A lot has happened in the markets over the past few weeks, and I want to give you my thoughts.
Tariffs
Numerous TV pundits and economists have labeled tariffs as inflationary over the last three months. However, while inflation might occur in individual products, I contend that tariffs are not a cause of inflation. Nobel laureate Milton Friedman famously stated, "Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." Since tariffs do not increase the money supply, they cannot lead to widespread inflation.
Milton Friedman
American economist and statistician
Recession?
Tariffs are being blamed for causing a slowdown. But does the data actually show this? If you have joined me in our webinar events over the past years, this may sound familiar. Consumers are 70% of the components that cause GDP to rise or fall. Since 2021, due to higher prices and interest rates, the bottom half of the consumers have been severely damaged.
Credit card delinquencies have surged recently. The worry is that high prices have led consumers to rely on their credit cards to fill the void. Following this trend, the Federal Reserve increased interest rates, resulting in credit card rates soaring from single digits to above 30%. This situation, coupled with mortgage delinquencies,
poses a significant concern; consumers risk not paying for their most valuable asset, which can further damage their credit. A struggling consumer has limited options for relief. One option is refinancing their home. Although refinancing can be challenging due to low interest rates, it is often essential for improving their situation.
These circumstances pose significant challenges for consumers and housing market prices. When a consumer is turned down for a home refinance, their subsequent choice is to sell their home, aiming to leverage its value to settle their credit card debts.
The chart above illustrates how quickly the demand for housing can deplete the available supply. Presently, the existing demand is sufficient to absorb all housing inventory in just 9 months. This indicates heightened selling pressure in the market, reminiscent of the conditions experienced during the Great Recession.
There are some bright spots;
The chart above shows that subprime credit consumers have not increased significantly yet, while those with prime credit have only experienced a slight decline. This is somewhat encouraging news; however, it is essential to monitor the subprime data closely.
My Conclusion
Based on data from the last two years, a consumer-driven recession is approaching. I believe there is much the current administration can do to avert a deep recession, and numerous policies aimed at increasing manufacturing in the USA are likely to help. If interest rates were to decrease significantly, this would provide considerable relief to the bottom half of consumers. The Federal Reserve (Fed) currently appears motivated to restrict the financial capacity of the lower half of consumers in order to slow down the upper half. I would like to see the Fed reduce interest rates and cut back, if not halt, money printing (which is driven by government spending).
I stay cautiously optimistic and believe that the recession may happen within the next two years.
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These opinions are based on Jakob Fries, CFP® observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on 03/11/2025 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities. Past performance does not guarantee future results.