By focusing on corporate tax cuts that have widened inequality yet further instead of on critically needed infrastructure revitalization that would have put people to work at good jobs, Trump has given us the largest budget deficit in history and, with his trade wars and threatened Mexican border shutdown, a possible end to the long Obama recovery.

John Mauldin titles his most recent newsletter “Recession Signs Everywhere” and ends it thus:

. . . Last year, I explained how trade wars can spark recession and trade deficits are nothing to fear. I won’t repeat all that here. But we have since seen several market swoons/rallies as harsher trade restrictions looked more/less likely. Whether you like it or not, asset values depend on the (relatively) free flow of goods and services across international borders. Interfere with that and all kinds of assets become less valuable.

Starting a trade war, at the same time growth is slowing for other reasons, is more than a little unwise. Agricultural tariffs have already ripped through US farm country to devastating effect, leaving losses some farmers may never recover.

The president’s tariff threats had other impact as well. Companies raced to import foreign-supplied components and inventory before the tariffs took effect. This jammed ports and highways last year, not with new demand but future demand shifted forward in time.

This is important, and I think we will see the impact soon (if we are not already). Transport and logistics companies geared up for last year’s surge, expanding their facilities and hiring new workers. Importers built up inventory in an effort to avoid tariffs that were supposed to take effect in January. The deadline was extended, but the threat is still alive.

At some point, all this has to stop. Carrying inventory is expensive and will eventually outweigh the benefit of avoiding tariffs. Then the boom will come to a screeching halt. Imports will fall as companies work down inventory. All those jobs and construction projects will disappear.

That, combined with the other cyclical factors and high debt loads everywhere, could easily add up to a recession. Exactly when is hard to say. Recessions usually get pronounced in hindsight, so there’s some possibility we are in one right now. But I still think we’ll avoid it this year. Getting into this box took a long time and so will getting out of it.

Regardless, we’ll have a recession at some point. I think the next subprime crisis will be in corporate debt. Next week, we’ll look deeper into the timing question, what the yield curve tells us, and why the next decade will bring little or no economic growth.

I realize this is not a happy conclusion, but I call them as I see them. I’ll leave you with one final but critically important thought: Prepare, don’t despair. Tough times are coming but we can handle them. You have a chance to get ready. I highly suggest you take it.

What does getting ready look like?  Not quitting your job; cutting back wherever you can to save all you can; not borrowing on margin; and, depending on your situation, perhaps moving some of your assets — if you’re lucky enough to have assets — into cash.

If a recession never comes, no harm done.

But with interest rates already low and the Republican deficit out of sight (as it was under Reagan, Bush, and Bush, with only Clinton ad Obama handing their successors a National Debt shrinking relative to the economy as a whole), if a recession does come, it could be a challenge getting out of it in the usual ways.  (The usual ways are cutting interest rates and ramping up government spending.)



Comments are closed.