In recent years we have experienced the emergence of the word 'fake' used on a multitude of things including a FAKE heiress, FAKE news, FAKE face, FAKE celebrity, the list goes on. Is it possible we're experiencing a FAKE Financial Crisis too?
Since the beginning of 2025 the DOW has dropped 10.6%, the S+P 12.6% and the NASDAQ 15.7%, all big drops. Unlike prior dips driven by market forces like too much speculation, poor quarterly results, soaring inflation, etc, this dip/correction is a direct result of a multitude of factors including new tariffs and retaliatory tariffs, erratic reduction of some tariffs, attacks on the Fed, etc. All of these elements are controllable factors, not necessarily market forces. While gold has soared suggesting long term inflation, there is an argument being made right now that implies:
1. Tariffs could deliver transitory, not long term inflation. ie; prices on certain goods will jump based on the tariffs and then stick there and not rise further.
2. All of this will settle at some point once trade deals have been negotiated, especially with our largest trading partners. This takes many weeks, not days.
3. Once things settle, inflation may resume at what was until recently a little over 2%, an acceptable level for the FED.
4. If this inflation bump is indeed transitory, the FED may not raise rates as many predict and instead may lower rates, especially if the economy shows signs of cooling, in particular, the labor market.
5. If the economy cools from the recent volatility (already the uncertainty is freezing/delaying planning and hiring plans), this may trigger rate cuts to stimulate the economy, especially if long term (not short term) inflation prospects remain tame.
6. If the dollar remains weakened (down over 11.5% this year alone) people buying US exports in other countries priced with retaliatory tariffs may not feel the price bump from those exports if tariffs are negotiated to around 10-15%. Our imports though will be even more expensive. But remember only 12-16% of US GDP is related to imported goods and services. There is the other 85%.
7. If rates drop, servicing debt/all debt, including government debt, becomes cheaper.
Of course the old adage applies again: but it all depends. Will the world still see the US as a reliable safe haven? That remains to be seen, especially important as it relates to the bond market. The above could happen, but it depends on so many different factors and forces that are impossible to predict. It's probably because of this unpredictability, uncertainty, volatility and current lack of confidence that our financial 'crisis' of the moment (fake or real) will persist for a while. However, once the clouds part and more certainty emerges, things could turn around, fast. The US economy for the most part is quite healthy!
