An Engineered Recession? - March 10th, 2025
The latest ISM data signals stagflation and adds to the growth narrative, putting pressure on market sentiment. Trump's latest tariff-related decisions/actions further intensified concerns. Meanwhile, there's a risk of a government shutdown (as far as I know).
Recent ISM data shows manufacturing stagnation (+0.1% growth in Feb) alongside rising prices (ISM Prices Index at 58.6, highest in a year)
Consumer long-term inflation expectations hit 3.1% (highest since 1995), while short-term spending dropped sharply (-0.8% in Jan)
Nomura Holdings believes the Trump administration deliberately allows a slowdown to engineer a recession. A cooling economy and disinflation with a much weaker economy would force the Federal Reserve to cut rates, which could weaken the dollar. This aligns with Trump’s broader economic strategy (e.g., boosting exports, reducing the trade deficit).
They may also know that a "negative wealth effect" across stocks and crypto is actually helpful to that end. A fall in equities and crypto would reduce consumer and business confidence, further cooling demand and keeping inflation in check.
Normura Holdings expects a Trump-driven market bailout (they call it the "Trump Put") to be significantly OTM (out of the money), not at the money. Options terms aside, this means prices are much lower than current ones. I'm not sure if I agree. The speed of the fall has been notable.
OH PLEASE I HOPE ME POSTING THIS MARKS THE BOTTOM. WORTH TO TRY RIGHT? (Worth mentioning, I dislike the left but this is getting hard to ignore. Maybe it's time to write that apology letter to Nick Fuentes after all lol)
However, we are entering the second week of March. Past performance is not indicative of future results.
Can Trump say anything to reverse the market direction from here unless he completely changes his policy stance?
Trump-driven market bailout
Trump's first term showed a high tolerance for equity market declines and volatility, especially regarding escalating trade conflicts.
While there may be a level of economic or market stress that could push Trump to scale back his tariff threats, so far, any moment he de-escalated, he quickly re-escalated.
See this graph of Trump's tariffs 2025 I created (not sure if I missed another headline)
In just two months, Trump's Tariff measures have surpassed the aggression of his first presidency. The goals of tariffs remain unclear.
Sometimes, Trump and his team use tariffs as a bargaining tool, meaning recent threats may be aimed at securing policy concessions. However, this time, Trump is framing Tariffs as a revenue source and a way to address trade imbalances, which would make it believable to keep them permanently.
A trade war de-escalation is more likely due to market stress or economic pressure rather than a glorified strategic decision. A sharp market downturn is the most probable trigger for a policy shift (Trump Put)
Two months later, Trump's tariff measures surpassed the aggression of his first presidency.
However, the market is in oversold territory. Many bottom indicators have already failed, so take this with a grain of salt.
DOGE
The U.S. Government is the biggest job provider. Let's get that fact straight first. However, when you cut government spending, even if it's wasteful, afraid, corrupt, underperforming employees, etc, you might risk a recession.
While it looks like a good idea on paper, lost jobs lead to less spending because many people end up without jobs, and job numbers won't look as good either.
What might happen is ending up with a recession (unless that's the goal?), followed by a need for helicopter money to bail out the economy. This will mean more money will be spent than was initially saved.
The money spent on some alleged cases such as trans operations on what... animals? (I say alleged because I am not in the mood to fact-check right now) Yeah, if that's true, it's great that it comes to an end. However, cutting jobs from people too aggressively might have severe consequences. I'm sure the democrats knew.
Trump Administration's Economic Playbook
They're actually openly laying out the plan to deliberately "Engineer a recession"
At the New York Economic Club, Treasury Secretary Scott Bessent reinforced Trump's strategy of shifting the U.S. economy from government-driven to private-sector-led growth.
1: “Public to Private” Transition & Wall Street → Main Street Shift
The administration is pushing for a reset in U.S. growth and wealth inequality by shifting economic drivers from government deficit to spending toward private sector stimulus through tax cuts and deregulation.
Bessent cited Trump’s direct question to him:
“How do we get this debt and deficit down without killing the economy?”
After 18 months of planning, the answer is clear:
Reduce government spending, shift reliance to the private sector, and rebalance global trade.
2: Trade Rebalancing & Tariff Wars
Trump has doubled down on tariffs, and they aren't just a negotiation tool but a permanent tool for trade rebalancing and revenue generation.
Inflation risks are not the priority; the focus is on restructuring the economy even at the cost of short-term growth pain.
Bessent made it explicit:
"Access to cheap goods is not the essence of the American Dream... The American Dream is about upward mobility and economic security."
The American Dream lies in the idea that every citizen has the opportunity to achieve prosperity (immigrant or not), upward mobility, and financial security.
https://thehill.com/homenews/administration/5180919-bessent-trump-trade-policy-tariffs
3: Fiscal Contraction & "Engineered Recession" Plan
Trump's strategy includes tightening government spending (fiscal contraction) while hitting the economy with tariff-induced trade disruptions.
This is to intentionally slow down growth to trigger a negative wealth effect (stocks and crypto down) to cool inflation and reset economic fundamentals.
Bessent signaled this shift on CNBC:
“We could see the inherited economy start to roll a bit.”
“There’s going to be a detox period for the economy.”
“There’s no Trump Put, but there’s Trump Call upside.”
This may mean short-term GDP growth will decline. The administration is betting on an early economic plan to enable a later transition to easier monetary policy (rate cuts) and private sector expansion.
However, this is happening simultaneously with global trade "rebalancing," which is essentially tariff wars against major trading partners. The combination of these two makes it impossible to sustain real GDP growth in the short term, let alone increase it.
We live in a debt-driven economy, where politicians and central bankers have normalized deficit spending and created an addiction to easy money through Quantitative Easing. This has severely weakened our tolerance for and tolerance of economic and financial pain.
So, can the public, politicians, and markets withstand the short-term suffering to reset the system? If markets panic too quickly, we may see the Republicans "bend the knee" back to deficit growth. For now, the Trump administration seems committed to controlled demolition of the economy before rebuilding it.
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There's also a risk of this playing out like what we saw in 2022
SP500 continued to experience selling pressure while skew reset lower & lower. It seems like investors are forced to sell lower instead of buying hedges such as put options.
Irony?
For years and years, conservatives and Trump supporters have been spreading a conspiracy theory about the "Great Reset" brought about by the World Economic Forum. The idea of the global elites was to use COVID-19 as an excuse to restructure economies and consolidate power.
Trump's current playbook feels a bit similar to mine. The irony is that it comes from the right and is framed as a "rebalancing act" rather than a reset.
- Instead of government-led intervention, there is a shift from public to private sector reliance. However, the pain still comes first.
- Instead of WEF, it's Trump-controlled demolition of growth to force a reset of inflation and interest rates.
- Instead of ESG and social planning, its trade wars and fiscal contraction were aimed at America First economics, but still with highly interventionist tactics.
Will markets, politicians, and voters accept this pain long enough? Will there be enough pressure to force a return to government-driven spending and deficit reliance?
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