10 May Recession Redux

“Cassandra is predicting a worsening recession.” – The Lonely Realist

TLR this week received the following letter from Cassandra (ED NOTE: a reminder that nothing in TLR is investment advice):

“Dear Mr. Realist:

I’m writing as a follow-up to our March discussion in which I warned that recession already had arrived, a conclusion you inaccurately questioned with the title “Recession?” [ED NOTE: here]. My fear is that your readers now may believe that the worst has passed, that America has experienced its “tariff correction,” and that “buying the dip” once again will prove itself the most profitable of strategies. The world, Mr. Realist, instead is experiencing the calm of a hurricane’s eye, the equivalent of an economic and geopolitical Trojan Horse, a mere interruption in the early stages of an historic reset.

The reason, Mr. Realist, is straightforward: President Trump is determined to create a new world order by pursuing the full panoply of MAGA policies that you, Mr. Realist, described last November [ED NOTE: here, here, and here]. The problem is that President Trump is aggressively pressing forward with all of those policies simultaneously. The widely-held view was that he would follow the serial process laid out in Project 2025. Pursuing so many policies all at once is destabilizing…, and instability has consequences.

The Trump Administration’s words and actions have invited policy responses from friends and foes alike that are profoundly consequential. Equally consequential is the fallout from on-again, off-again, thereafter amended and then revised Trump Tariffs that have not merely disrupted global commerce, they have permanently altered economic and geopolitical relationships. The most obvious effect of the tariffs thus far, but not the only adverse one, has been the temporary freeze on international trade. China has been preparing for all types of war with America, including economic wars, for many years. America and the rest of the Western world have not. American threats to the sovereignty of Greenland, Canada and Panama have distanced America from the interests of its European and Asian allies and the President’s and Vice President’s demeaning treatment of Volodymyr Zelenskyy and praise for Vladimir Putin have confused both allies and enemies. The potent combination of such new and unexpected policy statements and their seemingly haphazard execution have undermined faith in American commitments, institutions and obligations. That loss of faith will prove costly at economic levels not yet apprehended.

The domestic policies pursued by the Trump Administration are similarly disruptive, chilling business activity (both domestically and internationally) through actions that include: random and politically-targeted employee terminations that reduce the functionality of Federal agencies without significantly impacting America’s growing budget deficits [ED NOTE: DOGE reported that it has reduced government expenditures by $165 billion that a number observers report to be closer to $65 billion]; intragovernmental challenges to established Constitutional and judicial precedent that have created Rule of Law inconsistencies; the sale of government influence through the use of cryptocurrencies such as the $Trump coin [ED NOTE: Cassandra is referencing Matt Levine’s analysis that the $Trump coin allows influence-seekers to effectively “hand a bag of cash to Donald Trump”]; the Trump Administration’s decision to cease enforcing the Foreign Corrupt Practices Act [ED NOTE: the FCPA is a U.S. law that prohibits bribery]; President Trump’s decision not to enforce the Congressional timeline for sale of TikTok; selective withdrawals of Federal support for universities and entities perceived to be “Enemies of Trump”; selective gutting of scientific research and medical orthodoxy; and instituting an immigrant arrest and deportation campaign that has confounded America’s hospitality, construction and agricultural industries. Never mind whether the Trump Administration’s goals with respect to any or all of the foregoing are worthwhile or whether their achievement would be beneficial or detrimental. The problem is that these goals are being pursued everywhere and all at once. The result is instability and chaos, both of which are economically and geopolitically destructive.

The full extent of those consequences is unclear because there is as-yet insufficient “hard data.” What is clear is that there already has been significant economic and geopolitical damage. The “hard reality,” Mr. Realist, is that the world has lost faith in America, in American leadership, and in American exceptionalism, and that loss of faith will not be regained this Century or, perhaps, ever. The Dollar is in retreat and will continue retreating (it is -8% year-to-date), and U.S. Treasuries will progressively lose their exalted “safe haven” status [ED NOTE: here]. These and similar consequences will cost America dearly. Among other things, they will immediately impact the U.S. job market, in part by reducing tourism which, in 2023, contributed more than 3% of America’s GDP and accounted for ~11% of the total U.S. job market. This is in addition to similar losses that result from Trump Administration visa restrictions on international student college and university registrations [ED NOTE: here]. Hotels and airlines are feeling the pain and are already reporting increasing cancelations [ED NOTE: here]. Although it is too early to measure precisely, the adverse impact on American GDP, business and markets will be significant [ED NOTE: here]. Similar effects already are apparent from threatened deportations. Although the Trump Administration reported ~142,000 deportations since Inauguration Day [ED NOTE: here], which is lower than the 195,000 deported from February-April, 2024, by the Biden Administration, those deportations have been far better publicized and have significantly chilled employment in low-paying service industries. Their significant impact is not yet reflected in current data. The cumulative effect of the Trump Administration’s “Everything, Everywhere, All at Once” barrage of policy changes is evidenced by the reaction of American consumers: The Conference Board’s measure of U.S. consumer confidence plunged in April to its lowest level since the COVID outbreak in 2020. Consumers have only been this pessimistic during the Global Financial Crisis of 2008-09. That’s terribly meaningful.

As I said when we last spoke, Mr. Realist, Mr. Trump is the most unpredictable of leaders. The forces that President Trump have unleashed are mostly irreversible and their adverse impact on America and the world will not easily or quickly be repaired, even if the President wished to do so. Should the President allow the current policy initiatives to continue without swift and significant pull-back, the forthcoming recession and geopolitical reset will be historic.”

Finally (from a good friend)