Why Recessions Aren’t What They Used to Be
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Hello listeners, Meryl Thumset-Webb here. Just wanted to remind you that if you're enjoying our weekly podcast, and I really hope you are, you'll probably also really enjoy my weekly newsletter for Bloomberg subscribers. It hits inboxes every Saturday. This past week, I wrote about why America's markets are losing their FOMO. If you have FOMO for the market at the moment, I'm pretty sure it's not for the US market. It's for one of several others. Check out the link in the show notes on how to subscribe to the newsletter. It

does mean signing up for a dot-com subscription, but I promise you it is worth it. You will also get access to John's money-distilled newsletter and informative and actionable stories from more than 2,700 journalists worldwide. Right, now on to this week's show.

Welcome to Meron Talks Money, the podcast in which people who know the markets explain the markets. I'm Meron Somerset Webb. This week, Vincent Deloitte, Director of Global Macro Strategy at Stonex Financial, joins us. Now, if you're a regular reader of Bloomberg, you're likely to have come across his name before.

He's often cited in newsletters written by John authors. And earlier this month, John Stepak dedicated an entire Money Distilled to Vincent's piece, looking at whether the global cancel culture movement has come for recessions. So we thought it'd be a good idea to get him on the show with us to talk through some of his research pieces and to hear what he is currently thinking about stock markets. Vincent.

Welcome to Merrin Took's Money. Thank you very much for having me. Very happy to be here. Okay. Now, there's so much to talk about, but I want to start with a piece you wrote recently that John wrote about, about how recessions have been cancelled. So many things have been cancelled recently, but you think that recessions themselves are no longer what they used to be. Will you talk us through that?

Well, I mean, part of it is just a statistical observation, really. If you look at the 19th century, we spent almost half of that century in recession.

And then the frequency of recession started to decline, especially after the Great Depression, when we had the New Deal. And progressively, we increased the arsenal that governments can deploy against recession with the triumph of Canadians' ideas, the addition of the second mandate to the Fed. And it seems like every recession, we build new tools to fight them. And that takes us all the way to the 80s, which were almost a recession-free decade. Same story for the 90s.

One big recession in 2009, but for the past 16 years, I mean, if we exclude COVID, which we can all agree was exceptional, we haven't had a recession in the past 16 years. So it does seem that my theory is at least empirically verified. As far as why that may be happening, I would suggest three main explanations. One is technology. We have moved from agriculture to industry, industry to services.

tangible asset to intangible assets. If you were to buy the NASDAQ index today, you'd pay a dollar and you'd get about three cents intangible assets. Tangible assets are things that you can touch, things like plant, things like machines, things that you have to finance.

and things that you have to depreciate over time. Well, we no longer have this physical economy. Intangible assets behave very differently and they remove a lot of that cyclicality. Then there is the policy explanation, as I was hinting. We have hyperactive policy, which seems

debtor mine to do everything it can to avoid recession, even if that means inflation. And then the third one, I'm sure we'll talk about it a bit more, is the explosion of fiscal spending, which means that the U.S. economy, at least, is in a constant state of fiscal stimulus. Okay. Can I ask what you might think is a very obvious question? Why is it that intangible assets are so much less cyclical than tangible?

Because they are a different breed. Quite often, they just arise spontaneously out of the business process. I mean, if you think about a network effect, you don't really have to pay. It's just more people use your platform and suddenly you become the biggest platform and that gives you a huge intangible asset. You didn't pay for that. It just happened. So you didn't have to take a loan for it.

You don't use it over time. If anything, instead of you have diseconomies of scale in economies, right? The bigger you get, the less efficient you become. It's almost the opposite with intangible assets. I mean, you can think also about brand, about name recognition, about a lot of IP. It just behaves differently from the hard stuff that we use to produce stuff with.

And in a way, you can think of an international division of labor where the U.S. keeps the intangible assets, in large part because we have better core, better IP, and then we outsource all the tangible stuff to China, to South Korea, to Germany. And in a way, we've kind of outsourced recessions to our trade partners. So effectively, these intangible assets are no longer hostage to a capital cycle.

That's absolutely correct. So that's the way it works. We let other people take the head of the capital cycle and Western economies who are very dependent on intangible assets, i.e. the U.S., effectively no longer have to worry about it. Fascinating. And then we have policymakers and the different things that they do. And then we have this idea of there being a sort of permanent stimulus from effectively the welfare state, entitlements, health care institutions.

