Investing Insights

RECESSION WATCH  •  April 18, 2025  •  Jon Wolfenbarger

Powell And Trump Are Causing A Recession And Bear Market

SALZBURG, AUSTRIA — Trump’s destructive and chaotic tariff policies are causing a global trade war and tremendous economic uncertainty. They are also contributing to negative business, consumer and investor psychology, thereby increasing the likelihood of a major stock bear market and recession this year.

We know Trump likes tariffs because they provide him with negotiating leverage — aka “blackmail” —  to get what he wants from foreign countries. While that is more humane than dropping bombs on them, tariffs are still a tax on American consumers, which are never good for the US economy.

All Economists Know Tariffs Are Self-Destructive

The great economists Adam Smith and David Ricardo explained what is wrong with “mercantilism”, the economic system of tariffs and other trade restrictions favored by kings hundreds of years ago. Their work and the work of other Enlightenment thinkers on behalf of reason, individual rights, free trade and free markets led to the Industrial Revolution in the late 18th century, which caused the greatest increase in population…

and living standards in human history.

Here’s a key point Adam Smith made about mercantilism in his 1776 masterpiece The Wealth Of Nations: “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” And about the motivation for tariffs: “The interest of the dealers in any particular branch of trade or manufactures is always in some respects different from, and even opposite to, that of the public.”

David Ricardo developed the theory of “comparative advantage” in his 1817 treatise On the Principles of Political Economy and Taxation. This theory proves that countries are better off when they specialize in what they produce most efficiently, even if one country is better at producing everything. Tariffs and other trade restrictions interfere with this specialization, reducing living standards, like any other tax. As Ricardo put it: “Under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each…It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.”

Ron Paul, one of the few politicians who understands and advocates free trade and free markets these days, explained how tariffs harm American living standards:

“China’s retaliatory tariffs show how export-dependent industries are harmed by protectionist policies. Even if other countries refrain from imposing retaliatory tariffs, exporters can still suffer from reduced demand for their products in countries targeted by US tariffs. Businesses that rely on imported materials to manufacture their products also suffer from increased production costs thanks to tariffs. President Trump acknowledged how tariffs harm US manufacturers when he granted US automakers’ request for a one-month delay in new tariffs on imports from Mexico and Canada.

Many American consumers who are struggling with high prices are concerned that President Trump’s tariff policy will further increase prices. They are right to be concerned. Contrary to popular belief, foreign businesses do not pay tariffs. Tariffs are paid by US businesses that wish to sell the imported goods. When tariffs are increased, the importing businesses try to recoup their increased costs by increasing their prices. Consumers then must choose whether to pay the higher price, find a cheaper alternative, or do without the product. Whatever they choose, consumers will be worse off because they cannot spend their money the way they prefer.

According to the Tax Foundation, if President Trump’s tariff plan for China, Mexico, and Canada were fully implemented, it would increase federal tax revenue by 142 billion dollars this year — an average tax increase of over one thousand dollars per household. The tariffs would also decrease economic output. This does not account for the decline in consumer satisfaction caused by consumers being forced to alter their consumption choices because of government-caused price increases. It also does not account for the new businesses, products, and jobs that could have been created had government not drained resources from the productive economy via tariffs.”

Higher Tariffs Contributed To The Great Depression

This chart shows average US tariff rates since the 1890s. The projected Trump tariffs would be the biggest increase in tariffs since the Smoot-Hawley tariffs of 1930. Those tariffs notoriously contributed to the economic disaster that was the Great Depression. 

While tariffs contributed to the severity of the Great Depression, that disaster was primarily caused by the Federal Reserve creating lots of money out of thin air in the 1920s, which caused an unsustainable economic boom and stock market bubble in the 1920s. Then the Fed tightened monetary policy in the late 1920s, triggering the 1929 stock market crash and subsequent economic bust. This was explained in great detail by economist Murray N. Rothbard in his highly acclaimed book America’s Great Depression. 

Sound familiar? That also describes the past decade or so. That is why we believe the US will likely suffer from a recession due to the Fed’s monetary policies, which inverted the yield curve for over two years, longer than any time in history, even longer than in the late 1920s.

