A recession is inevitable, someday. However, the debate is about the severity of the recession and when it will happen. Will there be a soft landing or a hard landing? Scott Sumner has a great little post on his personal blog about this subject. He believes, in the end, there will be a soft landing and it won't be soon. However, I don't think so. I see Donald Trump getting revenge upon the world. More on that later. 

But, Dr. Sumner is the Phd., so we should seriously take a look at his analysis:

Which of these statements is true:
1.  Tight labor markets are almost always followed by recessions within a year or two (1966 was an exception).
2.  Inverted yield curves are almost always followed by recessions within a year or two (1966 was an exception.)
3.  The US has never experienced an expansion lasting more than 10 years.
Actually, all three are true.  And none of the three have any necessary implication for current monetary policy. (Over at Econlog, I explain why I believe labor markets are currently tight.)

He goes on to say that the Fed should tighten if the first is true. He says the Fed should loosen if the second is true. And he says the Fed should throw up its hands if the third is true. Those are not absolutely economic truths, but are most likely true.

Dr. Sumner goes on to say that since there is no longer high inflation, or deflation, and I chalk it up to the new normal, there will be no hard landing and maybe no recession soon. 

And he may be right. Sumner looks at the NGDP prediction market is up to 5.2 percent so he disagrees with history which says a recession is coming in the next 9 months. Of course, Sumner is not looking at credit crunches, tariff issues, deportations, labor shortages, corporate debt, etc. I don't think those things can be ignored.

NGDP Change VS 10 Year Inflation Breakeven

One thing that will be interesting to learn is if this experimental market is able to avoid weaknesses that exist in other markets, such as mispricing or speculation. The NGDP cratered quickly, especially in 2007. The chart shows this with the blue line. We can from the above chart that inflation targeting did not alert the Fed as inflation was sustained through much of 2008 (the red line).

But Sumner has an answer to that:

Market monetarists believe that inflation doesn’t matter, and that NGDP growth is “the real thing”.  Our textbooks are full of explanations of why higher and unstable inflation (or deflation) is a bad thing, but in almost every case the problem is more closely associated with high and unstable NGDP growth (or falling NGDP).  In most cases it would be entirely appropriate if trend inflation rose 1% because trend growth fell by 1%.  That’s because what you really want is stability in the labor market. 

It is up to the experts to determine if increased inflation to offset growth (NGDP Targeting) is a problem. It isn't a problem for Market Monetarists like Sumner, but it may be a problem for people on fixed income and for businesses who would have to price accordingly. Certainly, at the very least, NGDP must be monitored if not targeted by the Federal Reserve.

So, what about the fear of deflation? Sumner says in the same article:

As George Selgin showed in his book ‘Less than Zero”, deflation is appropriate when there is very fast productivity growth.  Isn’t deflation contractionary?  No, that’s reasoning from a price change.  Deflation is contractionary if caused by falling NGDP.  But if NGDP (or NGDP/person) is growing at an adequate rate, then deflation is an appropriate response to fast productivity growth.  Indeed if you kept inflation at 2% when productivity growth was high, then the labor market could overheat. (See the U.S., 1999-2000).

I can't remember any scenarios like this sort of non-contractionary deflation, but obviously better students of economics and history have found it.

So, as a word of caution, anyone engaging in predictions of NGDP will understand there are other economic indicators! This is just one more helpful indicator, albeit an important one!

As I said at the start of this article, I personally disagree with Dr. Sumner. I believe a recession could be close. Maybe not in 9 months, but close. Trump could attempt to overheat the economy first, however. That will force the Fed's hand.

Remember, Donald Trump does not forget. He said he did not like the European Union. He said they formed to make money. Trump wants the USA to make that money. Trump doesn't want Mercedes and Beemers in NYC. He will attempt to get rid of them through tariffs. The Europeans need to take the guy seriously.

Same with China. Trump said China is not fair, even though China is a developing nation that we could court for awesome future business. Trump looks at China as a threat and he will not try to make a deal with China unless it is a crushing deal for China.

Trump looks at NAFTA, and hates it! He has always hated it. He doesn't really want a deal unless it humbles Canada and Mexico. Here we are far removed from the start of negotiations with Canada and nothing. Absolutely nothing. Trump said on August 31, 2018 that he does not want to compromise with big bad Canada. That is like the Mexican American War, where the US took a third of Mexican land and the movies portray the Mexicans as the bad guys.

Trump has bought into, and enlarged the big lie about the American Empire, that we aren't empire, but just are the good guys. And he may not have the power to make good on his promises of an easy trade war victory against the world. He will most certainly label the world as the bad guys if that happens. It is disturbing fantasy.

What we must understand about Donald Trump in order to protect investors is that Donald Trump is a revenge first, deal second, demagogue. So, he never forgot the NFL not giving him a team. He sought revenge through the World Football League. Then he sought revenge through the player protests. 

It is said that he sought revenge against Seth Meyers' and Barack Obama's roasting of him to such an extreme that it motivated him to run for president. 

So, when the world laughed at Donald Trump at the United Nations, it set the world up for revenge. It made the world a more dangerous place. I do not know what form Trump's revenge will take. It will either come through war or economic war, or maybe both. With Trump hating all these other nations and loving tariffs, we have a serious potential problem for the American economy and its stock market.

We have possible alternative payment systems. We have possible alternative supply chains being organized in the future. It all looks very much like Donald Trump sees America as being the victim. And as victim, he will strike out! 

It is amazing that our stock market is so sanguine in the face of Donald Trump's obvious likes and intentions and his version of American exceptionalism fantasy. The propaganda out there soothing investors has certainly been forceful, and almost believable. But Donald Trump is heading off the rails, and that must be factored into risk going forward. If you need the money, do not bet on Donald Trump. 

Dr. Sumner may end up being correct, but with Donald Trump in the White House, it cannot be a low-risk proposition. Trump makes deals but I am starting to believe that he prefers revenge over the deal. A soft landing may not be possible when POTUS thinks he is the boss of all nations.

For further reading:

Where Do We Begin? No More Targets

Attacking the Everything Bubble Without Killing the Economy