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I have a conspiracy theory I’d like to share. Everything Donald Trump is doing is moving the US economy towards a recession. He knows this because he believes it is what the US economy needs. If you love Donald Trump, the next 12 months will be awkward. If you dislike the Donald, the schadenfreude will be thick and plentiful.
A conspiracy theory requires an end result and a motive. The Donald’s motive is lower interest rates and lower inflation as soon as possible. He needs to refinance the US dollar and kick start domestic manufacturing. Probably other things I’m not considering. As I’ve stated in previous blogs, President Trump has inherited multiple economic ticking time bombs. Taking his time could lead to something worse than a recession. Put another way, it’s called a market correction because it’s the correct thing for the market.
He is choosing to rip off the economic bandaid with the quickness. Here’s how and why:
- Government Austerity: Government spending is 25 to 33% of GDP, depending on who you ask. DOGE looks to end that. Over the weekend (02/02/25), CIA slush fund USAID was shut down. The Treasury department’s government checkbook is also being audited. The government money trough will empty and the pigs will be slaughtered. That sounds good in the long term but in the short term it will drag the GDP down for at least two quarters, in my humble estimation.
- Mass Layoffs: When you fire the 7th floor at the FBI and offer buyouts to people who don’t want to relinquish their Zoom jobs, that creates unemployed people. Those unemployed people don’t spend as much on gym memberships and pedicures. The downstream of this, especially in large metropolitan areas will be a force multiplier of unemployed gym bros and blue-haired baristas doing magic tricks for tips.
- Tariffs: It will take a few moments for Canadian, Mexican and Chinese products and services to be brought within our borders. In the meantime, we’ll be paying more for our iPhones and fentanyl. In the short term, this will mean large price increases and thus less spending. Those businesses will have to layoff employees. See Mass Layoffs bullet point above. Rinse. Repeat. Smoot Halley taught us that tariffs aren't a great long term play.
It's then possible that animals spirits fade as grey swans appear.
- Animal Spirits: We like to fool ourselves and think the economy and the stock market are populated by rationale actors making informed decisions based on transparent facts. The reality is that we are emotional buyers and sellers winging it on hot takes from a media that is biased to the right or the left. We then use facts and figures like PE ratios to baptize our decisions and wash away the earthy musk of fear and greed. As the espirit d’corps shifts, the greed turns to fear and the marketplaces are filled tumbleweed in the short term.
- Grey Swans: Plane crashes, domestic terror, union strikes, government scandals, natural disasters, wars and rumors of wars, Wall Street accounting shenanigans and/or a wet market pandemic could occur. Or not. Hard to say, but a grey swan turns black depending on how all the bullet points above finally bring us to the point of temporary exhaustion. One thing Covid taught us about pandemics and the markets/economy is that it’s violent but it’s short term. I’m not accusing Trump of planning any grey swans but he is planning on one occurring.
The key point here is that Trump believes that short term pain now gives him time to rebuild a long term Golden Age. Do you agree?
Related: Glory Days Gone By?