Housing Bust Continues

A canary in the coal mine for this recession is the continued weakness in the housing market. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) was 40 in April, well below the neutral 50 level, as shown below. Current sales conditions were 45, sales expectations in the next six months were 43 and traffic of prospective buyers was extremely low at 25.

According to NAHB Chief Economist Robert Dietz, tariffs are also a big concern for home builders: “Policy uncertainty is having a negative impact on home builders, making it difficult for them to accurately price homes and make critical business decisions. The April HMI data indicates that the tariff cost effect is already taking hold, with the majority of builders reporting cost increases on building materials due to tariffs.”

Home builders have already increased their prices by 6.3%, or $10,900 per home, in response to expected tariffs. This will hurt housing demand even more, which helps explain why housing starts fell 11.4% in March and are down nearly 28% since their peak in April 2022, as shown here.

Trump Will Blame Powell and Powell Will Blame Trump

It is well known that there is no love lost between Trump and Jay “Transitory Inflation” Powell.

Powell and the Fed clearly do not want to help support Trump or his tariff policies. In August 2019, former NY Fed president Bill Dudley wrote a Bloomberg oped saying "the Fed shouldn't enable Donald Trump" and urging the Fed to not "provide offsetting stimulus” to support Trump's trade war with China.

Trump is clearly not happy that the Fed cut rates by 0.5% just before the election, but will not cut rates now despite a weaker stock market and greater recession fears.

Last week, Trump said the following about Powell: “If I want him out, he’ll be out of there real fast, believe me…If I ask him to, he'll be out of there. I don't think he's doing the job…We have a Federal Reserve chairman that is playing politics. Somebody that I've never been very fond of…Interest rates should be down now."

He also said, “The ECB is expected to cut interest rates for the 7th time, and yet, "Too Late” Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete “mess!” Oil prices are down, groceries (even eggs!) are down, and the USA is getting RICH ON TARIFFS. Too Late should have lowered Interest Rates, like the ECB, long ago, but he should certainly lower them now. Powell's termination cannot come fast enough!”

At least Trump hasn’t (yet) done to Powell what President Johnson did to William McChesney Martin Jr., who was Fed Chair from 1951 to 1970, as this discusses.

However, Treasury Secretary Scott Bessent has reportedly pushed back against replacing Powell before his term expires in May 2026. Last week, he said the Fed’s supposed “independence” from politics is a “jewel box” that should never be compromised.

Given the significant legal and practical difficulties Trump would have in replacing Powell, it seems more likely that Trump wants to blame Powell, rather than himself, for the inevitable recession to come. Since Powell and the Fed never have and never will accept blame for causing any recession, including the Great Depression and Great Recession, they will blame Trump and his tariffs for the coming recession.

Rate Cuts Do Not Prevent Recessions and Bear Markets

As we have discussed repeatedly, due to the long and variable lags of monetary policy, Fed rate cuts do not prevent recessions and bear markets after significant Fed rates hikes and yield curve inversions. If they could, we would never suffer from recessions and bear markets!

Let’s look at proof of this from the last two major recessions and bear markets. As shown below, in the early 2000s, the Fed cut rates by 5.5% before the market bottomed. They had already cut rates by over 5% by December 2001 and the stock market fell another 33% after that. Then the Fed cut rates by over 5% before the stock market bottomed during the Great Recession of 2008-2009. In 2007, the Fed started cutting rates in August, before the market peaked mid-October. They had cut rates by 0.75% before the recession even started in December. They cut rates by 3.25% by May 2008 and the market fell another 54% after that. Given these facts, why do investors still pin all their hopes on Fed rate cuts? 

Investment Implications

The boom-bust business cycle and bull and bear markets are primarily caused by the bureaucrats at the Federal Reserve manipulating the money supply and interest rates. They can also be exacerbated by the policies of politicians. Given the aggressive Fed rates hikes of recent years, along with Trump’s self-destructive tariffs, it looks increasingly likely that a recession and major bear market is coming, if they haven’t already started. Wise investors will look for ways to prosper from this unnecessary calamity rather than suffer from it.