month, I mentioned how I welcome volatility. It provides an opportunity to buy quality assets at distressed prices. Conversely, when the market rockets up too quickly, I can trim some rich stocks to provide cash to buy again when the volatility causes markets to plummet the other way. While we were able to react a little, the reversal in April was too quick for us to fully take advantage of the uncertainty. But now, each subsequent threat is similar to the child crying wolf and the market appears to be ignoring the uncertainty. It’s become oblivious to the cowbell.

And, so, I’d like to say, “I’ve got a fever! And the only prescription is more cowbell!”

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