The Trump administration’s tariff announcement yesterday was important because of the high levels that will be implemented but just as much for the resolve demonstrated in Trump’s speech. Tariffs represent a vision Trump has had for a long time. Yesterday he said,

But I tell you what, when it looked like I was going to win, I announced that I was going to be doing exactly what we’re talking about today. Great consistency, actually, because I’ve been talking about it for forty years, because I saw what was happening forty years ago. If you look at my old speeches when I was young, very handsome, my old speeches and that people would say, I’d be on a television show, I’d be talking about how we were being ripped off by these countries. I mean, nothing changes very much. The only thing that changed were the countries, but nothing really changes. But it’s such an honor to be finally able to do this.

Back at the first enactment of tariffs in early February, I wrote, “Trump’s primary motive is to generate revenue and I doubt they will go away quickly.” As a matter of political strategy, if a recession was going to happen this year anyway based on preconditions and timing (more on that below), the administration was better off to steer it as close to the start of the term as possible because it would increase the likelihood of a recovery by the mid-terms in 2026 and a recession would generate the political will for the fiscal-expansionary parts of the administration’s plans later this year; tax cut extensions and perhaps more depending on the depth of the recession. The “Trump doctrine” in his second term is to monetize the US’s outsized economic and geographical advantage.

As it relates to investment, yesterday’s tariff announcement made the investment outlook much clearer. A recession is coming. Deals will be forged to lessen tariffs and there will be good news among the bad, but it must appreciated that the economy was fully primed for a recession going into this. The opening paragraph from my recent article on the 1990 recession explains this,

The business cycle is a fact of life. On average, every five years since The Great Depression, the business cycle has shown up as a recession or soft-landing [fig.1]. It has been five years since the last recession and reliable pre-conditions for one (not soft-landing) have arisen. The yield curve deinverted last year [fig.2], the Leading Economic Index is 16% below its high [fig.3], and the unemployment rate is 0.6% above its low [fig.4]. Payroll gains have been decelerating for 3.5 years in a long glide path into a recession [fig.5] and consumer credit growth has slowed to recessionary levels [fig.6]. In addition, because of how economic strength or weakness tends to sway elections, Republican presidents taking over from Democratic administrations typically have a recession in their first year.

The trade war is just the catalyst for a recession, not the cause. Much like the Iraq war-related oil price shock in 1990 was the catalyst, not the cause of that recession. The cause of the 1990 recession was a build-up of imbalances over seven years. It means that you can take the trade war away and still have the recession; it is just the “push.” From that same article,

An apt analogy for the business cycle is the life cycle of a forest. Trees continually shed branches and leaves that build up on the forest floor. After a certain amount of accumulation, a fire started at one point can connect through to the rest such that the whole forest burns down. The shedding trees symbolize imbalances built-up through the “good times.” Isolating the spark or “cause” of the fire or recession is merely a human-natured attempt to prevent it from occurring again, but whether the fire starts from a campfire or a lightning bolt is less interesting than the fire itself.

As much as inflation is talked about as a consequence to tariffs, it will be outweighed by the loss of demand. 5-year/5-year forward inflation expectations, the clearest indication of “long-term inflation expectations” that the Fed is watching to see if it is ok to lower rates, continues to fall (down 6 basis points today) suggesting a pathway to cut rates amid higher inflation readings. There is nothing new about the Fed lowering rates amid rising inflation (see charts below.) This is because the jobs mandate takes precedence in a recession as it is assumed the loss of demand will bring inflation down later. Of the 11 recessions since 1950, four (36%, more than a third) had a bout of stagflation within them as rates fell and the Fed cut rates. Short bouts of stagflation are common.

In the following charts, the black line is the Fed Funds rate and the green line is the year-over-year CPI (Consumer Price Index, inflation). Gray bars denote recessions. The crossing gold arrows show the Fed lowering rates amid rising inflation.

Recession of 1953:

Recession of 1958:

1973 – 1975 Recession:

Great Recession: