Near-Term Gloom, Long-Term Boom

2025-03-06 08:45:00 ET

Summary

• Trump can't change so many things without causing near-term problems, even if the long-term result is undeniably positive. As we continue to try to parse the daily barrage of news, there are disturbing signs that the economy has entered a weak patch.
• On the positive side, liquidity conditions are healthy and credit spreads remain quite low. It's hard to overstate how important it is for financial markets to be free of the liquidity squeeze which has accompanied every Fed tightening episode prior to the current one.
• I see a serious potential threat in the cryptocurrency space. Speculative fever is raging, turbo-charged by the belief that Trump will buy a mountain of bitcoin for a U.S. reserve stockpile.
• M2 is now almost back on track and inflation is no longer a problem. The Fed has tightened enough, and most of the excess money that was printed has been absorbed by the economy. This is very good news from a monetarist perspective; without excess money, there can be no rise in inflation.

Sorry for my prolonged absence. I had some minor health issues that are now behind me, and more recently I've enjoyed a few weeks skiing at Deer Valley with my brother. What's really kept me off balance, though, is the blizzard of executive orders emanating from the Trump White House - most of them good, but some - particularly punitive tariffs - bad for growth. Trump can't change so many things without causing near-term problems, even if the long-term result is undeniably positive. So I struggle to understand how serious the negative fallout of cutbacks, firings, and tariffs will be over the near term, as compared to the hugely beneficial effects of sharply reduced tax and regulatory burdens over the long term and how both those factors will play out in the months ahead. For that matter, I doubt whether anyone has a clear view....

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