MARCH 2025 EDITION:
Commentary and Economic Outlook
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 | Top Headlines from Commentary and Economic Outlook: |
The US economic growth is decelerating rapidly with growth likely to drop from over 3% into the 1-2% range as the effects of the Fed’s ultra-tight monetary policy impacts the residential and commercial construction industries and the deflationary/recessionary impacts of Trump Administration tariffs and DOGE layoffs impact the economy.
Q4 GDP grew only 2.3% with the critical investment sector contracting at over a 1% annual rate.
Latest Atlanta GDP Now came in at negative 2.4% for the first quarter of 2025.
Doge layoffs are recessionary and likely to hit the employment report for February or March.
Tariffs are the equivalent of a sales tax and are recessionary/deflationary and could hurt GDP growth in the short run.
If the Fed does not cut this year the US economy is likely to enter a recession in late 2025 or 2026.
Inflation is always caused by excessive money supply growth as occurred during the Pandemic (22% inflation with 22% excess money supply growth) and never by tariffs and deportation. The money supply (M0) shrank 5% Y/Y, indicating that prices will continue to decline.
We expect the new administration to be focused on cost containment, cuts in corporate taxes and lower deficits as the Treasury secretary has said. The market fears a massive increase in the deficit. Tariffs reduce the deficit and make a larger corporate tax cut possible.
| Stock Market: |
We are neutral on the stock market in the short term with an S&P 500 Index target of 6,000 as earnings season is over and there is a high level of uncertainty related to tariffs and details of the tax bill. The tax bill creates a 1,000 point swing in our S&P year end price target. So far there has been scant discussion of the magnitude of the corporate tax cuts. Slowing economic growth is also an overhang. We do have a year-end S&P 500 Index target of 7,000 based on a reduction in the US corporate tax rate to 18%.
Corporate tax cuts are the key driver of economic growth and stock prices. The IMF estimated that a 10% increase in country savings drives economic growth by 1.5%.
Most government policies, including immigration and tariffs, have an immaterial long-term effect on inflation or growth. Corporate tax policy and major changes in anti-trust enforcement do have an enormous impact on economic growth and stock prices. Most market forecasters, including the Fed, are ignoring the inflation and growth impacts of the dollar appreciating by 8% over the last 3 months.
| Bond Market: |
We remain bullish on bonds despite the recent sharp selloff of 10-year treasuries in response to a hawkish Fed and expect the 10-year to move into the 3.5%-4.0% range by the end of 2025.
The best cure for higher rates is higher rates. There has been almost 120bp of tightening in financial conditions and associated increase in the dollar that has not yet been reflected in economic growth or inflation.
We believe that fears of accelerating inflation are completely irrational. Inflation is caused by excessive monetary growth and energy shocks and is not significantly impacted by other government policies.
Tight Fed policy has already triggered a housing recession with residential investment declining by an average of 3.5% over the last two quarters. The only financial condition that matters is the 30-year mortgage rate as housing declines have caused 11/12 post WWII recessions.
The “Hatfield Rule” is a recession indicator which states that if housing starts drop below 1.1MM there will be a recession. It is superior to the “Sahm” rule as housing is a leading indicator and employment is a lagging indicator.
Trump administration policies are actually deflationary as pro-growth policies reduce inflation (quantity theory of money) and strengthen the dollar which has already appreciated by 10%. Dollar appreciation is highly deflationary and would almost fully offset any potential tariff increases.
| Economics & Fed: |
We expect that there will be 5-10% tariffs put on most imports to the US. We believe that this is bullish for the stock market as the revenue from tariffs with a 10% tariff raising $1.9 Trillion will be used to fund a substantial personal and corporate income tax which will power the stock market over our 7,000 target (Assumes effective corporate rate of 18%). The tariff’s price impact will be muted by a very strong dollar that has rallied 8% since Trump’s election became obvious. The Congress is also proposing $1.5-2.0 trillion of spending cuts that should provide ample budget authority for a large corporate tax cut.
We expect 3 Fed rate cuts this year. Despite the recent hot CPI print, we continue to forecast core PCE inflation will gradually decline to the 2% area by year-end as the 2-year delayed shelter component slowly moves toward current market rates. We expect the Fed to cut in the second quarter precipitated by a slowing US economy dragged down by high long-term rates.
Real time inflation- CPI-R (using market rents instead of lagged BLS panels) is running below 2% and PCE-R core is running at only 2.1% Y/Y.
The current Fed is very dangerous and needs to be reformed. Specifically, it slavishly follows an index that trails real time market inflation by two years resulting in the Fed being constantly behind the curve. In addition, the Fed’s arbitrary 2% target has been proven to be too low as it caused the great financial crisis.
The Fed should adopt a more flexible target range of 2-3% and modernize CPI/PCE to ensure real time pricing of inflation. It should also adopt an unemployment target range to balance out its stated dual mandate. Finally, it should adopt a free market approach of targeting steady growth of the money supply in line with nominal GDP growth and letting the Fed Funds rate float within a larger band based on market conditions.
We believe that Chair Powell should be removed by the President for neglect of duty and incompetence based on his role in creating the great inflation due to excessive money supply expansion and aggressive advocation of profligate government spending. The new Chair could lead the modernization of the Fed’s policy framework.
| Commodities |
We are lowering our 2025 target range on oil from $70-$90 to $60-$80 as it has become clear that Trump will use his influence with the Saudis and Russia to limit price increases despite tighter sanction on Iran. This policy will offset a good portion of one-time price increases from tariffs.
Pollution taxes are by far the most economic method to rapidly reduce carbon and improve the environment. Limiting natural gas production is highly destructive to the global environment and has led to regime change in Europe.