Why Recessions Are Disappearing and What It Means for Markets

The Decline of Recessions

• 📉 Historically, the 19th century saw recessions nearly half the time, but this frequency has declined significantly, especially after the Great Depression with the New Deal and the Fed's expanded mandate.
• 💡 Post-1980s, decades like the '80s and '90s were largely recession-free, and excluding the exceptional COVID period, the last 16 years have seen no major recessions.

Drivers of Recession Avoidance

• 🚀 Technology has shifted the economy from tangible to intangible assets, which are less cyclical and don't require the same capital financing or depreciation.
• 🏛️ Hyperactive policy from governments and central banks actively works to prevent recessions, sometimes at the expense of inflation.
• 💰 The explosion of fiscal spending creates a constant state of stimulus in economies like the US.

Intangible Assets and Outsourced Recessions

• 🧩 Intangible assets, like network effects and brand recognition, arise spontaneously and are not subject to traditional capital cycles.
• 🌍 Western economies, particularly the US, have outsourced the production of tangible goods, effectively outsourcing the cyclical downturns to trade partners.

The Role of Policy and Fiscal Stimulus

• ⚠️ While constant stimulus may not be sustainable long-term, it can prolong periods of growth and inflation longer than anticipated, as seen in recent years.
• 🧊 The economy can be seen as a bicycle needing constant momentum to avoid falling; the US economy is in a similar state of perpetual stimulus.
• 🔥 Two economic death scenarios exist: 'dying by ice' (slow growth, low inflation, like the EU) and 'dying by fire' (overheating, high inflation, emerging market style), with the latter being a potential long-term risk.

Renewal Without Recession

• 🛠️ Institutions like private equity and the VC industry now fulfill the role of clearing out inefficient businesses and fostering innovation, replacing the function of recessions.
• 📱 Despite the absence of recessions, innovation has continued, with major advancements in technology like the iPhone, large language models, and EVs.

Market Corrections in a Recession-Free World

• 🎢 Market corrections still occur, but without recessions, they primarily involve valuation corrections (multiples falling) rather than the deep, earnings-driven bear markets of the past.
• 📈 When multiples fall to a certain range (e.g., 16-17x), investors return to stocks, especially if earnings continue to grow, preventing prolonged bear markets.

The MAGA Movement and Shifting Tax Burdens

• ⚖️ The MAGA movement aims to rebalance returns from capital to labor, shifting the tax burden towards corporations rather than individuals.
• 📊 Corporate profit margins, which have grown significantly as a percentage of GDP, are seen as the primary source for government revenue to fund increasing liabilities like those for the aging boomer population.
• 🇺🇸 Policies like tariffs and a lack of corporate tax rate reduction indicate a move towards taxing corporations more, potentially leading to declining profit margins.

Challenges for US Markets and Opportunities for Europe

• 📉 A shift in taxation and potential capital controls could challenge the US market, leading to a reversal of capital flows that have long favored the US.
• 🇪🇺 Europe may see capital flowing back, potentially leading to currency appreciation, lower energy costs, and improved productivity, helping it recover from a prolonged crisis of confidence.

Short-Term Market Outlook

• ⚠️ A market correction is anticipated in July due to the market's strong rebound, rising yields, policy risks from tariffs, potential Fed surprises, and the impact of earnings season without buybacks.
• 📊 Tariffs may lead to positive inflation surprises in June, and companies might issue warnings about future earnings expectations.