Treasury Secretary Scott Bessent said last Tuesday that the underlying economy is healthy, and there’s no indication of a recession. Specifically, Bessent said, “What I can guarantee you is there is no reason we need to have a recession” since “we’re seeing some very good underlying data.” Bessent said there may be a “pause” as the economy transitions from relying on too much government spending, but the Trump administration is “going to get this spending under control, we’re going to bring manufacturing back home, and we’re going to make the country more affordable.”
Bessent has essentially replaced Yellen and Powell as the most effective national economic spokesman, but I was also pleased to hear Powell say last week that the U.S. economy is in “quite a good place.”
Here are the most important market news items and what this news means:
- Cooler heads are prevailing, and new trade agreements are anticipated. However, the European Union (EU) is being difficult, partially due to the fact that the EU does not have strong leadership since French President Macron and incoming German Chancellor Merz have weak ruling coalitions.
- It will be interesting if the EU will “blink” since they have been stubbornly restrictive in modifying EU tariffs. The EU’s trade enforcer, Maros Sefcovic, will be meeting with Howard Lutnick and trade representative Jamieson Greer this week. All the Trump Administration is essentially proposing is to treat the EU like they treat America. These negotiations will be fascinating, and again, it will be interesting if the EU will be willing to lower their respective tariffs.
- The Trump tariffs are largely about settling trade imbalances and forcing foreign corporations to increasingly onshore in America. Interestingly, the EU is still forcing the European auto industry to be 100% EVs by 2035, while in America, such mandates are collapsing. Since the German auto manufacturers have largely not been able to make money on EVs, they might as well increasingly onshore in America to make the internal combustion (ICE) vehicles that the majority of consumers demand.
- After Apple’s Tim Cook and Nvidia’s Jensen Huang met with President Trump, they announced $500 billion and $100 billion, respectively, in onshoring projects in America. Although $1.2 trillion in technology onshoring has been announced, after more pharmaceutical and vehicle production onshoring is announced, there could literally be several trillion dollars of onshoring announced.
- As the recent earnings announcement season wound down, tariff mania took hold, and the Atlanta Fed’s GDP Now forecast for negative GDP growth rattled investors. However, none of the economic tea leaves that signal a recession, such as PMIs, retail sales, factory output, existing home sales, and unemployment, are signaling an economic contraction. Instead, a soaring trade deficit caused by the dumping of goods to beat impending tariffs merely triggered the Atlanta Fed’s GDP Now model to forecast negative GDP growth.
- The ultimate irony is that this “dumping” of goods is expected to promote deflation, which, by the way, has enveloped the entire Chinese economy. While investors fear the narrative that tariffs are inflationary, deflation has already emerged, and central banks will have no choice other than to slash key interest rates. This is why I am still expecting four more key interest rate cuts by the Fed (the Dot Plot is forecasting two key interest rate cuts).
- When you look around the world, there are demographic problems impeding most countries. Only Brazil, India, and the U.S. have growing populations and new household formations that result in organic economic growth. Since the U.S. is the most pro-business of the countries with household formation, the U.S. is also an oasis as well as the engine leading worldwide economic growth. The fact the Trump Administration is soliciting trillions in onshoring is also expected to boost GDP growth.
- If President Trump can end the senseless wars around the world, a “peace dividend” may ensue. The truth of the matter is the world has gotten too small to have major military conflicts, so economic wars are now more common. China has been the winner of recent economic wars with the aid of Mexico. Leveling the playing field with China and Mexico is expected to be President Trump’s biggest challenge.
Overall, I am expecting economic optimism to steadily rise in the upcoming months. Continued strong corporate earnings and lower interest rates are a powerful one-two much that is expected to drop kick and propel economic growth dramatically higher. The U.S. attempt to be more fiscally responsible via the DOGE cuts and through extra tariff revenue has also helped Treasury yields to meander steadily lower. Clearly, there is a lot for investors to be excited about, so I hope you share my optimism.
