Control Panel: What next?

Last week was one of the most startling weeks in the market in my lifetime. To compare, the events must include both an action that will affect the economy as a whole (flash crashes don’t count) as well as a market rout.

I compare last week to:

  1. The bursting of the dot-com bubble in 2000 since both the SPX and Naz are driven into similar bubbles by the AI craze in 2025. The 2000 bubble pop was followed by a recession. The Federal Reserve cut the fed funds rate quickly but the SPX didn’t bottom until 2002.

  2. The 2008 Great Financial Crisis (GFC) since the entire economy was threatened by the housing bubble. Followed by the Great Recession. The Fed took many major actions, including cutting the fed funds rate to zero. The market bottomed in 2009.

  3. The Covid-19 pandemic since the entire economy was shut down. Pulled out by massive fiscal and monetary stimulus resulting in the worst inflation in 40 years. The asset markets rebounded quickly with a flood of money from the Fed and Congress.
    S&P 500 (SP500) | FRED | St. Louis Fed

  4. The 1973 OPEC oil embargo which impacted the whole economy, resulting in stagflation that lasted until after the nasty recession of 1980 - 1982.

The inflation-adjusted SPX chart shows the result of these crises. The wounds took months, in some cases years, to heal.

The stock market has been in a bubble for many months, just waiting for a pin to pop it. The pin was President Trump’s so-called “Liberation Day.” China responded to Trump’s tariff increases by increasing tariffs by an extra 34% on all US goods and also put export restrictions on some rare earths.

https://www.reuters.com/world/china-impose-tariffs-34-all-us-goods-april-10-2025-04-04/

https://www.wsj.com/economy/in-matter-of-days-outlook-shifts-from-solid-growth-to-recession-risk-027eb2b4?mod=hp_lead_pos1

In Matter of Days, Outlook Shifts From Solid Growth to Recession Risk

The economy was chugging along. Then came Trump’s dramatic tariff increase.

By Paul Kiernan, The Wall Street Journal, April 6, 2025

The stock market went off a cliff last week after President Trump announced the highest tariffs in more than a century, vaporizing more than $6 trillion of wealth in two days.

Whether the real economy will follow is impossible to know. But the risks are tilting in that direction…

The duties unveiled by Trump on April 2 will raise the average effective U.S. tariff rate from 2.5% in 2024 to around 22.5%, according to the left-of-center Yale Budget Lab. Combined with narrower tariffs Trump imposed in February and March, that will push up prices by 2.3% in the short run, equivalent to $3,800 less purchasing power for the average household… [end quote]

Inflation is still stubbornly higher than the Fed’s target rate of 2%. Fed Chair Jerome Powell last week declared that the FOMC will not cut the fed funds rate unless the economy shows clear signs of recession. Predictably, Trump screamed on social media that the Fed must cut but Powell will ignore him. There will be no monetary stimulus sparked by the asset market meltdown.

Meanwhile, DOGE is cutting federal agencies so forget about fiscal stimulus. Congress is set to cut taxes but the effect won’t be immediate.

Suddenly, there is a high chance of recession. Trump took a nice, stable growing economy and set it on its ear. There’s no point looking at the Purchasing Managers’ Report for March because April is a new world.

The Control Panel shows a developing crisis. Every metric reflects fear. Every panel made me gasp. Stocks, junk bonds, USD, gold, silver, copper, oil…all fell off a cliff. Only Treasury bond prices rose. Junk bond spreads spiked, an indication that recession could cause defaults.

The trade is strongly risk-off. The Fear & Greed Index is in Extreme Fear at 4 which is the lowest I’ve ever seen. VIX hit 45 which is close to the crisis level of 50.

The Treasury yield curve fell along its entire length but especially in the 2-year duration which indicates recession fears.

Financial Stress is still low. This isn’t a financial crisis (yet) since the Fed is managing liquidity well. So far, it’s the popping of a stock market bubble and anticipation of a recession.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -2.8 percent on April 3, up from -3.7 percent on April 1. The alternative model forecast, which adjusts for imports and exports of gold as described here, is -0.8 percent.

The Atlanta Fed suddenly began to incorporate gold exports in its reports a month or so ago. That’s because the balance on gold was negligible for a long time but has suddenly spiked to -$5 billion. This shouldn’t be enough to significantly change the Net exports of goods and services which was minus -$226 billion in 4Q24. The United Kingdom, Hong Kong, and Switzerland are regional centers for trading refined gold and were the destinations for 86 percent of U.S. exports of gold bullion in 2012 but I don’t know if this has changed.

The damage caused by Trump’s tariffs won’t be reversed even if he changes his mind tomorrow. The whiplash caused by the uncertainty has led to market volatility. Some of the air has been let out of the bubble but there’s a long way to go. Previous comparable crises have taken a long time to bottom without major Fed support which won’t happen this time.

There may be some bargain hunting tomorrow but I think the crisis is just developing and may last a long time.

The METAR for next week is stormy. “Liberation Day” will liberate a lot of investors from their portfolio balances.

Wendy

https://www.usitc.gov/research_and_analysis/tradeshifts/2012/minerals.htm

16 Likes

The mood of the market has changed at least for now. Recession worries have been around for a while. The yield curve uninverted only recently.

Yes, many are selling their stocks as fear takes over. They are selling the dollar. Some are buying treasuries.

How low will prices go before investors decide they are worth the risk? Its an adjustment, not a total meltdown.

3 Likes

Interesting that we have seen no reports of margin calls. No doubt there have been some.

Also no reports of Wall Streeters jumping out of windows.

Apparently just another day at the office!!

1 Like

That makes no sense to me. How can what happened this week change the estimate for what happened in the first quarter?

DB2

2 Likes

LOL that is the most mis-guided take on what is happening I have heard.

3 Likes

They are always adjusting numbers as they become clearer. They even revise them months later.

2 Likes

You need to get out more.

13 Likes

It is an adjustment in the same way Mike Tyson used to adjust guys’ chins.

4 Likes

@DrBob2 they are collecting the data as it arrives from 1Q25. They are trying to put together an accurate picture for 1Q25 which is earlier than the BEA, Census Department, Labor Department and other sources report officially.

What happened this week won’t change the estimate for what happened in the first quarter. It will help them build an estimate for 2Q25 as the data is collected from this point on.
Wendy

3 Likes

That makes sense. For example, the jobs report for March was just released two days ago.

DB2

Anybody looking at the futures. It looks like it is game on and Mike is coming in for seconds. I think I will have a hangover tomorrow.

1 Like

Excellent thread launched by excellent Wendy with excellent sane comments.

What our Empress of Stats and most of our follow on discussion is NOT DISCUSSING is (soto voce) the mere possibility (and still at low probabilities) of a large scale politically induced systemic collapse. (all soto voce please do not frighten the children).

That significant albeit small possibility has had me remove my last bits of non-O&G investments in the USA except for a bundle of private loan deals to great warehousing properties I know well in Southern California. I think the USA has a non-zero chance of being in mixed anarchy and civil war in five years, and that is enough to push me out.

Idiotically induced civil quasi-to-full-collapse is rare, but does happen at a significant level, and is

Extremely Expensive to investors immune to terror.

Not terrified yet, but not wanting to be terrified too late.

4 Likes

To put it another way, the economy is in for a good, solid rogering.

1 Like

YES! And politically rooted rather than macro-economic cyclical Rogering are two very different situations. Both at once?, well, politics Trump economics….

1 Like