The Paradox of Thrift
"The paradox of thrift, a core concept in Keynesian economics, suggests that while individual savings are beneficial, if everyone tries to save more during a recession, it can lead to decreased spending, lower production, and ultimately, less overall savings"
We are now officially in uncharted territory. The Global policy uncertainty index hit a record high in January and arguably has grown far worse since that time.
Trump's trade war is coming at a point in the global economic cycle when it will very likely cause global depression. Which, as we see in the chart below will be unforeseen by the majority of investors and pundits:
Step back to 2008 when interest rates collapsed to the zero % bound for a decade. The rules of Japanification were now in place which implied that that neither monetary nor fiscal policy stimulus could be fully normalized. Those rules remained in place up until the pandemic. Since the end of the pandemic, the Fed has raised rates to 5.25% and has held them near these high levels for almost three years now. So along comes Trump three years into a tightening cycle with plans to now reduce fiscal policy as well. In the process, his chaotic policies have imploded Consumption (domestic), Exports, Investment and Government spending.
These are the four factors that make up GDP:
GDP = C(d) + X + I + G
We all know that Trump's trade war has collapsed consumer confidence and disrupted exports. We also know that uncertainty has clouded the outlook for corporate investment. However, it's on the topic of government (fiscal) spending where things get really interesting. Why? Because ironically, if all of these Federal job cuts push the U.S. into a recession, then the deficit will grow much larger instead of smaller as intended. This was the lesson from Japan over the past 30 years. But, then again, Japan is not "exceptional" in the way of Trump.
Every pundit knows that Atlanta Fed real-time GDP estimator has collapsed into contraction for the first quarter, however it's being totally ignored:
"We own the economy in the fourth quarter," Lutnick clarified. "We cut regulation, we get shovels in the ground of this $2 trillion of a commitment to build factories, to build production back to America. You've got everybody coming back to America to build. That starts really strong in the third quarter."
Right, but we're in the first quarter currently, not the fourth quarter. In other words the Trump administration believes they have a free pass from now until the fourth quarter which happens to be an additional six months from now. Therefore they've front-loaded all of the pain of their policies and left all of the tax cuts and goodies for the end. They believe this will work and they can control a recession should it take place between now and Q4. They think Biden will get all of the blame. It's a fool's errand of biblical magnitude, unfortunately record arrogance prevents Bartiromo from questioning it.
The Fed decision was released today and the net result is that the Fed is totally frozen in their tracks. Recall that they were planning multiple rate cuts by this time in 2025, but all of that has changed since the start of the year. The Fed is using backward data to claim that the economy is strong. At today's press conference Powell claimed that the economy was strong in Q4 2024, in order to imply that the economy is still strong now. For all we know, the economy is falling off a cliff. Under these conditions, monetary policy error is inevitable on a scale that will dwarf the 2008 debacle. Let's recall that the Fed has caused every recession since WWII and this Fed which is flying totally blind will not be the first exception.
The Fed's Magic 8 ball has been further clouded by a late cycle rise in commodities identical to what took place in 2008. This is likely due to China which is desperate to restart their economy.
Recall that the Fed was fooled by this late cycle commodity inflation in 2008 as well. We all know how that worked out.
What's worse is that Trump's approval rating has hit the highest level since pre-pandemic. So he has been fully vindicated in causing extreme market turmoil and he has a clear path to escalate his trade war two weeks from now.
Notice where consumer sentiment was the last time Trump's approval rating hit this same level.
No one will be laughing when this con job explodes.
Turning to the casino, this rally in large cap momentum began at the lows of Monday March 10th, which is over a week ago now. We can assume that hedge funds are fully unhedged now. What we see below is that the put/call ratio never spiked during the first leg down of this market rout.
The net effect of Trump's policies on markets is to cause the largest rotation OUT of U.S. stocks in history.
In summary, we have reached peak exceptionalism.
“Peak US exceptionalism is reflected in record rotation out of US stocks"
