6/27: Both S&P500 and Nasdaq closed at all time highs. Completing Stage 2 of my post on 4/11.
The post is getting messy. Here’s my prediction of Stage 3:
But recession is already baked in IMO. Even if all these tariffs are paused but they are only for 90 days. Business investment will crater because of uncertainties. We already have massive layoff in the federal government. GDP is bound to go negative in Q1 already. Q2 will get even worse.
Q1 GDP is now confirmed to be negative, that’s before most of the tariffs even hit. Q2 numbers will be interesting.
8/22: Powell caved in and signaled rate cuts ahead.
It actually seems more profound that just being a dove. Fed has completely abandoned the 2% anchor?
The Fed used to have a dual mandate: steady inflation and max employment. Now it’s just employment.
Data is lagging so we won’t know for sure if we are in a recession until months later. Anyway markets doesn’t care. We are now at the final stage of my toy prediction. Stocks and cryptos are both ripping higher.
Lots of deflationary forces for the Fed to get ahead of. Deportations are deflationary, taking pressure off housing and consumption in general. Deregulation is deflationary. Tariffs are deflationary, which the market sees. They’re a consumption tax and you can only drive down inflation by decreasing the money supply. European central banks never respond to increases in VAT’s with rate increases even when VAT increases pop inflation numbers for a month or two. They understand the macroeconomic picture. I think Smoot-Hawley is a poor analogy to Trump’s tariffs for a variety of reasons but it certainly didn’t cause inflation. Just the reverse. As would be expected using basic arithmetic.
The Fed was behind on inflation. They don’t want to be behind on deflation.
Tariffs = taxes. Raising tax revenue of course will reduce deficit. That is until the point when tariffs push us into recession. Then deficit will soar again.
IF tariffs push us into recession. Thank God tax rates didn’t revert to pre-2017 levels. That would have pushed us into recession.
Trump is taking aim at NEPA and at the 2009 “Endangerment” finding. Any progress will be pro-growth and anti-inflation. Then there’s AI which while overrated also has the potential to be deflationary. Deflation everywhere.
