The Great Reset: Where Does the Pain End?

Just seven years ago, in March 2018, President Trump announced tariffs on China, sending the stock market into a tailspin. The S&P 500 dropped 8.5%, and the VIX—a measure of market volatility—hit 26. Yet, the market bottomed out the very next day after the tariffs took effect, eventually recovering to new all-time highs. Fast forward to today: the market is down 10%, with the VIX at 28, just two weeks before another round of tariffs is set to kick in. History seems to be repeating itself—but with a critical twist. While 2018 was marked by rising growth and inflation (a period some call "Macro Summer" or reflation), today we’re in the opposite scenario: slowing growth and falling inflation, dubbed "Macro Winter" or deflation. This shift changes everything—and suggests that the market’s pain might linger longer than it did back then.

A Tale of Two Economies: 2018 vs. Now

In 2018, the economy was strong enough to absorb the shock of tariffs. After the initial drop, the market rallied, only to stumble later when growth and inflation rolled over into deflation, triggering a 20% plunge. The Federal Reserve then stepped in, cutting rates, and the market roared back. The lesson? A robust economy can weather a trade war—at least for a while.

Today, however, growth is already headed lower. Even after two encouraging inflation reports showing CORE PCE and CORE Inflation declining, the market hasn’t found its footing. This suggests that, unlike 2018, the current economic backdrop lacks the resilience to shrug off trade tensions. The market likely won’t bottom until the Fed signals rate cuts—and a full recovery might not happen until those cuts are implemented. With tariffs looming on April 2nd, the Fed will probably want to see how prices react before acting, potentially delaying cuts until May or June. They’re likely waiting for at least three declining inflation reports; we’ve got one so far, with another expected by March’s end.

Inflation and Oil: A Silver Lining?

One piece of good news: this trade war isn’t likely to spark inflation without a surge in oil prices—and that’s not on the horizon. OPEC plans to increase supply in April, which should push oil prices down further. Some speculate Trump is pressuring OPEC politically, but regardless of the reason, lower oil prices ease inflation fears. This gives the Fed more room to consider rate cuts, potentially sooner than later.

How Bad Is the Slowdown?

The economy is showing signs of strain. Corporate layoff announcements have spiked to their highest level since the pandemic, unemployment has edged up, and manufacturing employment is back in recession territory. The Atlanta Fed’s Q1 GDP estimate has dipped into negative territory, and the media’s recession drumbeat is spooking consumers into cutting back. Add in the Department of Government Efficiency (DOGE) curbing spending and tariff uncertainty weighing on businesses, and you’ve got a recipe for a slowdown.

But is it a full-blown recession—or just a rough patch? Not all signals are dire. ISM manufacturing and services indexes remain in expansion territory, employment has been up three months straight, and February added 150,000 jobs. Goldman Sachs and Morgan Stanley forecast GDP growth at 1.5% and 1.7%, respectively—hardly recession numbers.

Interestingly, this fear, uncertainty, and doubt (FUD) might be exactly what the Trump administration wants. They’re aiming for an “economic reset”—slowing the economy enough to tame inflation without tipping into recession. It’s a delicate balancing act: scare people into spending less to cool prices, then step in with stimulus before things spiral too far. The market, though, isn’t betting on the “avoid recession” part, given the unpredictability of the trade war’s scope and duration.

Stimulus: A Game Changer

Unlike 2018, when the Fed was hiking rates and Trump had already spent his tax-cut ammo, today’s setup is different. The Fed and Treasury are armed with stimulus options. The Treasury General Account (TGA) has already released over $300 billion into the economy, boosting bank deposits and spurring loan creation—bank credit is hitting all-time highs. Trump has cards to play too: tax cuts, deregulation, and infrastructure spending.

The bond market is also pitching in. As bond prices rise and yields fall, borrowing gets cheaper, unlocking credit—especially for sectors like real estate, where lower mortgage rates could spark activity. This cushion of liquidity could soften the slowdown, and markets might start pricing it in by April.

The Global Reset: Trade War as a Financing War

Trump’s ambitions go beyond domestic policy—he’s trying to overhaul the global supply chain. By slowing the economy without triggering a recession and forcing the Fed to pump in liquidity, he’s turning the trade war into a financing war. The U.S., with its deep financial resources, has the upper hand. Think of it as an economic siege: cut off your opponent’s supply lines (or revenue from U.S. imports) and wait them out. The country with the most firepower to stave off recession wins.

China, the only real contender, is stretched thin—its financing rates are near zero, and a prolonged trade war could push it into recession. Yet its markets remain strong, perhaps because Trump’s tariff stance shifts daily, keeping opponents off-balance. This unpredictability might signal a more negotiable approach than in 2018.

Trump’s Vision: Pain Now, Gains Later

Trump’s goal is bold: make the U.S. a manufacturing powerhouse, slashing the trade deficit, saving money, and protecting jobs. The U.S. is the world’s biggest importer, spending heavily on foreign goods—a revenue lifeline for other countries. But it doesn’t export enough to offset that, running a $1 trillion annual trade deficit. Trump blames foreign tariffs and is using reciprocal tariffs to force others to drop theirs, letting U.S. goods compete abroad, boosting domestic manufacturing, and creating jobs.

If they resist, their economies—more dependent on U.S. consumers than vice versa—could crack first. But this strategy punishes U.S. companies with overseas operations or supply chains, hiking costs and clouding earnings outlooks. Materials, industrials, and consumer goods sectors are reeling, front-loading inventory before tariffs hit. Imports are surging, dragging on GDP growth, though this reflects preparation, not weakness.

Where Does the Pain End?

The market’s pain won’t likely end until the Fed signals rate cuts—possibly in May or June, depending on inflation data. A full recovery might wait for actual cuts. The next two inflation reports will be pivotal: if inflation keeps cooling, a slowing economy could unlock more liquidity support. The falling U.S. dollar reflects this rising liquidity—global money supply is hitting new highs, and gold’s breakout suggests markets expect Fed cuts. But if the dollar rises, signaling a risk-off mood, trouble could loom.

Inflation risks seem low—oil prices are dropping, government spending is being trimmed, and supply chain price spikes are just tariff prep, not structural inflation. In the short term, the economy will decelerate, but onshoring and reshoring are picking up, promising jobs and growth down the line.

The Bottom Line

Trump’s “Great Reset” is a high-stakes bet to reshape the U.S. economy and global trade. The short-term pain—market drops, uncertainty, and a slowdown—is real. But if the U.S. can navigate this without a recession, leveraging its financial might and stimulus tools, the long-term payoff could be significant. For now, markets are caught in the crossfire, waiting for the Fed’s next move and clarity on the trade war. The pain ends when those pieces fall into place—likely not before spring. Can the U.S. win this economic chess match without breaking the board? Stay tuned.