"Manufacturing recession"? Trump and Bessent have almost "revealed their cards," the key next step is: will the U.S. stock market drop first, or will Congress and the Federal Reserve make concessions first?

Trump ignites recession fears, and the U.S. stock market is undergoing a "thrilling" market reassessment.

Overnight, U.S. stocks plummeted, with the Nasdaq dropping 4%, marking the largest single-day decline since September 2022; the S&P 500 index fell 2.69%, the worst single-day performance since December 18, 2024; the Dow Jones Industrial Average closed down 2.08%.

Compared to Trump 1.0, Trump 2.0 is playing out a completely opposite script. The market is beginning to realize that allowing a recession in the U.S. is something Trump must do.

Nomura analysis points out that the U.S. economy is experiencing an artificially induced recession. The problem lies in the time lag between the "pain" required in the first phase (the "withdrawal period" as described by Bessent, or the "transition period" as Trump calls it) and the "benefits" brought to the market in the second phase (massive deregulation, tax cuts, and lowering interest rates/Federal Reserve rate cuts).

To regain market confidence in the future, the Trump administration needs to find a way to shorten the timeline and bring forward the "benefits" of the second phase, shifting negative sentiment from current difficulties to the support needed by the private sector to help address these challenges. However, achieving this will face significant challenges, especially in garnering enough support to pass continuing resolution bills (to ensure government operations) and subsequently complete budget reconciliation, which will be a daunting struggle.

A Daunting Struggle

Nomura Securities strategist Charlie McElligott points out that the U.S. economy is undergoing a noticeable "phase shift," which will bring significant pain.

He believes that the policy path of the Trump administration is not merely traditional fiscal tightening but a deliberately engineered "Engineered Recession," actively creating economic downturns to eliminate the factors overly reliant on government stimulus in the market and readjust the policy framework.

McElligott emphasizes that the key to this strategy lies in the policy direction recently revealed by Treasury Secretary Scott Bessent in his speech at the Economic Club of New York, which includes:

Transitioning from government-driven growth to private sector stimulation. The Trump administration aims to reduce direct government intervention in the economy by cutting government spending, lowering taxes, and deregulating, encouraging private capital to take on more responsibility for economic growth.

Accelerating the "reset" of international trade patterns. The government is pushing for a rebalancing of global trade, aiming to weaken the structural dependencies brought by globalization and restore the competitiveness of U.S. manufacturing. In this process, tariff policies will be a primary tool, although it may bring short-term inflationary pressuresWeakening market bubbles through "fiscal contraction." The Trump administration plans to reduce excessive market stimulation by cutting government deficit spending and utilizing the "Negative Wealth Effect," which involves letting asset prices fall to curb speculation and excessive consumption.

McElligott further points out that this deliberately induced growth drag and negative wealth effect, known as the "artificially induced recession" theory, will lead to a deflationary shock, followed by the second phase of "phase transition":

With inflationary pressures easing, the Federal Reserve will have room to cut interest rates, lowering the cost of capital and stimulating the private sector. Subsequently, tax cuts and massive deregulation will follow.

However, Nomura notes that the issue lies in the lag time between the "pain" required in the first phase and the "benefits" favorable to the market in the second phase (massive deregulation, tax cuts, lower interest rates/Fed rate cuts):

In the current era of severe debt issues, due to the long-term reliance of governments and central banks on deficit spending, they have fallen into a "moral hazard" dilemma, which is an over-reliance on this method to drive the economy, while society's tolerance for pain is decreasing.

Therefore, the question is: Can voters, politicians, and central banks endure the consequences of this carefully orchestrated "economic rebalancing" process, or will they compromise in the face of greater economic pain, ultimately returning to that unsustainable deficit spending model?

The final outcome depends on whether the Trump administration can quickly trigger a deflationary shock through the dual blow brought by "Controlled Demolition"—that is, slowing economic growth and causing a negative wealth effect—thus creating conditions for future economic stimulus measures. If this process is not swift enough, the market may adjust itself, finding a "clearing level," at which point the so-called "Trump put option" will become worthless.

Financial blog ZeroHedge points out that the current economic situation indicates that their judgment from a month ago was correct. Although Trump and Bessent may not actively push the U.S. economy into recession, they do not reject such a scenario, especially considering the upcoming midterm elections. They still have time to blame the economic downturn on the Biden administration and its massive debt accumulation, which was a key factor supporting the economy previously.

Additionally, ZeroHedge believes that once the economy and market undergo adjustments, Congress may have to pass large-scale fiscal stimulus to respond to the recession. In this context, the economy and market will subsequently rebound and continue to improve until the midterm elections in November 2026. This trend will help consolidate the Republican political advantage, although there may be some degree of economic pain in the short term