This week the focus may well be on US JOLTs tomorrow and CPI on Wednesday

Outlook

Today we get the German trade report and later, Japanese GDP. This week the focus may well be on US JOLTs tomorrow and CPI on Wednesday, even though everyone knows it’s too early to see the inflationary tariff effect (although lumber is already at a 30-momth high). Also, consider consumer confidence on Friday, plus a slew of UK data, including GDP and trade.

Mr. Powell on Friday offered zip. The economy is in a good place and the Fed is waiting.

for “clarity” on the new policies. Bah. Over the weekend, Commerce Sec Lutnick denied a recession, although Trump refused to answer the question. Some analysts jumped immediately to the deduction that he knows perfectly well his policies are driving the economy into recession, but please—that is to exaggerate his capabilities. Even the top economists are not sure recession is inevitable, if only because of uncertainty over what comes next is tariffs and other issues.

The press and other media are blowing up with commentary on the current state of affairs. While we enjoy seeing analysts struggle for new vocabulary to describe the “chaos” wrought by the current government, we have reached the point of saying “enough, already.” This is not to say any of it is wrong, but it sure is exaggerated. We still have a skilled labor shortage so even if companies are flummoxed on how to plan, we can’t expect unemployment to rise to recession levels. The crypto “reserve” is ridiculous and only a grift to make money for insiders, not a serious threat to anyone’s sovereign money. And so on. 

One of the most relevant comments comes from the current CEO of the Soros Fund, a job the current TreasSec Bessent held in 2011. She says Bessent “is easily one of the most market literate Treasury Secretary that the US has had in a long time. It matters because when Scott says something, it is important to take it literally

“Scott has said that Trump cares about the level of 10-year Treasuries.” Keep that in mind!  Since Trump took office, the 10-year has gone from 4.80% in the middle of January to roughly 4.15% today.” [Note that the 10-year did not go as low as 4.15%).

This administration has more “pain tolerance” for the S&P compared to the first term. Now it is more sensitive to other asset classes. From a Reader’s notes” What ultimately cannot be controlled is consumer and corporate confidence. That is currently falling off a cliff.”

Here’s the problem and it’s a gigantic problem: if the US can drive the US 10-year yield down even further and with German yields rising like a balloon on the new spending plans, there is a real possibility that the Bund ends up yielding more than the US. That would be a death sentence for the dollar. But to be argumentative, is that really in any way probable?

We learned a few lessons late last week. First, Trump was unable to unwind the anxiety arising from tariff uncertainty by giving auto companies a reprieve and then another 30-day reprieve to Canada and Mexico. The first time he gave a 30-day reprieve, the dollar recovered. This time it did not, and in addition, the Nasdaq entered a correction.

This is a Big Deal. We knew his management capabilities are low—six bankruptcies are more than “strategy” and connote failure. Chaotic mismanagement is now known for sure. Various excuses, like his real goal being to get Canada and Mexico to shun and tariff China, are not credible. Trump doesn’t think that far ahead, even if his lackeys do use that fable in the end as his “strategy.”

Apologists say there really is a Plan, devised by Commerce Sec Lutnick, formerly the head of broker Cantor Fitzgerald. The Plan is a form of supply side economics that failed so badly in the 1980’s. The rough idea is to bring manufacturing jobs home from low-wage countries. In order for this to work, either US wages have to fall drastically or a whole lot of capital is needed to replace workers with machines.

So far there is no evidence big money capitalists are lining up to start new factories to make matches, kitchen sinks and tidy-whities. The plan ignores that the US is a service economy and also that tariffs will cause vast losses to the farm sector. As happened last time with those Chinese soybeans purchases moving to Brazil, , federal subsidies will be needed to compensate for the loss of farm sales. Some efficiency.

Would markets buy that there is a credible Plan? You bet. Uncertainty is the top enemy of both the economy and the markets. Deliver a semi-credible story, and they can go back to pretending everything is hunky-dory. The other fable being circulated is that Trump is deliberately aiming for a recession in order to drive the Fed into more rate cuts and to drive Treasury yields down, saving some of the budget. Again, long-term thinking like this is not in the Trump wheelhouse, although it seems to be in TreasSec Bessent’s.

Here's the problem: TreasSec Bessent has tried to talk Trump out of seeing a rising stock market as a vote for him. But new focus on yields or not, Trump dislikes a stock market pullback. When the Nasdaq hit a new low on Thursday, he pretended he wasn’t looking at it—but within two hours, announced the new tariff reprieve. Of course he is looking at the stock market! How far can the stock market go down before Bessent’s waving the car keys in front of him stop distracting him?

To some extent, the overreaction of analysts is being recognized as overkill and is a factor in re-thinking just how bad things are. We do not yet have the expected inflation. We do not yet have severe unemployment. The Fed is on hold and to imagine early rate cuts is not consistent with the Fed’s usual data-dependent stance. Yes, Trump is a jerk and his top two lieutenants Lutnick and Bessent want to restructure the economy in ways that will be painful and sometimes catastrophic for many. Musk is incompetent and probably won’t last long. The dollar will indeed lose some status as a reserve currency. But don’t forget, the next guy can reverse or modify all this. In fact, the midterms can go a long way toward taming these boys.

