US economy was already in a fragile state going into CY25 with weakening household balance sheets & corporate margins stagnating amidst high real rates of 200 bps. But what likely will push the US economy over the cliff is the 2nd April reciprocal tariff event. It is almost certain now that US might see a recession by end CY25 with the global growth too lower by 0.3-0.5%. A world where recession in some form or other might be there everywhere. A world where US economy might see high inflation + low growth initially changing in to a low inflation + low growth medium term. A world where Europe fiscal expansion might need to be aided by a large monetary push as well. A world where BOJ might not need to hike as much as earlier, we expected. A world where disinflationary forces rule outside US courtesy Chinese cheap imports as well as lower commodity prices. A world where global savings will flow into bonds and gold uninterrupted. A world where risk assets are just at the beginning of a multi-year downtrend if US tariffs don’t go away soon. We look at which countries stand to loose most in this new fragile world. We also believe Trump's ploy is to engineer an outright recession in US so as to bring rates lower so as to refinance the large maturities lined up in USTs in CY25,CY26 & CY27. The interest cost savings will then be utilised for the continuation of tax cuts. Dollar is headed significantly lower to 95 levels as capital outflows continue from Mag-7 and US equities in general. Energy prices still headed lower due to weaker global growth, higher supply, a fragmented world trade and low geopolitical risk premium (if no US security umbrella, then less wars). In all a deflationary world where bonds & Gold rule. We finally believe that it will be significantly darker before dawn arrives for risk assets.
