Blain’s Morning Porridge – Dec 16th 2024: What have we learnt in 2024 and what have we got to look forward to in 2025?
‘..but instead it just kept on raining.. a veil of tears for the virgin birth.”
Politics was an overarching theme in 2024 – and, regrettably, will remain so in 2025 as global investors figure out likely policy action by central banks and the growth outlook for 2025. “This time it’s different” (TTID) and FOMO remain the most malign forces acting on asset prices, but is a new full blown European Sov Debt Crisis also on the cards?
This will be the last full week of market activity for 2024, but as the year wends towards its weary close – it doesn’t feel that markets are slowing. There is still plenty of up, down and sideways activity, and much to think about in terms of how 2025 plays out. While everyone is watching US markets, there is plenty to worry about elsewhere. (The Porridge will be “occasional” between Dec 23-Jan 3rd.)
This week we have an expected rate cut in the US and a hold in the UK. The market mood is split: On one hand there is fervid speculation on the never-ending upside for the US markets. On the other, nothing but doom and gloom for Europe and ongoing doubt on China. Neither side of these arguments will ever be 100% correct. (And yes, there is far more to global markets than just Europe or ‘Merica!)
One overarching market theme of 2024 was Politics – how incumbent governments were punished at the ballot box for the heinous crime of inflation. Inflation and growth will be the key focus in the coming year. How governments and central banks will respond in terms of politics and policy is the point for 2025 markets. If you expect them to make mistakes, and then you won’t be disappointed when they inevitably do!
2025 will be a lighter year in terms of elections, but don’t underestimate ongoing political volatility. We’ve seen six different iterations/themes within politics this year that are worth noting for markets – they hint where the future flashpoints will stem from:
- The upside market rally following Donald Trump’s win on November 4th has been spectacular. The market is rationalising how Trump V.2 will be a period of political and economic sanity. No one expects him to deliver on the threats – tariffs, immigrant expulsions and redefining alliances, are all negotiating tactics.
- The Emergence of Elon Musk, the world’s richest man, parlaying his wealth into political influence at Trump’s side, is a fascinating development, demonstrating the power of influence and money. I suspect we barely understand just how significant the power of wealth (and Musk’s own personal social media loudspeaker) may become.
- The UK provided an object lesson in snatching defeat from the jaw of victory. After winning an impressive majority Sir Keir Starmer’s new team utterly misjudged the mood. No one cares how bad the Tories were – the electorate just wants fixes. Labour have proved politically courageous (making tough calls), but overly dour, talking down the economy to such an extent recession feels nailed on. Their dismal political performance has given opposition parties platforms from which to effectively snipe from, but real issue in the UK is how strong and disruptive Nigel Farage’s populist Reform party could become as Labour fails to deliver any sense of national feel-good.
- Populism is not about Right vs Left: Trump’s Republican party is not right wing – it combines a melange of populist policies of left and right. France is being undermined by a diametrically opposed axis of the Far Right and Far Left who want the same things: higher benefits, higher wages and lower taxes – essentially undeliverable. The UK Conservatives are terrified as they see Reform absolutely burying traditional “conservative” values (such as remaining in the 1950s for ever). What divides populist parties is the convenient themes like immigration for the right, or “social justice” by the left. (Immigration works as a theme because so many voters feel threatened, whereas themes social justice themes have a limited appeal outside those immediately affected.)
- Polarised political populism leaves Germany and France ungoverned, even as debt concerns about France and Italy magnify and recession looks nailed on. The ECB is responding to vacuum at the heart of Europe by doing all it knows it can do – easing rates and hoping the stalled European economy responds. Hope is never a good strategy.
- Politics applies even in authoritarian states. There are signs of internal political dissent even in China, where the media have spotted the slew of removals from the top echelons of the PLA for graft and corruption. That may hint the lid is being kept tight on rising social dissent among workers. How will China’s CCP maintain its Iron Rice Bowl compact with the workers by delivering prosperity if the economy continues to stall?