Forecast

The keyword persisting into this week is “uncertainty.” We may start seeing, however, a consolidation of policy stances and thus less erratic statements that sow such confusion. The euro is trading within the Friday range (so far) and some consolidation is due. The euro rally is getting a little long in the tooth. Tomorrow is pullback Tuesday and we expect to see it deliver on time.

Stock Market: As a general rule, the stock market is not the economy, but equity indices do tend to fall ahead of and during recessions. For perspective, see “Food for Thought” below.

What is the stock market outlook? A slew of big names are out in force pointing out that as the 25th anniversary of the Dot-Com Bubble Burst comes closer, the same thing is happening now.

Oaktree Capital’s Marks (who called the 2000 crash) calls it “Bubble Watch” and alarm bells like “investors chasing returns with disregard for risk, sky-high valuations justified by dubious ‘new paradigm’ arguments, and markets displaying textbook signs of ‘irrational exuberance.’”

Economist Krugman agrees. P/E’s are nearing 1999's level of 93, which was crazy, “AI fever is concentrated on a handful of companies — the Magnificent 7 — most of which are already entrenched quasi-monopolies.

Important AI researcher says “Generative AI itself won’t disappear. But investors may well stop forking out money at the rates they have, enthusiasm may diminish, and a lot of people may lose their shirts.”

For its part, Goldman says “it’s different this time” but hedge your bets anyway.

The stock market passes the “So What?” test for the FX outlook mostly when there is a crisis. The rest of the time the correlation is weak and unreliable. We went through a 20-year period when the dollar and S&P were inversely correlated, which makes no sense if we think foreign stock-buying “should” have an effect on the dollar. Now we see the euro gaining traction on capital flowing to Europe, especially defense company stocks. Articles are everywhere pointing out that the US has just lost its dominance in the defense industry world—we can no longer strong-arm other countries into buying our planes, tanks and bombs. This cuts demand for dollars as well as a harsh comeuppance for Trump’s ego.  We can believe the defense company CEO’s are flooding the White House with grievances.

The US gained power after WWII at Bretton Woods for two reasons—financial capability and military superiority. Britain was broke and had to give up sterling as the preeminent reserve currency. There is an excellent book on this topic, The Battle of Bretton Woods by Benn Steil, including the part about the US representative being a Russian spy.

Now that Trump has begun a crypto reserve, his TreasSec Bessent has spoken of targeted sovereign default, and extreme policy mismanagement is harming the economy, that financial capability is in doubt. And now that military superiority is being lost to Europe (and presumably China, as well), the only thing left supporting the US at the top is having the world’s biggest (and most robust) economy. Critics say it ain’t enough and some of them say we are in process of losing that, too.

Viewpoint: Some are saying the US is giving up reserve currency status by starting a crypto reserve, which doesn’t take the US sovereign to issue. Oh, please. It’s a Trump grift, not real. Second, the next guy can just dismantle it. The same thing holds for the US losing status as “leader of the free world.” A lot of the grief coming from Europe has to do with losing their Sugar Daddy and taking responsibility for themselves. No more freeloading on Uncle Sam. Yeah, Trump is right, even if he is also crude and crass and a dreadful manager. Again, the next guy can reverse it, just as Biden did. 

Food for thought

The “stock market” is not the most reliable indicator of pending recession. An investment house writes “In 16 of the 31 recessions that have struck the U.S. since the Civil War, stock-market returns have been positive. In the other 15 instances, returns have been negative.”

But wait, it’s more complicated than that. JP Morgan, for example, has a model (sigh) that points out changes in GDP and equity indices is unreliable and other factors work better, like the yield curve, private sector debt, domestic spending and profits. It deduces that as of late January, “there is a 20% chance of recession. This is 10 percentage points above the unconditional 12-month probability of a recession occurring at any given time.” 

There is a ton more data out there. All of the reports mention that stock markets recover before a recession is considered over. 

One thing we take note of is the top five crashes of the past 150 years. They are World War I and Influenza.

The 1929 Crash and Great Depression.

Great Depression and World War II.

Inflation, Vietnam, and Watergate.

The Lost Decade (Dot-Com Bust and Global Financial Crisis).

So, the question is whether Trump has the wherewithal to add to this list. If he were to do all the things he says he is going to do, yes. But like all bullies, Trump is a coward. We bet he retreats, just as he has several times already in his first two months. 

From left field can come a Shock that Trump is not prepared for. Russia and China just love it that Trump is dividing the nation. War—real war with American boots on the ground—is a surefire way to keep that ball rolling. Trump does not want war. Again, he is a coward (and draft-dodger) but mostly doesn’t want his legacy to include a war. (He doesn’t know his legacy will be only as a convicted felon and grifter.) But when China invades Taiwan, as we fully expect, he will run for the hills. More divisiveness and more loss of confidence in the US, accompanied by a falling stock market and dollar as everybody and his brother exits the untrustworthy US.

Bottom line: buy gold.

Fun tidbit: The Washington Post reports over a dozen incidences of violence—Molotov cocktails, gunfire—at Tesla storefront, charging stations and cars themselves since the inauguration. Everywhere—Colorado, Massachusetts, Maryland—and Germany.The stock is down 35% and in Germany, Feb sales fell 76% y/y. That Nazi salute may have had something to do with it. Apologists say Feb is always a bad month for car sales. Tesla owners got the most recalls of any car company in 2024 affecting 5.1 million vehicles. Comedian Stephen Cobert joked that Musk might look to his own workforce for efficiency before rampaging through the federal bureaucracy. 

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