ever since Trump’s tariff threats began everyone
has been trying to figure out how they will impact the economy will there be inflation will there be
a recession or could stagflation be the outcome a recent report by one of the world’s largest asset
managers may have found the answers and spoiler alert they’re not good in fact they suggest that
a recession could be imminent and that’s why today we’re going to summarize this report and tell
you what it could mean for the economy for the markets and for you my name is Nick and make no
mistake this is a video you can’t afford to miss the report we’ll be summarizing today is titled
quote “How are US consumers and firms responding to tariffs?” It was recently published by Apollo
Global Asset Management and we’ll leave a link to the full report down in the description for you
you’ll notice it’s more like a compilation of data than a report per se thankfully Torstston
the head author of the report recently did an interview where he talked in detail about many
of the infographics included in the report more importantly he provided additional nuances
that’s not included in this document itself we’ll leave a full link to that interview down in the
description as well for you to come back and watch later now the report begins with a few quotes
from the CEOs of Southwest Airlines Chipotle and PepsiCo as you might have guessed they paint
a pretty bleak picture the one from the Southwest Airlines CEO probably hits home the hardest quote
I don’t care if you call it a recession or not in this industry that’s a recession then the report
lays out a flowchart which basically shows when a recession will be in the US and why and what’s
fascinating is that the infographic is titled quote the voluntary trade recession logically
this implies that Trump intentionally caused a recession which is something many have speculated
about more about that in the description now as you can see Torston expects the US economy to
enter a recession by the summer and this is based on the flow of goods the catch is that he doesn’t
specify what he means by recession neither in the report nor in the recent interview even so it’s
clear that at this point the US is headed for a technical recession as some of you will know a
technical recession is two quarters of declining GDP and it’s only declared by the National Bureau
of Economic Research after it happens and as some of you may have heard Q1 GDP came in negative
and chances are that Q2 will look the same we will only really find out by the end of July which
happens to be over the summer in the interim the flowchart notes that by the end of May there will
be quote empty shelves now to our understanding Torston doesn’t mean that there will be a shortage
of goods but a drop in consumption that causes retailers to stop stocking certain products
and this is because the next slide notes that retailers have been stockpiling inventories ahead
of the tariffs which presumably means more supply i’d also be remiss if I didn’t mention Torston’s
more immediate prediction and that’s that the activity at US ports will grind to a halt
by early to midmay besides the fact that most of the tariffs could be resolved by then
Torston did not address this halt in activity in his recent interview in fact he specified that
the economic impact of the tariffs will depend on their magnitude and duration which are still
unknown most importantly Torston stressed that if the tariffs on China are not as severe as the ones
Trump proudly presented after Liberation Day then he believes many of the adverse market effects
we’ve seen would be quickly reversed because the US continues to be quote the most dynamic and
exceptional economy in the world but obviously that optimism won’t make for good headlines and
by the way guys if you’re enjoying this video been a sharp decline in earnings outlooks among
the S&P 500 companies that’s comparable to the pandemic of course a change in earnings outlook
does not mean that there will necessarily be a change in earnings it’s essentially a change in
sentiment however the same cannot be said for the data about new orders of goods by retailers
as you can see new orders are clearly collapsing and this is true regardless of the indicator you
use notably you’ll notice that there was a surge in new orders at the start of the year now that’s
the increase in inventories ahead of the tariffs which we will come to in a second first we need
to look at the more concrete data and that’s the sharp decline in corporate spending plans
fortunately all these indicators are still within normal range unfortunately it looks like this is
going to change in the coming months as the trend is indeed clear corporates are pulling back on
their spending if that wasn’t bad enough various indicators of prices being paid by manufacturers
reveal that we’re seeing a huge runup in costs comparable to the start of the pandemic at first
glance you’d think this means that inflation is about to skyrocket but upon closer inspection
however the affforementioned increase in inventories suggests we could actually see goods
deflation in the short term to provides multiple infographics in the report showing how inventories
have skyrocketed in recent months and there’s one thing they all have in common they’ve all surged
to levels last seen at the end of the pandemic and this is interesting as you’ll understand why if
you remember what happened back then to refresh your memory the pandemic restrictions meant that
nobody could spend money on services the result was a massive surge in goods consumption and surge
in goods related inflation eventually the pandemic restrictions went away resulting in a surge in
services related inflation at the same time goods inflation collapsed because retailers stockpiled
lots of goods in response to the pandemic demand the data in Torston’s report suggests we could see
a similar phenomenon but for different reasons at this time retailers have been stockpiling goods
ahead of the tariffs but consumers have been reducing their consumption per the quotes of
the CEOs we looked at earlier and the consumer data we’ll look at a bit later the effect of this
increase in supply and decrease in demand could be a drop in goods inflation in the short term at
the same time services inflation could also fall because of the reduction in consumption as well
as the crackdown on illegal immigration which has supposedly been keeping housing costs high for
