In today’s issue:
- The US economy entered 2025 weak
- Trump’s initial policies may tip it into recession
- The stock market is vulnerable to a negative growth surprise
I’ve warned repeatedly over the past year that the US economy, the world’s largest, is not as strong as it appears on the surface.
It’s now probably slipping into recession.
If it hasn’t already done so.
This I wrote back in October:
[W]hen it comes to high productivity but also highly cyclical manufacturing jobs, these have now outright declined for two months running. That’s a warning sign that a recession might have already begun.
That said, one should not read too much into the monthly data, as they can be volatile and subject to large revisions. So, what do the year-on-year comparisons look like?
One thing that stands out is the rise in part-time work, which has increased by roughly 1 million, more than accounting for total jobs growth. This implies that full-time jobs have actually declined slightly over the past year. Take public sector jobs out of the equation and the decline has been even larger.
So, we have an economy adding low-productivity, part-time jobs and shedding high-productivity, full-time jobs. Does that sound like a strong economy to you? Of course not. It looks like one slipping into recession.
Things are also likely to get worse rather than better. Businesses aren’t borrowing, implying that they aren’t investing in the future. Businesses that don’t invest tend not to hire more workers, especially full-time ones.
The private sector continues merely to limp along. Confirming the weak business investment data mentioned above, US capital goods orders, adjusted for inflation, have been negative for two years now.
The Q4 GDP estimate released last week shows that business investment remains negative. No investment, no sustainable growth.
This should be of concern to investors everywhere. The US stock market is historically expensive and comprises 75% of total global stock market capitalisation.
If a recession is indeed on the cards, US stocks are in for a shock. As their valuations adjust lower, they are likely to be a drag on all markets.
Trumponomics: short-term pain for long-term gain?
Now, enter President Trump. He is generally regarded as pro-business and pro-growth. But his initial economic policy actions are more likely to weaken than strengthen economic activity.
Why?
One reason why US headline jobs growth and economic data generally have continued to show a positive picture is due to unusually high government spending during the past few years. The government has been running a huge deficit of over 5% of GDP.
That deficit is partly due to funding unusually large-scale immigration. Housing and feeding millions of new arrivals without proper jobs is not cheap. Trump has already begun to crack down on that.
Some of it is due to former President Biden’s mis-named Inflation Reduction Act, one loaded with all manner of pork-barrel spending. Trump has said he’s going to crack down on a lot of that too.
He’s also taken initial steps to carry out the mandate of the new Department of Government Efficiency, offering buy-outs to two million federal employees.
Not all employees will take him up on the offer, but no doubt some will, in particular those nearing retirement.
All of the above actions are likely to be positive for the economy in the longer term, as they will shrink the public relative to the more productive private sector, enabling Trump to cut taxes down the road.
The near-term effect of spending cuts, however, will be to weaken aggregate economic demand, public and private, and quite possibly tip the already-weak economy into recession.
Is the US stock market in for a repeat of 1980-82?
The US stock market, trading at lofty valuations relative both to its own history and to the rest of the world, is vulnerable to a reassessment should that recession be confirmed over the coming months.
The above picture is something of an historical echo of what took place in the US from 1980 to 1982. The economy was already weak in the late 1970s and inflation stubbornly high.
President Reagan entered office promising to get inflation down, lower taxes and also to shrink the government share of the economy, with the notable exception of defence.
He would achieve all of the above, in time, with varying degrees of success. But first the US would fall into a deep recession, the worst since the Great Depression of the 1930s.
And the stock market would tank. At the nadir in 1982 the price-to-earnings (P/E) ratio of the Dow Jones average had fallen into the single digits. (Today, depending on whether based on trailing or forward earnings estimates, it is in the mid- to high-20s.)
The Federal Reserve played an important part in that, keeping interest rates high even as inflation came down. That picture is also not so dissimilar to today.
The Fed cut rates last year but by far less than the decline in inflation. US monetary conditions have thus tightened, rather than eased.
The US yield curve is telling us as much. It has been flat to inverted for months. That has been a reliable indicator of a looming recession for decades.
The US stock market has a habit of ignoring yield curve inversion until a recession actually arrives. This happened in the late 1980s, late 1990s and prior to the global financial crisis of 2008-9.
While I’m not specifically predicting a US-led, global stock market crash, I do believe that markets face substantial headwinds in 2025. Trump’s initial policy steps make these all the stronger.
Beware the tariff threat
And I haven’t even mentioned tariffs yet. If Trump isn’t bluffing and actually does introduce a general tariff on imports, and other countries respond in kind, then a global stock market crash becomes a distinct possibility.
In a highly globalised world of complex, cross-border supply chains, tariffs would wreak havoc on corporate profitability and stock market valuations.
I’m hopeful that cooler heads will prevail and that tariffs will only be used as a bargaining tactic to achieve better terms of trade and perhaps to devalue the strong dollar rather than as an actual, permanent policy. But if I’m wrong, look out below.
Economic historians sometimes scratch their heads and wonder why the US stock market collapsed so suddenly in October 1929.
As someone with a background in economic history, I have an idea. Congressmen Smoot and Hawley had proposed a general tariff on imports some months prior.