Expect to see all these themes, and more, develop through 2025…
The market that worries me most is Europe. There is a rising expectation last week’s ECB ease heralds an even swifter move to easier rates as it tries to defibrillate the stalled European economy while avoiding a new Sov Debt Crisis. When last the ECB tried QE the economy barely shrugged between 2012-22 – and the embedded problems at the heart of Europe simply deepened. It won’t suddenly boom this time either.
Europe’s ailing economy will likely continue to run slow to Global trends. Inflation looks likely to remain sticky, and well above 2%. Zero real yields in Europe at a time when France and Italy’s increasing public debt woes will be under massive market scrutiny looks unsustainable, and could trigger a new debt crisis – especially if the ECB is unable to backstop the rising concerns with new buy-back programmes , which will require political alignment between EU member states.
While everyone is focused on France as the new poster child of Euro-Sovereign Bond Crisis, I can guarantee market commentators will be looking to see which other nations might also be in trouble. Sovereign Bond Crises quickly assume a life of their own…. I expect to see debt analysts re-run all the data on the debt loads of other European states, European bank exposures to that quantum, and just how vulnerable Europe could be a stag-flationary crisis! All it may take to precipitate a new crisis is one well asked question. Like: why should the rest of Europe assume any responsibility for French debt?
In the UK- what is there left to say? The earnest new government has painted massive milestone targets on its forehead – which it will most likely miss and ensure ongoing political disruption, despite its massive majority. If Elon Musk delivers on the rumours to fund Farage’s Reform party to the tune of $100mm (which he can do… X UK may have declared less than $3.9mm profits last year, but there in nothing to stop it making such a donation!), then expect that to dominate the political debate next year. My guess is Musk might do it – just to to see what happens and flex his tweekers. (Meanwhile, the UK wages will remain low, housing scarcity will remain unfixed, firms will continue to list elsewhere, and London will get all the attention…)
The US is going to be “interesting”! It’s still in a risk-on phase – but note how companies that “merely” deliver consensus results get spanked by the market. Investors are looking to invest in exceptionalism, and believe the US is poised on it.. hence the insatiable excitement around AI, Nvidia and the rising pushback on stocks that don’t seem to be leading the discussion or matching the narrative of Trump recovery.
The contrarian view is that the market is massively over-speculating on AI and ongoing upside. They accept AI is another paradigm shift – but let’s find the companies set to directly make it happen and profit from it, rather than trying to project the upside onto the MegaTechCaps that dominate the market. (Who are the guys who have the money to buy the promising new firms.)
One question I really don’t understand is the fantabulous fortunes being made in crypto, meme-coins, and bitcoin. This morning Bitcoin is up at $106K. Its all on the back of the upside the new Crypto-favourable Trump administration has promised – but, what will that actually create? My problem with crypto is the use case – what can crypto do better that isn’t already done? Sure there are aspects like tokenisation and fractional overership of real world assets, and how these may open new investment opportunities, but how do these actually create such speculative value. How will “deregulation” of Crypto suddenly the create a real crypto paradigm shift?
Call me a sceptic, but the creation of SPACS didn’t create value… NFTs proved a short-term speculative frenzy. I expect the Crypto rally will continue to roll, fuelled by flows on the basis “I don’t know what or where it leads, but I better invest in case it does?”. As I’ve said before… FOMO and This Time Its Different are dangerous investment drivers. Just answer me the simple question: how will deregulating crypto create value?
The second issue that amuses me is where all the wealth that’s been created in crypto-wallets is going. For every crypto-nerd who seen their wallets triple in value this year, there must be matching losses? If your crypto wallet is showing six-digit value in your DOGE and similar holdings, does that make you wealthy? No. Not until you sell them and have real currency – which is only possible as long as there is greater fool to buy.
My advice is not to wait. Sell now before everyone else starts to question what they are really worth.
Out of time, and back to the day job..
Bill Blain
Author, Blain’s Morning Porridge
Windshift Capital
www.windshift.capital
