The Recession Has Already Started | George Robertson

Key Concepts

• Recession: A significant, widespread, and prolonged downturn in economic activity.
• Fiscal Tightening: A reduction in government spending or an increase in taxes, which reduces aggregate demand.
• Monetary Impulse: The impact of central bank actions (like interest rate changes or quantitative easing/tightening) on the money supply and credit conditions.
• Flow of Funds: A system of accounts that tracks the flow of money and credit between different sectors of the economy.
• Tariffs: Taxes imposed on imported goods, which increase the cost for importers.
• Unitary Executive Theory: A theory of American constitutional law that holds that the President possesses the power to control the entire executive branch.
• Corporate Profits: The earnings of corporations after all expenses, including taxes and inventory adjustments.
• NIPA Tables (National Income and Product Accounts): A set of accounts that measure the economic activity of a country, including GDP.
• Reverse Repo Facility (RRP): A tool used by the Federal Reserve to manage liquidity in the financial system by selling securities with an agreement to repurchase them later.

Summary

This discussion, featuring George Robertson of The Monetary Frontier, presents a strong bearish outlook on the current economic situation, arguing that the US is already in a recession due to significant fiscal tightening, primarily driven by tariffs. Robertson emphasizes a "flow of funds" approach to economic analysis, asserting that the Federal Reserve's impact on the economy has been minimal since 2014-2015, with fiscal policy being the dominant driver.

The Shift from Fiscal Impulse to Fiscal Tightening

Robertson contrasts the previous regime, characterized by a strong fiscal impulse that supported GDP growth and prevented a recession, with the current environment. He highlights that the Federal Reserve's actions have been largely a "no-show" in terms of significant impact on the flow of funds, especially after the 2008 Global Financial Crisis (GFC) and even during the COVID-19 pandemic, where the Fed's contribution was relatively modest compared to the overall economy's size.

The core of Robertson's argument for a recession lies in the dramatic shift towards fiscal tightening. He identifies President Trump's policies as the primary catalyst for this tightening. While Trump's rhetoric focused on a "big beautiful budget" and tax cuts, Robertson contends that Trump has, in fact, implemented more fiscal tightening in a shorter period than most presidents historically.

Tariffs as a Fiscal Tightening Mechanism

A central piece of this fiscal tightening, according to Robertson, is the imposition of tariffs. He unequivocally states that tariffs are a tax paid by the importer, not by the exporting country or solely by corporations. He argues that the macroeconomic impact of tariffs is a direct fiscal tightening due to a greatly increased tax bill. Robertson estimates that approximately 80% of this tariff tax is borne by corporations, leading to a significant hit to their earnings. He cites Ford's projected billion-dollar earnings hit as an example.

Robertson dismisses the debate over who ultimately pays tariffs, emphasizing that the "macroeconomic impact" is a tightening of the economy because it represents an increased tax burden. He calculates that tariffs have already increased the corporate tax bill by an estimated $200 billion, with projections reaching $300 billion. This is not revenue for the government in a way that stimulates the economy; it is a tax that tightens fiscal conditions.

Data-Driven Recession Call

Robertson presents data from the daily Treasury statement to support his recession call. He shows a sharp decline in the combined monetary and fiscal impulse as a percentage of GDP, falling from approximately 5-6% to 2% in a matter of months. This represents a nominal GDP drop of four percentage points, which he describes as "falling off a cliff." He believes this data indicates that the recession likely began in the third quarter of 2025, a view he expects the National Bureau of Economic Research (NBER) to eventually confirm.

He specifically points to the decline in the "monetary impulse rolling annual cumulative" and the "fiscal impulse rolling annual cumulative" as evidence. While the Federal Reserve's contribution has been minimal, the fiscal side, particularly due to tariffs, has created a significant drain.

Impact on Corporate Profits and Equities

Robertson's analysis extends to corporate profits, which he argues have already hit a wall and are declining, even before fully accounting for the impact of tariffs. He presents data showing that corporate profits, after taxes and inventory adjustments, have stagnated during the Trump era and are projected to drop significantly when tariffs are factored in. He estimates a potential 10% drop in corporate profits in the third quarter due to tariffs.

This decline in corporate profits, he argues, is not being reflected in equity markets. He shows a chart of the S&P 500 adjusted for tariffs, where corporate profits have taken a dive while the S&P 500 has continued to rise. He concludes that the S&P 500's expansion over the past six months is not justified by corporate profits, especially when adjusted for tariffs, leading him to state that "the wheels have come off."

Market Disconnect and Potential Catalysts

Robertson acknowledges the difficulty of trading this bearish view, noting that markets have been largely ignoring the data, similar to the pre-pandemic melt-up in February 2020. He attributes this to market leadership being driven by sentiment and technical indicators rather than fundamental flow of funds.

He suggests that the catalyst for a market realization and subsequent downturn will likely be an event related to the Supreme Court's rulings on President Trump's executive actions. Robertson believes Trump is attempting to establish a "unitary executive," which would grant him broad powers to act unilaterally, including imposing tariffs without congressional consultation. He anticipates the Supreme Court will rule against these actions, potentially leading to a constitutional crisis. This event, he believes, will force a re-evaluation of the market's current optimism.

Investment Strategy and Conclusion

Robertson's personal trading strategy has involved using put options, though he admits to being "steamrolled" by market dynamics and the actions of entities like Citadel, which he believes manipulate option markets through dynamic hedging. He has since shifted to longer-tenor options and is awaiting a catalyst event.

His ultimate conclusion is stark: "The door is already shut. And I would say even to be a little abrasive that you're pretty foolish to be long equity right now." He emphasizes that the economic downturn and the decline in corporate profits have already occurred, and the market's current optimism is disconnected from this reality.