The markets weren’t so concerned because they didn’t think it would pass the Senate, even though the House had already approved a version of the bill.
But in October, a key senator went from opposing to supporting the tariff, making it likely that it would pass through committee and be put to a general vote. In the meantime, public support for the tariff had increased.
Now, the market was spooked. Stocks began to decline, slowly at first, but a few days later the crash came.
Might history repeat? I don’t know, but given how expensive the US stock market is today and with tariffs posing a possible if not clear and present danger, I would avoid it.
Regardless of where you look, defensive investing remains the name of the game. In case you missed it, I wrote a series of articles on defensive stock market investing last week. You can find it here.
Until next time,
John Butler
Investment Director, Fortune & Freedom
Beware the Power Lines
Bill Bonner, writing from Baltimore, Maryland
In a world full of genuine uncertainty – where real historical time rules the roost – the probabilities that ruled the past are not those that will rule the future.
– Lars Syll
What if the whole kit-and-kaboodle – $100 trillion worth of ‘assets’ worldwide, unsupported by real world output – suddenly melts down?
Where’s our Big Gain then? Let’s leave that question, like an uneaten pizza; we’ll heat it up later.
First, we look at why the ‘big picture’ can be so misleading.
One of the curiosities of today’s asset prices is that stocks rose even while the Fed was tightening. The Fed began its fight against inflation in 2022. It raised rates steadily for the next two years… until July of 2024.
But instead of meekly succumbing to the Fed’s higher interest rates, the Dow hit a low under 30,000 in September of 2022, and then rose 14,000 points over the next two years. This was not what anyone expected, including us. No analyst we know saw it coming.
Their (our) logic was airtight. The Fed had driven up stock prices by dropping interest rates almost down to zero. But now that inflation was on the loose, they’d have to raise rates to fight it; they couldn’t rescue a falling market for fear of making it worse.
But anyone who thinks economics is a science must have a Ph.D. or a hedge fund to promote. The rest of us know it’s voodoo. The number of inputs is always infinite… cause and effect are never clear… and the test results are irreproducible. This is why central planning always fails… and macro (big picture) investing is so treacherous.
“History shows no clear correlation between real prosperity and the keeping of macroeconomic statistics,” writes Reuven Brenner.
You can never actually see the ‘big picture.’ Instead, you look at statistics, such as GDP growth, unemployment, and inflation, that are supposed to describe it. But often, they are more fraud than fact. GDP figures count government spending as ‘output.’ But the more resources consumed by government, the less real wealth – valuable goods and services – are available for everyone else.
The unemployment numbers are similarly misleading. They count everyone with a job as ‘employed’ – whether he works 20 hours or 60, and whether he earns minimum wage or a million dollars. Lower unemployment doesn’t mean people are better off; after all, there was full employment in the Soviet Union.
And inflation? The statisticians don’t merely add up the prices at the grocery store or the latest real estate sales. They create ‘models’ that adjust prices according to their own cockamamie theories. If this year’s computer is faster than last year’s, for example, they’ll tell you that the price has gone down – even though you paid more for it.
Garbage in. Garbage out. The statistics are always contrived, revised, and largely fictitious. The data is fluid. And the theories – the Phillips Curve, the Fed’s ‘stochastic’ model, Keynesianism, Marxism, Modern Monetary Theory – are always imbecilic. Add as many Greek symbols as you want; they’re still nonsense.
(Only one school of economics really makes sense. It rejects ‘data’ in favor of ‘principle.’ More to come…)
But our sad mission is to try to connect the dots, and to try to understand what is really going on. Why did stocks go up, for example, even while the Fed was raising interest rates?
Fed Funds are not the only source of ‘liquidity’ to float asset prices upward. And as we suggested yesterday, when the markets bubble up, they give off a vapor that causes even more giddy behavior. Crypto currencies are now worth $3.3 trillion. The stock market, overall, is worth $55 trillion. The average house is worth $420,000.
Suppose you paid $200,000 for the house ten years ago. Now, you have $220,000. The house may be exactly the same. But now you can borrow much more money against it. You can access more ‘liquidity’. And you might use it to gamble on Nvidia… or #Trump… or an apartment building down the street. After all, they’re going up!
Stocks have added nearly 50% in value since the bottom in September ‘22, or about $17 trillion total. And yet, actual output (GDP) has only been creeping up only at a 2.2%.
And the money supply, M2 (see above), has been going up too. It hit a high of $21.7 trillion soon after the Fed began to tighten. Thereafter, it shed a trillion dollars to a low of $20.7 trillion a year later.
But then it rose, even as the Fed continued to raise rates, for another 18 months.
What made the money supply go up? What made stocks go up? Why did investors go mad for AI?
An influx of money from overseas, eager to take advantage of the Fed’s higher interest rates? Cash ‘on the sidelines?’ The Trump effect?
Or, the momentum of the biggest bubble in history… now, like a Hindenburg drifting slowly towards the power lines?
Stay tuned…
Bill Bonner
Contributing Editor, Fortune & Freedom
For more from Bill Bonner, visit www.bonnerprivateresearch.com