Headlines: Will tariffs lead to a recession?

Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. Today, got Bob Fraser joining on the show, and we're going to talk a little bit about the economy, recession risk, consumer spending. These are things that are on people's minds right now, right? The tariffs are coming in hot and heavy, and, you know, we're getting a lot of mixed headlines on the economy. And of course, we had to pull in our very own chief macro strategist, Bob Fraser, to help us parse through the headlines. What's noise? What's real? And it's important to look beyond the headlines. So, Bob, there you go.

As usual, there's a lot of noise. I mean, yes, you know, the one thing you can count on is there's going to be noise. And what's happening right now is, of course, you know, Trump is turning over our every table, right? And he's a huge wild card. And the truth is no one really knows what's going to happen with tariffs, right? The outcomes are pretty wide-ranging. The potential outcomes, right? Could be we enter long, protracted trade wars. And already we're seeing, you know, foreign consumers pulling back from US brands. We're seeing anti-Trump elections overseas. We're seeing Xi doubling down on kind of getting in long-term mode for trade wars. So the bottom line is no one really knows, right? And Trump still seems to be excited about the tariffs.

He has shown, as we sit now, some retraction or just, you know, softening.

Yeah, yeah. Backpedaling a little bit.

Right.

So my position from the beginning of the year was it was negotiating strategy. So I think it's a mix of negotiating strategy and he does believe in tariffs, but he's about the only one that does believe in tariffs as they will generate a lot of revenues, but there's also a cost. But so what's happening is amidst all this, we're seeing the stock market crash. Okay. And so that's really what confuses people, right? Whenever there's a stock market crash, that's when we get the calls. That's when everybody's saying, hey, what about this and that? But the stock market and the economy are two very different things.

Yeah.

And people, most people conflate them, at least emotionally, right? And they— but they're extremely different.

When the stock market's down, they feel the pain of it because their portfolio is down. It feels a lot more real. Yeah.

Well, and there's all these negative talking heads. And so that's what's happening right now, you know. Now let me talk about the stock market. Now I'm not generally a stock market prognosticator, but I actually pointed out— and you saw charts in January when I did the economic update for 2025, I said markets are going to go down. And if you remember that, and they're priced to perfection. I mean, we were seeing the PE ratio of the stock market at a 36. Now let me explain what a PE ratio is. That's the price of the stock relative to the earnings of the stock market. So the price-to-earnings ratio, and it's like this. So if I had a lemonade stand that earns $1,000 a year. So, Ben, I have a lemonade stand that I want to sell you. My lemonade stand earns $1,000 a year. So you're going to buy my lemonade stand. You're going to get $1,000 a year in earnings. What are you willing to pay me for that lemonade stand? And if you're willing to pay me $36,000, 36 times the earnings, then you would be a stock market investor. Now, how do you feel personally? Would you be interested in buying my lemonade stand for $36,000?

I was hoping you'd be closer to 3,000, but I guess you're not.

So yeah, and typically, and I have all the data that shows that when you have PE ratios that are that high, it means the valuations are of course very extended, and the likelihood of high returns for the next 10 years are— I mean, basically it's about a 0% return at that price. Well, of course we saw the markets crash and, you know, come down into much more reasonable territory. So a lot of the stock market movement is basically anything that's shaking, like a Trump, a Trump earthquake, then people will sell and selling begets selling. And what happens is when everybody is bullish in the stock market, like at the end of that, of last year, then everybody who was going to buy has already bought, right? That's the whole point about bullish sentiment. And that's why when everybody is bullish, that's why the market usually goes down. And conversely, when everybody is bearish, that's when the market usually goes up. Because when everybody's bearish, everybody believes the market's gonna go down. Well, then people have already sold. So the stock market has done what the stock market does, right? There's a little bit of uncertainty or a lot of uncertainty, and the stock market took a dump. So that's created a lot of questions. Now let's shift to the economy. So the economy— and there's still not a ton of data out, okay, for the new year of what's happening. I think the reality of Trump's moves, I think, surprised the markets, even though he's doing what he said he was going to do. I think the violence of everything, the speed, the reaction and everything is kind of right, taking everybody's breath away, including mine. I mean, I mean, you know, it's quite disconcerting. But if you look at some of the basics, so the reason I called for a strong economy is really primarily consumer spending. So there's a great article I just sent you this morning from the Wall Street Journal, and it's made the point about consumer spending and that consumer sentiment is in the toilet. I mean, consumers are very gloomy about the economy. Well, in the past, consumer sentiment is a precursor to consumer spending, right? So if you feel super gloomy, you're going to stockpile money away instead of spend it, and that's not good.

