Made in America
Trade Policy is derailing the most important agenda item, reducing government spending, the only path to debt stabilization. A problem that was made in America.
Another Sudden Stop
On March 14, 2020, we published The Carter Credit Crisis as an analog for the pandemic policy panic, that approach worked well and played an integral part in timing the low in 2020. Carter’s credit controls caused what at the time was the shortest post-war recession. The ISM Manufacturing Survey fell from 50 in February to 29 in May, a tremendous business confidence shock. Fed Chair Volcker was battling the 14.8% CPI peak in March ‘20 with a 20% policy rate, in response to the credit policy shock he reduced the rate to 9% amidst a collapse in investment and consumption. The recession lasted 6 months, GDP fell 2.2% GDP, S&P 500 earnings contracted 4%, and the 17% drop in the S&P 500 lasted 6 weeks. The pandemic policy panic recession was 3 months, GDP contracted 10%, S&P 500 fell 28%, the 33% S&P 500 crash last 4 weeks. Those two ‘sudden shocks’ recessions look to be decent analogs for the Trump Trade Shock.
The Trump Trade Shock is beginning to look a lot like the Carter Credit Crunch. Next week we get the first two regional Fed manufacturing surveys, we suspect capital and labor investment plans will get marked down to recessionary levels. Meanwhile the FOMC is waiting for definitive hard data deterioration, while there is a run on US assets resulting from the administration’s trade policy that appears to derailing the most important element of policy, reducing government spending. We made a call last week to add equity exposure, funded by reducing Treasuries that thus far has worked well. However, the attack of the bond vigilantes is the fourth major tremor in the Treasury market in the last five years due to the US approaching our fiscal limit, and although equities are ending the week sharply higher, system instability is disconcerting. The administration needs to soften their trade policy tactics to allow Congress to make progress on spending. A recession would blow out the deficit.