quite some time now for context housing costs have been the biggest contributor to inflation
in recent months as it so happens goods and housing each make up 1/3 of the CPI meaning they
collectively amount for 2/3 of the CPI measure sprinkle in a sharp decline in oil prices and you
have a recipe for a sharp decline in inflation in the coming months the caveat though is that this
will be accompanied by a sharp decline in economic growth and this is presumably why Torston is
foreshadowing recession and not stagflation oh economic growth we’re likely to see with a bunch
of eyeopening indicators first heavy truck sales which are collapsing now for reference almost
3/4 of all goods in the US are moved by trucks a decline in truck sales means less goods moving
the good news is that the heavy truck sales are still within normal range for this time of year
the same is true for the logistics managers index which keeps track of logistics activity across the
US in this case the concerning thing is that the index never really recovered after the pandemic
and this is one of the many data points that suggest the economy didn’t really recover as much
as we’ve been led to believe torston also looks at a few charts related to trade between China and
the US which makes sense given that China appears to be the primary target of Trump’s tariffs and
is also America’s biggest trading partner after Canada and Mexico two charts show a surge in
container ships departing China for the US in February March and April which is consistent with
the surge in inventories we looked at earlier the third chart shows something that nobody has been
talking about and that’s the collapse in container freight rates and if this sounds familiar that’s
because container freight rates were a big talking point among macro analysts during the pandemic the
surge in goods demand we discussed earlier caused a surge in shipping costs but again these shipping
costs recently started collapsing speaking of which there’s a big misconception about tariffs
that need to be addressed most people think that a 10% tariff on say an iPhone means that the
price of the iPhone will rise by 10% this is not accurate it means that Apple will have to pay
an extra 10% when it imports the iPhone from China as a fun little fact iPhones cost Apple around
$500 to produce and it’s extremely important to note that most of these costs are not related to
manufacturing which apparently cost as little as $30 considering that iPhones sell for around
$1,000 each this means Apple makes a 40 to 50% profit for the sake of simplicity let’s say
that Apple has to pay a 20% tariff on iPhones imported from China and that increases the cost of
production from $500 to $600 some economists would argue that in these circumstances Apple would pass
on the cost to consumers meaning prices would rise by $100 however this assumes that corporates have
the capacity to pass on these costs to consumers in other words it assumes that the consumer is
doing fine and will continue to pay that cost as we learned earlier however consumers are not doing
fine and they have been cutting back on spending as a result and this means that it’s going to
be very hard for corporations to pass on the costs of tariffs to consumers and that means most
corporations will have to keep costs where they are and reduce their profits as it so happens this
is exactly what Walmart recently said it would do keep costs for consumers where they are to gain
market share funnily enough though Walmart is going to pass these costs on but to their
suppliers as it so happens the second part of the report focuses on the consumer and not
surprisingly consumer confidence is at record low levels and tourism has also slowed what
is surprising though is that consumers have also been on a buying spree ahead of the tariffs
which could contribute to short-term deflation but first the sentiment what’s crazy is that
consumer sentiment is literally at record lows even lower than the levels seen after the 2008
financial crisis and what’s even crazier is that consumer sentiment has been on the decline
since the pandemic and never recovered further evidence of the fake economic recovery and this
might have to do with the next indicator which is rising concerns around unemployment more and
more people are concerned about losing their jobs however restrictions on immigration could mean
that companies are more and more concerned about not getting employees back after they fire
them and the result could be another paradox and that’s that companies try their best not to
fire people and that reminds me another variable that many economists seem to miss is the rise in
the gig economy and its impact on unemployment now for those who don’t know unemployment measures
how many people are looking for work but can’t find any many people who lose their jobs choose
to do gig work rather than to file an unemployment claim which could also result in artificially low
unemployment data i’d also be remiss if I didn’t address the uh elephant in the room and that’s
all the government layoffs from Doge now Torston mentioned in his recent interview that 280,000
people had been laid off by Doge in theory uh this means unemployment is about to spike in practice
however those laid off by Doge will reportedly continue being paid until September 30th so they
won’t show up in the unemployment figures anytime soon in any case as you might have guessed the
report includes a statistic that’s been recently going quite viral and that’s the rise in consumer
expectations around inflation and if you’ve heard about this data chances are you’ve also heard
about how a lot of it is based on how people lean politically meanwhile actual inflation has been
falling faster than expected because of the supply demand dynamics I mentioned earlier regardless
Torstston looks at another viral statistic and that’s the sharp drop in travel from the rest of
the world to the US it’s quite remarkable really travel to the US has declined by as much as 30%
from some countries and the number of tourists arriving by the air has likewise fallen by
as much as 30% uh perhaps we’re mistaken but this drop in travel is also probably related
to politics rather than the tariffs the data around the share of credit card accounts making
the minimum payments however is definitely not nor is the data around the delinquency rates on
these credit cards on the one hand both numbers are still objectively low 11% and 1% respectively