There's these indexes where they're surveying consumers and basically saying, how do you feel about the economy? You know, where do you think we're going? And if it's negative, negative sentiment, that's usually a leading indicator of spending, right? Where you're staying here.

And again, why does that matter? Well, in the United States, consumer spending accounts for 70% of the economy. So if consumers are out burning their credit cards up with spending, you know, then the economy is going to do okay. And that's really what's been the story all through COVID and post-COVID. I mean, pre-COVID we saw consumer spending solid. During COVID it plummeted. And immediately rocketed up and then accelerated. So we're in a hockey stick moment for consumer spending and it's still happening. So we do have current data, so it's still happening. So in spite of consumer sentiment, people are gloomy and they're spending like crazy. Now we're still seeing a few things softening like air traffic and other things, but it's booming. We're also seeing wages. Wages are still growing. I mean, 3.4% wage growth still, you know, the rate of growth is slowing. But it's still growing at 3.5% a year. So yeah, net worth is still high, household net worth. I just looked at those numbers. And so all these things, they're still solid. Now we did just see the GDP print and it showed negative for the quarter. And again, that's going to grab a lot of headlines and stoke a lot of fears, but it really was driven by a surge in imports, and that was people getting ahead of the tariffs. So anybody importing was basically buying massive amounts of imports to get ahead of the tariffs. So it's a little anomalous. Doesn't mean we really saw negative growth in the real economy yet. So just the way the numbers are calculated, right?

So it could be potential softening, but it's more a preparation for potential of tariffs that have made businesses make these moves that are kind of skewing the numbers. And yeah, we'll have to see it kind of play out. Over the next couple of quarters.

So we're seeing consumer sentiment. It's literally as bad as it was during the great financial crisis.

I think this is really interesting because to your point earlier, these have been highly correlated for a long time. And so if you just look at sentiment, it's really easy to get stuck in, oh man, it's doom and gloom. This is as bad as it's ever been. But the data is that kind of diverging from the sentiment, which has not really happened before. And one of the points to make in the article I think is really interesting is that they actually bifurcated sentiment based on political party, right? So sentiment has started to become a lot more political ideology than—

isn't that interesting—

than it was in the past. And so if you're a Democrat, I mean, it's—

things are really gloomy.

Really, really bad. And if you're Republican, things aren't that bad, probably, you know, gone down a little bit, but it's night and day difference. So you can, you know, a lot of it trends to kind of who's in the office, it seems like.

And it's, and it's your emotions, your feeling about the future is really what it is, you know.

Now to play the other side of it, it is possible that it's still leading indicator, maybe not as strong of an indicator of consumer spending and maybe a little bit earlier. Like, could we see this play out a few quarters from now, or is it It's all just too hard to say because now, you know, I think it's disconnected.

I think it's disconnected. I think other things are more important than consumer sentiment to drive consumer spending. I think wages and jobs, right? So if people— if the job market is super weak, I think people stop spending, right? If they feel like they're going to get a wage cut or they're going to get laid off and there's no jobs if they do, I think people then get skittish. I think net worth household net worth is another big driver. If they see equity in their house crashing, these kind of things, or the stock market crashing, and you got a lot in the stock market, I think you start to feel like, gosh, I need to be conservative in my spending. I think those things are more real. And interesting, we still haven't seen the household net worth has not crashed in spite of the stock market. It's still up there.

So, right, we are seeing some kind of more smaller shifts within spending to maybe more bargain hunting or looking for ways to say, but overall, I think spending was up 3% just last month, right? And so it's on the whole still pretty good.

Well, and again, that stat confuses people because people are so aware of the pain that's out there, right, from inflation and all this. But again, let's look at the economy in quartiles. So look at the wealthiest groups.

Sure.

They're the ones that are doing the bulk of the spending. The bottom quartile's the poorer folks. They're not spending as much and they're hurting. But on the average, spending is doing great. I mean, averages discount the pain of the people at the bottom and they, because they're averages. But the economy floats on averages.

