The Trump Recession

Fred Lane and Jack Schibli manage Lane Generational, an SEC-registered investment fund. Fred is a long-time friend and an experienced investor with more than four decades on Wall Street. You can follow their work and subscribe to their blog at: https://lanegenerational.com/insights. Fred has appeared on several Economics Matters podcasts. I asked Fred and Jack to weigh in on President Trump’s tariff policy. Full disclosure, my wife and I invest in their fund.

Fred and Jack discuss the specifics of Trump’s ‘Liberation Day.’ Their views complement my argument that Tariffs Won’t End Trade Deficits. Four days after the inauguration I penned 30-Year TIPS Are Looking Mighty Attractive where I warned that Trump would cause economic havoc and lower the stock market. 30-year TIPS are looking even more attractive for investors to find shelter from what is looming — a Cat 5 economic hurricane.

The hurricane includes massive retaliatory tariffs, including those just announced by China. But the eye of the storm, which will surely produce what Fred and Jack predict — stagflation, i.e., the combination of high inflation and high unemployment — is the global boycott of American products. Our largest trading partners are not countries/regions like Canada, Mexico, the EU, the UK, and China. They are the people living in those countries. And the people living in those countries are sick and tired of the daily insults and threats coming from Trump and his cotterie of mental misfits. Boycott America is on. Yankee Go Home is coming. And The Trump Recession appears inevitable.

But let’s hear from Fred and Jack.

Why the Trump Tariffs Must Be Rolled Back

Trump’s agenda is to create an economic “level playing field” in trade, to incentivize the rebuilding of our manufacturing base. Over the last four decades, manufacturing as a percentage of total employment has fallen steadily from its peak of 39% in 1944 (and 21% in 1980) to just 8% today[i]. U.S. corporations have outsourced manufacturing (and pollution) to low-cost centers across the globe, primarily China. This is capitalism and economic theory of comparative advantage at work, and U.S. consumers have been the beneficiary with low-cost access to all types of goods from sneakers to phones and TV’s. However, outsourcing has come at the expense of the hollowed out middle class, who have seen employment opportunities shrink and real wages stagnate.

Our outsourced manufacturing base, combined with the global reserve status of the U.S. dollar, has meant significant sums of U.S. dollars have flowed to surplus nations, which were then recycled into U.S. assets, pushing interest rates lower and equity prices and housing prices higher. We believe that this has further worsened the wealth and income divide in America, bifurcating into the “haves and have nots”. Trump appears to be playing toward his populist base, with promises to reinvigorate American manufacturing. We don’t argue with the ultimate objective, as in our view, the current top-heavy consumption economy is not a durable economy, but to expect an overnight reversal of more than four decades of globalization and supply chain development is pure fantasy.

Trump’s broad and reciprocal tariff announcement seeks to take the effective tariff rate to an estimated 29% from the current ~2.5% rate, a level not seen since the start of the 20th century[ii]. The reciprocal tariff calculations are incredibly flawed. The official calculations can be seen here, but effectively the Trump administration has calculated an “adjusted” tariff rate each country charges on U.S. goods by simply taking the trade deficit as a percentage (ignoring their unnecessarily complex equation where coefficients conveniently balance to multiplication by 1). For example, the U.S. imports $136.5 billion of goods from Vietnam, and exports just $13.1 billion to Vietnam, based on the most recent year-end figures. To calculate Trump’s “adjusted” rate, simply subtract exports from imports and divide by imports [(136.5-13.1)/136.5) = 90%]. The reciprocal rate applied to Vietnam is half the “adjusted” rate (45%) – oh and don’t forget to add the baseline 10% applied to all nations for a total of 55%. Given the actual tariff rate applied by Vietnam to U.S. imports – per the Trump administration’s own report – is less than 15%, this seems rather unreasonable and nonsensical.