The problem there, of course, is, and I get that, I completely see what you're saying, but it's not really sustainable, is it?

Over time, nothing is sustainable. If you think about, you know, a bicycle, a bicycle is always pulling. It's only because you keep adding momentum to it that it doesn't fall. I would argue the U.S. economy is in a similar situation. And yes, I agree that at some point there is a capacity issue, crowding out, debt crisis. We may be at the beginning of one, but

I think if we are running it in the world hegemon, at a time of high nominal growth, this process of constant stimulus leading to inflationary growth can last longer than people think. And it certainly has. I mean, look,

In the past five years, I've been on so many panels against so many distinguished economists who are so much smarter than me, who had already assigned 100% probability to recessions after the Fed started hiking great in 2022. Then in 2023, then we had the regional banking crisis. Last summer, we had the sound rule panic. There seems to be something that mainstream economists are missing here. And I think what they are missing is how long

this process can take. Doesn't mean that it's sustainable. In the long term, I would agree with you. But as John Maniacain said, in the long term, we're all dead. Yeah. So basically, we can expect it. If you're right, we can expect to see a very long period. We don't know how long, but a very long period of either no recessions or very mild recessions, followed by at some point, probably, possibly far out in the distant future, a catastrophic collapse of the state.

Correct, but I would stress that that collapse would happen by fire. You know, there are two ways you can die, right? You can die by ice or die by fire in an economy. And dying by ice is pretty much the story of the European Union for the past 20 years where, you know, the economy slows down.

inflation is below target, like a kind of Great Depression-like scenario. And then the death by fire is something that's more common in emerging markets where the government spends too much, inflation takes off, the economy accelerates, capital leaves the country, and you have a

a very different recession experience. I mean, in one case, it feels like, you know, slowly falling asleep as if you were, yeah, like dying from cold. In the other end, in the other one, it's kind of a frantic, manic recession where the economy overheats into a recession.

And then you would get an Argentina-style renewal at some point, but that's far off. There is one thing that I wanted to ask you about, and John and I will talk about how you need recession to clear things out. You need a recession for creative destruction and renewal, etc. But you argue in your paper that that's not really necessary because we have new institutions that take, or new organizations, should I say, that take the place of a recession to create renewal. Is that right?

Yeah, I mean, I'm a little uncomfortable with that argument because it's almost religious or moral, right? You can hear the Catholic schoolboy in that, oh, you need the pain, you need to atone for the sin, and it's only through the pain that you shall be redeemed. I mean, I think it's best to leave that to one's conscience. I think the idea is that here that recession would clear out inefficient businesses and favor innovative ones.

I would argue that we have a huge portion of our economy that's now dedicated to that. I mean, clearing out the carcasses is basically the job of private equity, right? I mean, they will go out and scout for air conditioning businesses that are run by boomers and take on some debt and buy them so they can put their clients on Salesforce and call that improved management. Then we have the VC industry, which constantly needs to justify fees and is constantly looking for the next big idea.

And I mean, I'm making fun of it, but empirically it has somewhat worked. I mean, I don't think innovation has slowed in the past 16 years. I mean, we had major, you know, from the iPhone in 2007 to a large language model to advancement in EVs, batteries, space. Despite the absence of recession, it seems that we are on the verge of a technological breakthrough.

OK, so let's take that. I mean, I think it's a very compelling argument. And you're right that empirically recessions do appear to have almost disappeared. So if there will be no recession, will there then be no market correction?

As we hear a lot about the only way that you will see a big market correction in the U.S. being as a result of a recession, and most people are churning out papers showing us how much markets fall in different types of recession. If that's not going to happen, does the U.S. market just go up forever?

It's not that good, Marion. I'm sorry. No, we already had market corrections despite the lack of recession. I mean, 2022. Oh, but I don't think we're really going to count that and that we're pretty much back where we were.

Well, OK, then maybe I mentioned it because I thought it was an interesting precedent in the sense that we had a large market correction affecting both stocks and bonds at the same time. I mean, if you look at total return of a 60-40 portfolio, the losses of 2022 was considerable because, OK, the stocks may have been down only 20 percent, but the bonds were also down. So in terms of the total dollar damage, it was almost as bad as 2008.

