In recent weeks, an old-fashioned “self-fulfilling prophecy” appears to be taking shape. To ensure that the Republicans remain in power in two and four years, it is crucial for Trump to give the economy and markets a blow now.
For Trump and his colleagues, there is nothing more enjoyable than bashing Biden. And let’s be honest, the man himself—or rather, his fellow policymakers—had little trouble blatantly buying economic growth. The budget deficits recorded under Biden’s leadership are nothing short of remarkable.
But now that the election campaigns are over, criticising previous policies has, in my view, taken on a clearly strategic nature. Everything that now goes wrong economically or in market terms can easily be attributed to Trump’s predecessor. And so, Trump & Co are doing their utmost to reinforce this strategy. The doubling of import tariffs on Canadian aluminium and steel fits perfectly within this narrative.
Playing with fire
There is another important reason why I believe Trump is aiming for some short-term pain. He and his new bestie, Elon, are one hundred percent convinced that they can shape and mould things. So why not the economy and financial markets as well?
This is precisely where the danger of this strategy lies, especially if Trump is genuinely seeking a recession. The time frame leading up to the next Senate elections in November 2026 is short from this perspective. On average, recessions last about ten months. So, even if it starts immediately, it would be close to the end of the year before the economy hits its lowest point.
Assuming that unemployment would significantly rise during a recession, Trump would have little time to turn things around. Rhetorically, perhaps, but not in the numbers. Although roughly only a third of Senate seats will be contested next year, and the Republicans seem to have a reasonably comfortable lead, if the “It’s the economy, stupid” theme gains traction, the race could become tighter than desired.
Risk-averse
I do not expect the Trump administration to be willing to take this gamble. If the US economy truly starts to weaken—with the Atlanta Fed Nowcast for first-quarter GDP growth still deep in negative territory—Trump will likely adjust his strategy. Moreover, a significant economic downturn (former Treasury Secretary Summers already sees the chance of a recession at fifty percent) would open the door wide for the Federal Reserve to resume interest rate cuts. There is ample room for this.
And the markets?
The absence of a recession typically means that stocks may correct but will not enter a prolonged bear market. Another supportive factor is the rapid depreciation of the US dollar. Growing recession fears on one side of the Atlantic and an ill-conceived plan to spend 800 billion euros on defence, plus a fantasy plan to invest another 800 billion euros in innovation (Draghi), on the other side—combined with a possible ceasefire in Ukraine—have pushed the euro towards 1.10 against the dollar.
A weaker dollar means an easing of financial conditions, something markets generally love. Altogether, this short-term pain may indeed be just that—short-term.
Jeroen Blokland analyses striking and current financial market and macroeconomic charts in his newsletter The Market Routine. He is also the manager of the Blokland Smart Multi-Asset Fund, a fund that invests in equities, gold, and bitcoin.