Yeah, the economy is the sum of all the parts. So it matters. Exactly.

And so all it takes is a bunch of rich guys out filling up the restaurants and the restaurants are doing just fine.

Right. So, you know, looking from here, Where do you kind of see how you see this playing out?

Right.

Obviously you said there's a lot of potential ways that this tariff war plays out. Trade war could be very protracted. It could be a big bluff. We don't know at this point, but what do you kind of put probability-wise right now with, are we headed toward recession? Where's your head at right now?

Yeah, we're definitely not falling off the cliff economically speaking right now. So, I even saw the fears about the dollar and the dollar crashing. It's like, yeah, in the short, short, short term, it's fallen a little bit. In the long term, dollar is still the world's main currency and it's not changing. So I definitely think, I mean, recession is definitely a possibility down the road. It's not going to happen right away. I still think tariffs are going to play out. Like I said in January, I think he's using it as a negotiating tool right now. I think he's got 18 countries he's negotiating with to get concessions and gets trade concessions to buy American goods and/or immigration concessions and other things. So I think he's hopefully going to be a little bit more methodical and disciplined about the process negotiating these tariffs. And then once he gets what he wants, he'll negotiate away the tariffs, primarily trying to boost American exports, which I can comment on that. I don't think it makes a lot of sense. I don't think Trump's economics are very good. Getting people to boost, buy American goods. Well, one, do we have the ability to produce those goods? We really don't. And are we competitive? You look at the American steel industry, it's way behind the Asian steel industry and in technology and operational efficiency. So just boosting exports, it's not necessarily a good thing. You're hurting overseas companies and boosting American companies, but the American companies are not competitive. And same with automobiles. You know, automobiles, American automobiles have gotten a lot better since the '70s and '80s, but do they still compete at the same level as foreign cars? You know, I mean, you could argue maybe close. So tariffs actually skew the market. They basically give a boost to uncompetitive products. It's not necessarily a good thing, but back to the point of, do I see recession coming? I think hopefully we'll start to see some resolutions where tariffs are dropped with some of these nations. I do think he's going to continue to punish China. China is a bad actor. They're basically out there stealing technology left and right. They're trying to get the global hegemony across the world. Every nation, you're spending money with their Belt and Road Initiative. They get companies, they JV with companies to get them into China. Then they steal all their technology and then boot out the companies. They're really bad actors. My guess is Trump is not going to negotiate the tariffs to zero for China. Is trying to negotiate importing American goods, but American goods will never compete in China. The cost is just never— it's never going to work, right? You know, and besides the fact that Chinese consumer spending is tiny compared to America consumers— they have an export-driven economy, not a consumption-driven economy. America has a consumption-driven economy. So it's not necessarily an appealing market. You look at electric automobiles or phones, I mean, China has their own options. That are more competitive in their own markets than American options. So I don't think it's real, number one. Number two, China is in an existential battle right now. So, you know, you guys have seen my charts on the demographic collapse of China. They are in a massive decline. You know, we see by the end of the century, their population will be half what it is today and their workforce two-thirds lower. It is existential and they have an export-driven economy. And of course, America is their biggest consumer and it's collapsing. I mean, they have a property bubble collapsing, they have a demographic collapse, and now their main economy is driven on, on exports and that's collapsing. They are in an existential battle for their future. Honestly, I don't know how the Chinese Communist Party survives into the next decade, so they're gonna fight tooth and nail. To get what they want. And they're clever. And the advantage they have, you know, they figure they'll just outlast a Trump, right? They don't have the political turnover that we have, right? You know, so they'll just outlast whatever guy is in there. They take the long road and they don't really care what one guy does. They know that the winds will shift and everything will go back, and they just gotta hunker down. So that's the way I see it playing out. I think tariffs will be negotiated in most other nations. In China, I think it's going to be, you know, Trump is trying to destroy China. And I don't think he's going to compromise entirely on the tariffs.

Yeah. Great. Well, thank you so much for coming on and sharing your thoughts. And to our listeners, if this was helpful, please drop us a like, share it with a friend, give us a rating, always helps. Also, if you have other questions that you're having as an investor that you want us to look at and answer, please do submit those requests and questions on the tab on the top of the website. And we appreciate you listening. So tune in for the next episode and hope this is valuable for you.