But it was also much shorter. Now, why was it much shorter? And as you mentioned, much shallower. I mean, we're basically back at an all-time high. I think it's because of that tail, that recessionary tail that's been removed. So if you think about a bear market, in the equity market, you're really accomplishing two things. The first thing that you're accomplishing is correcting for over-optimism. People are

People get too excited about the future, too excited about future growth, and they pay too high a multiple for stocks. So you need to knock that down. And then in a recessionary bear market, there's a second thing that kicks in, which is the economy does slow, EPS starts to fall. So the multiple drops, the earnings drop, there's an interaction effect that takes stock down from, you know, by sometimes 50%, like we had in 2008 and 2000. If I'm right and we don't have recessions, we only see the first part of

of this process, the valuation correction. The valuation correction typically takes multiple down by 20%. When that happens, if earnings are still growing, people are going back to stocks. So that leads me to this idea named after a famously wrong economist who in 1929 mentioned a permanently high plateau for valuation. I sometimes believe in that, that

We will see other corrections for sure. But once multiples fall into the 16, 17 range, people will go back and buy stock. So we won't have the very deep bear markets where multiple falls into the low teens as we had in 2008 and 2001.

OK, and they will go back into equities much faster than they would have otherwise, because the lack of a real recession means that earnings per share either stay static or continue to rise. So the numbers that would previously have said to people, Jesus needs to be a lot cheaper before I'm going back in, simply won't be there.

Absolutely correct. The earnings are going to grow by about 6% a year, which is way below the post-World War II average, by the way. And you compare that to bond yields. I mean, OK, you have bonds that yield around 4.4% in the 10-year today. Let's say we have a big correction that brings it back down to 4%. So you have one instrument that gives you 4% fixed, has a lot of duration risk. That's bonds.

And then you have another interest instrument. If we're looking at a 18 P that, that converts into a 4.5% earnings yield and is growing at one at 6%. I mean, you are going back into stocks because you no longer have the fear that you have these catastrophe declines in earnings like we had in 2009.

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Okay, I want to stick with this for a minute, just because there is another piece that you've written about the MAGA war on the corporation, where you talk about how one of the probably so far misunderstood parts of the MAGA revolution is to be a rebalancing of returns to capital and returns to labor. So we would expect that kind of

change, and I'm going to ask you to explain what you mean by that in a minute, but that would lead surely to falling earnings, which would mean that even if valuation stayed within this high plateau range that you suggest, you could still get a long-term bear market. Yeah, or at least let me walk through the idea. Yeah, if you could unwind that for me, that would be great.

In general, in the U.S., in the West, in general, we have a funding crisis. We have a lot of boomers. They voted themselves very nice benefits, and they are aging, and they are getting to the period of life where you spend most of your healthcare expenses. So someone is going to have to pay for it. We don't have the private savings to pay for it. So one way or another is going to have

It's going to have to come from the government budget. And you go back to the government budget, you can inflate some of that. I believe we are doing that. You can increase debt capacity. But at some point, I think you're going to have to tax some of it. The question is, who do we tax? And the answer is not foreigners.

Trump came in and basically promised that something that really countervenes the concept of the state, that somehow the U.S. would be able to tax foreigners. And that was a beautiful story, a story that got him elected in one way, because it meant that we would not have to tax labor or capital. We could simply tax foreigners.

The reality is that we don't tax foreigners. I mean, you know, if you are in the UK, I cannot send an IRS agent to take your money away from you. Nor can I force the Bank of England to swap its currency reserves for a bond that doesn't pay interest. That was another idea that was thought a few months back.

So now we are back to square one. We have this increase in liability and government expense, and we really only have two ways we can take the money from because we don't tax sales in the US. So we can either take it from corporate income or individual income. That is the grand sum total of all income that there is in the US. It's either earned by corporations or individual. And my impression is that Trump and then the MAGA movement is protecting income.

individual income. We are seeing this with the big, beautiful bill. We have so many exemptions, right? We have the TCGIA, the tax cut of 2017 that are extended. We have no tax on tips, no tax on social security, no tax on overtime, extension of the state and local deduction. All that is basically to protect individual income from the shock of tariffs.

On the other side, we have some level of tariffs, which are taxed on corporations. Corporations are the ones that pay tariffs. I mean, again, it's not foreigners. It's the importers, so it's a tax on corporate income. And we also do not have any reduction in the corporate income tax rate. So if we look at the burden of taxation in the U.S., it's falling more on corporations, less on labor,

And that means that over time, profit margins are going to decline. Now, for the first part of your question, will that lead to falling earnings?