on the other hand however both are clearly on a strong uptrend and this foreshadows more stress
among consumers in the coming months torston seems to contrast this data with the number
of tourists visiting Las Vegas as well as the occupancy rates of Vegas hotels now both have
actually held quite steady which actually makes sense now for those unaware gambling behavior
tends to remain robust regardless of economic conditions and there’s actually data that suggests
gambling will increase during hard times as people effectively gamble to try and get ahead and that’s
why it’s a bit strange that the weekly demand for hotels in general has remained relatively
steady especially considering the recent drop in international travel and tourism what’s not
strange though is that there’s been a decline in the number of cash purchases of homes the chances
are that it’s usually investors who do this kind of stuff and the recent crash in the markets has
investors pulling back from cash purchases torston then presents an infographic that showcases just
how reliant the US stock market is on China with exponentially more revenue from the S&P 500
coming from China compared to US exports to China and this is presumably intended to give
the reader the impression that the US can’t put any significant tariffs on China without them
backfiring finally Torston presents this matrix of outcomes with the title saying it all quote
“A trade war is a stagflation shock.” There’s no question about that but it is questionable as to
whether the US has entered a fullblown trade war just yet uh you’ll also recall that Torston said
the US could quickly rebound from these tariffs if they’ve scaled back in fact the report appears
to present a significantly more bearish picture for the economy and the markets compared to the
interview Torston did about the same data just 2 days later and this makes us wonder whether
the co-authors of the report have had a role in moving it off of the mark whatever the case you’ll
remember that Torston stressed that if the tariffs on China are reduced then most of the bad stuff
is likely to go away however he warned that if they stay at their current levels then there is
a 90% chance of recession starting by the summer not stagflation recession to put things into
perspective Torston believes that the worst case scenario on the inflation side would be a personal
consumption expenditures index or PCE to rise by 1% over the next year and it’s currently around 2%
perhaps we’re mistaken but inflation in the low 3% range isn’t exactly stagflationary torstston also
stressed that the increase in inflation ultimately depends on whether retailers can pass on these
costs to consumers if the economy is weakening and consumption is falling and retailers will have
to eat the costs as additional expenses and you’ll recall we already starting to see early signs of
that happening i’d also remind you that Torston said that the US economy was quote still the
most dynamic and exceptional economy in the world despite the tariffs he even said that he hasn’t
seen any signs of anything in the market breaking even the recent stress in the bond market it’s
in stark contrast to what’s in the report which again leads us to believe that it could have been
the co-authors having a hand in things or just a clickbait and this brings me to the big question
and that’s what this report means for the economy for the markets and for you the answer to all
of the above fundamentally depends on the final tariffs particularly the final tariffs on China as
Torstston himself pointed out we’ve already seen China and the US introduce multiple exemptions
which suggests that the most important goods may not be affected by tariffs at all however it’s
clear that tariff threats have done serious damage to both corporate and consumer confidence although
this hasn’t translated into much concrete data yet the Q1 GDP data that recently came out suggests
we will get the recession tors foreshadows in the report however it could be argued that the economy
has been weak for a long time and I’ll reiterate that many of these indicators such as consumer
confidence has been falling since the pandemic and has never really recovered given this fact any
further weakening due to tariff concerns could in fact be the thing that tips the US economy into a
recession and it looks like that’s exactly what’s going on but again this is not something that
would be officially declared until long after the fact while there are many unofficial indicators
of economic recession they all continue to provide a mixed picture some say that a recession is
coming others say that a recession is already here and I’ll repeat that unemployment is likely
to be kept artificially low in the coming months due to gig work and Doge severance payments the
consequence for the economy could therefore be more chop and grind just like what we’ve seen in
the markets in recent weeks both could continue to chop and grind until tariffs are finalized
and both could see short-term periods of growth once that happens but the underlying weakness will
likely remain how it impacts you really depends on your personal circumstances unless you work in
an industry that’s known for laying people off at the slightest hint of economic weakness
like hospitality then you’re probably fine and if you work in such industries you probably
already know what you’re in for at the same time the prices of most goods could actually fall
as retailers swallow any tariff related costs to try and gain market share or to keep market
share like Walmart it sounds like traveling is going to get a lot cheaper too and sprinkle in
continued decline in oil prices due to OPEC’s upcoming production increase and all of a sudden
the inflation picture doesn’t look nearly as bad as expected but make no mistake things could
go very wrong very quickly we could in fact see supply chain issues and empty shells if
the trade threats escalate into a fullblown trade war thankfully this hasn’t happened yet and
with a bit of luck the situation will continue to deescalate in the coming weeks and months whatever
happens you can bet that politicians will trade every swing in the market before it happens and
you can learn more about that watching our video right over here and if you’re not subscribed to
the channel yet you can do that right over here that’s me for now thank you very much for
watching and I’ll see you guys again soon
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