The Watchdog — Home and Abroad
Scott B. MacDonald, Ph.D.
February 23, 2026
Summary: Last week was tumultuous, considering the Supreme Court’s decision against the Trump administration’s tariff regime, a lower-than-expected Q4 real GDP number (coming in at 1.4% missing a 2.8% consensus), and with the Fed’s preferred inflation metric, core PCE, coming in higher-than-expected at 3.0%. This sets the stage for a new week of further uncertainty built around tariff fall-out, economic data, geopolitics (Iran), and earnings. Economic policy uncertainty looms largest, leaving markets volatile.
The week ahead. Economic data dominates large, including consumer confidence on Tuesday, initial jobless claims on Thursday, and lots of inflation data on Friday (producer price index and core PPI), and construction spending. Market analysts and economists will be looking for signs from a plethora of Fed speakers sprinkled across the week. Will there be any hints of how the Fed is leaning for its next FOMC meeting in March? Probably, but data fluctuates as do opinions. Finally, it will be another potentially raucous week for corporate earnings with Nvidia, Salesforce, Home Depot, and Lowe’s on deck, which should provide insights to the software sector and consumer sentiment.
What next for Tariff Man? At first glance, last week’s 6-3 Supreme Court ruling that the Trump administration exceeded its authority by imposing tariffs under the International
Emergency Economic Powers Act (IEEPA) of 1977 appeared to be a major setback for a president who styles himself as “Tariff Man.” Indeed, the Supreme Court decision invalidated an estimated $140-$160 billion in tariff revenues, opening the door to companies seeking refunds. However, Plan B quickly swung into action – Section 122 of the US Trade Act of 1974 was swiftly invoked, ultimately taking US tariffs to a flat rate of 15% for all countries for 150 days; US trade partners were told to honor tariff deals as the Trump administration recalibrates; and the corporate refund seekers were told, see you in court (where a decision could take years to arrive at a decision). After 150 days Congressional approval is needed to approve any extension.
The fallout from the Supreme Court has been varied, ranging from indignation and claims that the justices are traitors to jubilation that someone finally stood up to President Trump and to concern over the impact to fiscal and trade policy and how to react. As the Trump administration has made tax cuts, how much revenue will still come from tariffs? Does that impact government borrowing needs?
The uncertainty over trade policy is a major issue for businesses, influencing capital spending and hiring. Small and medium-sized businesses are the most vulnerable as they lack the depth of expertise to read the intricacies of trade policy. The foreign reaction is also varied with China, Brazil and Switzerland benefiting from a radical cut in their tariff rates to a flat 15%: China falling from 30%, Brazil from 50%, Canada from 35% and Switzerland from 39%. In the other direction, the UK, Italy and Australia will see their tariff rates climb. To put it mildly, much needs to be sorted out.
What does Smith’s think? Four things are worth noting. First, the Supreme Court decision was a blow to the Trump administration’s economic policy, but hardly fatal, considering the White House’s contingency planning. Second, the decision reinforces the perception that US policy is unpredictable, fueling the argument to de-risk from the US and find other more reliable trade partners.
Third, the Supreme Court decision strengthens China’s hand; Beijing may not always play on a level playing field, but it is more predicable than the US under Trump. It also bolsters China’s hand when President Trump and Xi meet in Beijing at the end of March to discuss trade. The removal of tariff threats, which last year escalated to 145%, will make it more difficult for Trump to press Xi for larger purchases of soybeans, aircraft and energy.
Fourth, while there has some celebration that the Supreme Court upheld the power of Congress to tax, President Trump remains a man in a hurry. He is 79 years of age, has a breakneck schedule (that would exhaust much younger people), wants to leave his mark on the US and global economies, and faces mid-term elections in November where he could lose his majority in Congress. Tariffs remain his favorite tool, and he will not surrender them easily. Whether he is right about the tariffs is almost immaterial, they are going to be part of the US economic policy landscape through his term, which US consumers and companies as well as foreign governments and companies will have to endure.
Headlines - Abroad
Iran – the military card. The US military buildup in the Middle East continues (the biggest since 2003), talks over Iran’s nuclear program are ongoing (with little headway), and Iran’s domestic politics remain unsettled (campuses are seeing new anti-regime demonstrations). President Trump warned Tehran last Thursday to reach a deal within a “maximum” of 15 days or face unspecified consequences. With an economy in freefall and mounting domestic and external pressures, the theocratic regime has no intention of going quietly. Recently it held meetings with China and Russia, made a trade deal (for drones) with Russia and its Islamic Revolutionary Guard Corps (IRGC) and affiliated groups remain in control of the streets for now. Although Iran’s military power has been beaten up over the past two years, it still carries a few punches, including the Shahed drones, which were tested and improved by their use by the Russians in Ukraine.
What does Smith’s think? The lynchpin in the Iranian situation is the military. Throughout the theocratic state’s history (since 1979) it has relied more on the IRGC, which was created in 1979 to defend the theocratic state and operate separately and independently of the regular military, which the clerics distrust. The Revolutionary Guards are a key pillar of the state, reporting directly to the Supreme Leader, not the elected president. The disastrous bombings by Israel and the US last year as well as the emasculation of its proxies in Lebanon, Gaza, and Syria and endemic corruption have discredited the IRGC, allowing the military claw back power and prestige. As in 1979, once the support of the key security force evaporates, regime survival is more problematic. The Shah’s secret police, SAVAK, could not contain the situation without the military’s support. That support disappeared when the armed forces refused to fire on citizens. The theocratic regime is keenly aware of this but has little intention to give ground domestically, while the chances for US military actions have increased. What happens when the next round of air strikes hit the country and the Iranian people again take to the streets? When does the military turn?
Mexico’s drug challenge. Mexico’s drug war went up a notch in late February as the Mexican authorities (working with the US) killed the head of the Jalisco New Generation Cartel (CJNG) in a shoot-out. Along with the Sinaloa Cartel, the two organizations are the country’s largest, playing an active role in the export of cocaine, fentanyl, and methamphetamine to the US (where demand remains high) as well as being involved in arms and human trafficking and violence against Mexican officials and police.
In the aftermath of the drug capo’s death, cartel violence shut down Mexico’s second largest city, Guadalajara, and witnessed attacks across 20 states in the country, including the killing of 25 members of Mexico’s National Guard. Although the Mexican authorities responded with a show of force, the event left both citizens and tourists sheltering in place.
What does Smith’s think? The decapitation of the CJNG is a positive development as the Mexican government clearly indicated that it understands the gravity of the situation and needs to be in the good graces of the Trump administration before USMCA trade talks begin. While the cartel problem remains, President Claudia Sheinbaum has increased operations against the cartels, ending the “hugs not bullets” policy of her predecessor. She has also extradited drug traffickers to the US. What comes next? While US-Mexican relations are on a more positive track, the drug wars are likely to escalate as succession struggles will be played out. Points scored for President Sheinbaum, but a hard slog ahead remains in taming the cartels.