The quick answer is I don't know. I am somewhat hoping that we can do it in what Ray Dalio would call a beautiful deleveraging way, where what happens is nominal growth is very high, so the pie is growing so fast that we can reduce the share of capital without reducing its absolute number. In other words...

Nominal GDP grows at 7-8%, which is where we've been since COVID, and maybe EPS grows at 3-4%. So over time, we are rebalancing from capital to labor without necessarily causing a contraction in EPS.

OK. I mean, but the whole thing makes sense, the idea that tax burden should shift towards corporations to a degree. One of the numbers that you quote that John and I have talked about a lot in the past is this idea that profits are an idea. Fact that profits account for much more GDP than they have over the long term. So 10.6 percent of GDP at the moment in the US accounted for by profits. Long term average is more like 6 percent. So you'd be looking for some kind of normalization there.

Yeah, it's, I forgot, I think it was a famous American bank robber who was asked, you know, why do you rob banks? And his answer, well, that's because that's where the money is. If I'm the U.S. government and I'm looking for money, I'm going to take it where it is. And the money in the U.S. is not in the bottom 99% of the income distribution. The money is in corporate margins, which, as you pointed out, have exploded since the mid-90s. So it

only makes sense that we are seeing this kind of political pendulum swing away from the big ideas of the 90s, of Blairism, of Clintonism, of, okay, we're going to tax labor and we're going to be nice to capital because capital can move.

And we had basically four years of that where we reduced corporate income tax rate. We added all these exemptions, the effective tax rate falling even below the nominal tax rate. And at the same time, we made our governments more reliant either on debt issuance or on taxing income. This movement actually ended in the U.S. in 2018 with Trump cutting taxes on income and starting to raise revenue on corporations with the tariffs. And Trump, too, I think is even

a clearer move in that direction. And if I may make some more forecast, I suspect that the MAGA movement, as Trump kind of goes away, will move further into that direction under the impulse of people like J.D. Vance, like Miller, like Bannon, like Tucker Carlson, where you see very clearly that this is between a fight between capital labor. I mean, you can almost take your old Karl Marx book out there and then see this play out in real time in the Republican Party.

Interesting. You know, when we use that joke about UK finances, why did you rob a bank? Because that's where the money is. We use it about pensions. Why are you going for pensions? Because that's where the money is. That's where all the spare capital is in the UK. Some might not call it spare, but there you go. I wanted to just stick with the big, beautiful BILF.

for a minute because one of the things you say and I've written about recently is this idea that it may impose taxes on foreigners. You know, we recently had this talk about taxes on remittances and then there is an idea that foreign companies and individuals could be taxed differently inside the U.S. with capital that they earn inside the U.S., which could end the flow of capital coming into the U.S. and in turn has been one of the big drivers of the U.S. rally.

Yeah, I think that is indeed a key provision in the bill. I think it was unique. So there are two parts. One you mentioned is the remittances, which would be a significant hit for, you know, in small Central American economies like Honduras, Nicaragua, even Mexico. And then the second part is, I think it's part of the trade negotiation. I mean, the EU had threatened to put a digital service tax on the tech platforms and

And basically Trump wanted to codify that so that it can't be part of the negotiation and said, no, I'm going to have in my bill, I'm going to reserve the right to tax the dividend and the interest and the coupon payments to foreigners who are taxing us. So yeah, it's an extraordinary change in the philosophy of taxation. I mean, there was this idea that, you know, we treat all capital holders the same. I mean, that was part of that kind of globalization. We want to make

ourselves open and attractive to the rest of the world. And taxing capital doesn't work because capital can move. Well, we are walking the way back. I think it's highly significant. And I think it would accelerate what we are seeing today, which is the repatriation of foreign capital from Europe, from Japan, from South Korea, which are massive investors in the U.S. stock market and are now bringing their money back home because they are not treated fairly in the U.S.

