When staring down the abyss of looming stagflation, a bond market rout, and a reset on the global economy… let’s try to pretend it’s all something else. Christine Legarde would have made a great French President. Of course it’s not Stagflation... it’s just... Well? What is it?

The debt crises that apparently threaten to engulf Paris and London are very, very different. Paris is in genuine financial and market trouble. London has a perception problem.

Both crises are rooted in political/fiscal miscalculations and the widening polarisation between political populism and conventional politics. The crisis in Paris is very real, but the one in London is largely driven by Doom-Scrolling financial misdirection of doubtful right-wing provenance, looking to snipe the centrist Labour govt.

Everyone knows Europe is finished. Over-regulation, bureaucracy, a demographic bust, dusty old industries and the prospect of slow lingering decline.. Nonsense. The Sun may shortly rise on new prospects and growth as geopolitics and new trade develops. Might be time for the great rotation back across The Pond.

Watch the bond markets! In bonds there is truth. The current political ructions across Europe highlight the fragility of Europe’s cobbled together bond markets. If they break, the outlook for markets will be… interesting (and not in a good way.)

It was once holy scripture that government bonds were the risk-free-rate from which all risks were priced. In the last decade markets have changed. The bond market is increasingly hollow and thin. The reality is few folk outside bonds pay attention – central banks set bond rates. Good or bad thing?

Despite the robust US economy, the market’s prime concern remains when and how quickly the Fed will ease interest rates. What if they don’t? We’re heading into a new normalised post GFC interest rate environment, and long-term higher rates will be a good thing!

The Fed is going soft, while the ECB and The Bank remain tough on rates and inflation. The market is watching the numbers, but the critical element is the need to normalise real interest rates to restore the functionality of the market economy.

Bond Markets are a wonderful thing to behold in full rally mode, but expectations of a swift return to lower rates depend on Central Banks playing ball, and nothing else changing. Experience shows things change quickly re inflation, rates and markets!

Nvidia confirms the AI everything bubble! FOMO means everyone will play catch up! There is a growing divergence likely as inflation, growth and interest rates spells deep trouble for Europe and the ECB, while the USA recovers and the UK muddles through.

It’s too easy to write off Europe to the multiple threats of recession, low-growth, energy and inflation, but it has previously surprised us by its’ resilience! How will it fare with potential energy dislocation, fiscal and monetary risks and Russian disinformation? Can the Energy war be won?