The Trump administration’s justification is that this calculation best captures “currency manipulation” and other “non-tariff trade barriers”. They appear to be targeting bilateral trade deficits of zero, which in our view completely disregards basic economic theory, and the concept of competitive advantage – a cornerstone of international trade. Notably, the calculation focuses solely on goods, and ignores trade services, in which the U.S. runs a major surplus with most nations thanks to tourism, financial services, IP & technology and more. Another perplexing element of the tariffs are the exclusions on pharmaceuticals, energy, rare earth minerals and semiconductors. Part of Trump’s reshoring narrative revolves around national security, as the U.S. lacks self-sufficient manufacturing in these specific critical areas, which are perhaps the most important to incentivize new domestic supply chains.

Let’s assume these tariffs stick - what’s next? We see a stagflationary recession. The disruption to global supply chains which would be similar to the pandemic, which in turn likely ends in higher prices and inflation. The trouble is the lack of domestic substitutes for manufacturing at the scale on which we are reliant on the rest of the world. Companies will have no choice but to bear the burden of higher cost by eating some margin themselves and/or passing the rest on to the consumer. In our view, the administration’s rhetoric is overlooking the fact that the burden of tariffs will fall primarily on domestic companies and consumers rather than foreign nations. Notably, the path of the U.S. dollar can offset or worsen the impact of tariffs. During Trump’s first term, the U.S. dollar rose in response to his (far less severe) tariffs, effectively neutralizing their impact. Yet presently the U.S. dollar is down nearly 6% in 2025, which unless this trend reverses will only serve to aggravate the inflationary effect of tariffs. Consumers are still battling with the sticky impact of pandemic inflation, to which they were well suited to manage, thanks to government stimulus, but that has now largely disappeared. With an economy so reliant on consumer spending, our view is U.S. growth is likely to falter. We also note the heavy reliance of consumer spending seemingly derived from the wealth effect, as significant gains in financial assets and housing over the last decade have bolstered confidence. A turbulent stock market would likely have the reverse effect.

Many are probably wondering – as we are – how could the Trump administration be so ignorant to these realities and what is the true objective? An overnight manufacturing (no pun intended) renaissance appears unrealistic. Our best guess is the Trump administration is manufacturing a recession scare to drive interest rates down. Given our enormous debt burden, and the high-interest rate environment, interest expense has surpassed both military and Medicare to be the largest line item in the government budget. With nearly $9 trillion of maturing debt in 2025 needing to be refinanced, and likely several trillion more in new issuance, Treasury Secretary Scott Bessent has his hands full. Trump’s scare tactics are showing success, as the US 10-year yield has fallen to a flat 4% from 4.57% at the start of the year. Of equal importance will be whether the Federal Reserve responds by lowering short term rates. The inflationary element of tariffs will put Fed Chairman Jerome Powell in a predicament – perhaps he (yet again) leans into the “transitory” narrative of price increases. Perhaps Treasuries will be part of the tariff negotiations, as we speculate Trump may be seeking deals whereby foreign nations can avoid tariffs by committing to buy long-dated U.S. Treasuries, but for now it seems foreigners are frightened by U.S. assets and are moving the other direction.

Will Trump die on his Tariff Hill? It seems like economic martyrdom to us, and the midterms aren’t too far away. Midterm losses in Congress would jeopardize furthering his agenda over the remainder of his term. Or is this some sort of 3D chess move to strike a deal? He is the self-proclaimed “master negotiator” after all. We hope it’s the latter and financial markets can move past the vast uncertainty he has created, which left to its own devices could singlehandedly cause a recession, as businesses pause capital expenditure and hiring plans. We also await legal clarity, as Trump invoked the International Emergency Economic Powers Act to justify his unilateral tariffs, which requires a lawful economic emergency. The Senate has already passed a resolution to block Canadian tariffs citing Trump’s fentanyl emergency claims as invalid. While the House is unlikely to pass the bill, the takeaway is Trump has lost support in the Republican-led Senate, which may undermine his agenda and force him to find middle ground.

We are investors. We are nonpartisan. We are optimists by nature and trust that sanity will prevail.

Related: The Tariff Impact in One Graph

[i] FRED Data: Nonfarm Payrolls.

[ii] Evercore ISI

The Trump Recession