And that means a reversal of flows that have only gone one direction for a long time. I mean, yeah, let me just add something. I think one thing that probably the Trump crowd did not quite understand, or maybe they understood, they didn't say they did, is that

The trade and the capital account balances are a simple mirror of one another. If I have a trade deficit, I have a capital account surplus and vice versa. It's just the way accounting works. I mean, if you consume more than you earn, than you produce, somehow you must be financing this. Either you sell assets or you borrow, but you have a surplus in the capital account. So if we are going to correct, quote unquote, trade balances, we need to correct capital account balances. And the age of

protectionism on the trade side means that on the capital side, we have what Russell Napier called the age of national capitalism. We're going to see barriers to the movement of capital. We are going to see different treatment based on the nationality of the capital holder, and we are going to see financial repression. And you can see all these ideas slowly making their way in the U.S. discourse because, again, we're trying to close the trade. We're going to have to close the capital at the same time.

Okay. So that does suggest that short term, at least, things will be challenging for the U.S. market. I believe so. I'm doing the thing that one should never do on a public podcast, which is a verifiable short term market call. So in the research, we warn our client that we think the market is going to crack in July. Why did I pick July?

One, it's because the market, as you pointed out, has rebounded so much. We're basically back at a new all-time high. We have yields starting to get to the point where they start to hurt the equity market. I mean, I would say 4.5%, 4.6% on the 10-year is a pain point. We could be there in a couple of weeks.

And July, of course, we have massive policy risk with the end of the 90-day pause for tariffs. I'm very skeptical that we can negotiate complex deals with 200 countries in less than two weeks. I'm also very skeptical that Trump's great friend Xi Jinping is really interested in a big, beautiful deal. So we have policy risk on the tariffs. We'll have a very important Fed meeting where there's still some expectations of cuts or certainly expectations of forward guidance toward that cut.

which we may not get. I also worry that the positive inflation surprise that we had last month will be reversed in June as we see the impact of tariffs and prices. The tariffs really did not hit until the end of May when they were actually paid, so that's why they were not in the May number, but they may show up in the June number.

And then I also worry that this will be earnings season. So companies, I think, will still have decent earnings, but they'll start to get lower. We have very high expectation for the second half of the year. So they might start warning that this is not going to be met. And then finally, as companies report earnings, they are not allowed to engage in buybacks. So these first two weeks of July, when most companies are in the process of reporting, we won't have this buyback bid, which is, I think, what saved the market in April of 2025.

Fascinating. Thank you. One last question before I let you go. Do you think that under these circumstances, there is a chance of things defrosting a little in Europe? We talked about Europe dying of ice, but there do seem to be significant changes. And if we see flows of capital leaving the US and heading towards Europe, sort of the obvious place for the money to go. Might Europe defrost just a little?

I believe so. I mean, against our own will and our better judgment, but we are somewhat

forced into making the right policy moves finally by the Trump administration. I mean, one thing that I find fascinating in Europe is the lack of investment. If you look at the trend in GDP between Germany and the US, it starts to diverge in 2018, where the US really takes off and Germany starts to stagnate. Now, you can talk about the pipelines, the energy policy, digital revolution, China, all the social things that we know about. But

One thing that's very clear is different trajectories in deficits. I mean, since then, the U.S. deficit to GDP has averaged 5%. Germany, we've been under 1%. If we were just to add back this deficit to German growth,

and assume a 40% pass-through, which is tiny, 40% fiscal multiplier means the dollar of public spending increases by only 40 cents, which I think is way too low, German GDP would have caught up with U.S. GDP. So we have underinvested in ourselves for many, many years, and Trump is basically forcing us to invest back at home by telling us that our money is no good in the U.S. So just bringing that money back means that the currency appreciates,

Energy costs fall, productivity picks up, yield curves steepen. And yeah, it's a pretty good outlook for, at least relatively speaking, for Europe to cash up on what has been a 20-year crisis of confidence. Excellent. Thank you. Happy days for Europe. You're traveling at the moment, Vincent, I know. What are you reading on the plane?

Oh, I'm going to have to give you the honest answer here, which is not what you expect. I am reading How to Change Your Mind, a book about the spread of psychedelics in the U.S. in the 60s and early 90s. And it's a fascinating read, but it's not how I produce economic research. I keep the two activities separate. Thank you very much.

Thanks for listening to this week's Merion Talks Money. If you like our show, rate, review and subscribe wherever you listen to podcasts. And keep sending questions or comments to merionmoney at bloomberg.net. You can also follow me and John on Twitter or X. I'm at merionosw and John is john underscore steppeck. This episode was hosted by me, Merion Somerset Webb. It was produced by Sam Asadi and Moses Andam. Sound design by Blake Maples. And of course, very special thanks to Vincent Deluat.

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