Happy New Year? Disruption and Disappointment Ahead
Blain’s Morning Porridge 6th Jan 2025 – Happy New Year? Disruption and Disappointment Ahead
“Propaganda should be popular, not intellectually pleasing. It is not the task of propaganda to discover intellectual truths.”
It’s clear 2025 will be a challenging year – there are plenty of issues to cause markets headaches, but opportunities in abundance. The primary problems may come from the ongoing politics of disruption and the likelihood electorates are going to remain profoundly disappointed.
A Guid and Prosperous New Year to one and all. “Lang May Yer Lum Reek” is the traditional Scots New Year greeting – wishing you prosperity in the form of a roaring fire causing your chimney (Lum) to pump out smoke.. ultimately destroying the planet.. but we didn’t know that back when we thought coal was the wonder fuel! The traditional New Year’s gift to one’s neighbours was a lump of the blackstuff!
What will be the Big Issues to Worry About in 2025?
The economic reality in 2025 will be the cost of energy and inflation. But the coming year might also be summed up in: “One man’s arrogant, woman-hating misogynist conman is another man’s freedom-fighter.” I guarantee Elon Musk will generate the most pixels in the social and media sphere. Social conflict is set to increase. Factor destabilisation into your market expectations. (I predicted 2025 will see the War on Woke formalised under Trump v2.) The New Year is less than a week old, but Musk has served clear notice of his intent for the year: I WILL BE AS DISRUPTIVE – DISAGREE WITH ME AT YOUR PERIL.
One almost feels sorry for Nigel Farage. He goes on the BBC’s Laura Doomsberg show on Sunday morning to appear as statesmanlike as he can. He is reasonable-ish, saying he doesn’t agree with everything Musk says, even that right-wing, conspiracy-peddling, uber-pr*ck Tommy Robinson is a bad-un who should be in Jail. By the end of the day Musk was demanding he be sacked as leader of Reform. (Farage owned 60% of Reform as recently as September, when he said he’d give up his majority stake in the party!)
Musk is putting out a daily tirade of invective across UK politics. No one is safe from the laser-like death-sweep of Musk’s “X”. Its destabilising and its distracting from the business of sorting the economy. Whatever we older folk think about Musk’s need for a moral compass the kids see him as the smartest man on the planet. This will end badly. A past master of the art once defined: “The essence of propaganda consists in winning people over to an idea so sincerely, so vitally, that in the end they succumb to it utterly and can never again escape from it.” It’s also a definition of a demagogue.
That’s the first lesson of 2025: Political Destabilisation will accelerate. This is going to be the way the year plays out. Expect more disruptive shocks. Much as I hate to write this – betting against Musk will probably be a mistake in such an environment. It will be “interesting” to see how Trump copes with it.
The second lesson is coming: It will be rising disappointment further fuelling unrest.
Last year the democratic world spun populist. 73 elections and in every single developed nation the incumbents were punished for inflation, falling living standards, and crashing state services. Populists won an increasing share of votes across the globe. They are feeding a message of fear to electorates – the urgent need to slash spending, cut taxes and ease rates to restore growth, while blaming outsiders. (It would be churlish to say populism is being funded by the wealthy to maintain their wealth – but that’s pretty much what it looks like. There is a massively complex argument to be had about what future politics should look like – but it’s a topic for future Porridges.)
Curiously, Economists aren’t too worried.
Economists see the world in numbers – not the concerns of individuals. They see modest increases in unemployment if energy prices and inflation trigger a downturn. They are missing the reality which is mounting pain and discontent across electorates from rents (forget buying a home) rising faster than incomes, and inflation impacting their spending choices. In a world where everyone is struggling, desperately trying to hold onto jobs in economies that, to a greater or lesser extent, seem headed for destruction from either downturn or conflict – the economists see a mild recession. They aint seeing the trees for the wood.
When is the tipping point? (Don’t believe me? Ask your kids what they think.)
There are many who believe the Second Coming of Donald J Trump will magically restore balance and prosperity to the US economy. They may be right – there will be positive effects. The USA will remain the strongest performing and likely most attractive investment destination, but reform of the economy will be slow and painful, and likely riven by increasing social tensions and polarisation. I can see dissention in the Republican Party being dealt with severely by Musk’s Dept “X” – any doubters will be purged. Ruthlessly.
In Europe, chaos looks a stronger possibility as the issues of political populism, debt, growth, recession and renewed inflation look likely to escalate.
Oh well, plenty to write about each morning then….
Aside from that Mrs Lincoln, how did your enjoy the play?
Of course, there is far more to worry about than just Politics….
Beware the consensus. Every single article I read over the holidays on the outlook for markets focused on the USA. There are 7.7 bln other people living on the planet, and while their economic weighted vote may be smaller – they still count.
Trump’s agenda will matter. He threats to seize the Canal Zone, buy Greenland, trigger trade wars, tariffs and mass deportations, means the World is paying attention. My Canadian chums weren’t laughing much when he offered them an Anschluss to become the 51st state. These may all be negotiating ploys – but they have a cumulative effect on perceptions of the USA’s soft power – which matters.
What will be some of the big themes this year?
Trump vs the Fed?
Trump would love a compliant Fed slashing US rates to boost the economy and weaken the dollar. Will it happen? Under Federal law, Trump can appoint a successor, but he can’t fire Powell. That leaves it to the Senate and House to approve a change in the law – which is unlikely given the degree to which Republican lawmakers have already shown the limits they will impose on Trump.
Weakening the credibility of the Fed would have major ramifications on the dollar and especially the Treasury market, but in the absence of any credible alternatives… how much would the MAGAfication of the Fed really set back the US economy?
Inflation, Central Banks and Rates?
The Morning Porridge has long warned that interest rates would be cut more slowly than the market anticipates for 3 reasons: i) Energy costs and sticky inflation, ii) global trade and supply chains frictions, and iii) Central Banks wishing to establish normalised interest rates to quell financial asset inflation (the major reason stocks still remain so highly valued.)
Inflation remains a threat, but how likely are sustained “shock” interest rate hikes of the scale and magnitude likely to trigger a deep global recession? Low unless it’s some kind of exogenous shock that totally disrupts global energy prices or a new pandemic-like event.
Global Stock Market crash?
Stock pickers remain certain the AI everything bubble will deliver. They believe ultra-high valuations are justified on lower interest rates and lower taxes. What if these are not delivered? Unlikely to trigger a crash, but maybe a slow down. It will probably require some kind of shock to trigger a full reversal.
European Crisis?
Europe is beset by multiple problems from political instability, chronic economic sclerosis, energy anorexia, to outright recession risks. The core issue remains a group of disparate economies giving up their financial sovereignty to adopt the Euro. It requires the ECB to underpin the sovereign-credit of non-financially sovereign nations (ie nations that no longer control the financial printing presses), without any political mandate. That was a recipe for disaster in 2011 as nations tried to game the system and remains so today – this time it will be France and Italy at the forefront of potential debt crisis.
China and Global Supply Chains?
The potential impact of a US/China trade war is generally assumed to mean good for the US and bad for China. What if it’s the other way round, or events conspire to see China – which has economic problems of its own – actually given a boost relative to the US? The economic reality is China remains critical for global supply chains – these are proving much slower to shift.
Political failure?
The UK increasingly looks to be snatching defeat from the jaws of victory after last year’s Labour election win. Nothing feels like its likely to improve. Bills are rising and services continue to cost more and decline. National confidence is shot. What might change?
Private Markets?
Private Capital Markets provide above average returns – but are notoriously illiquid. This is becoming a problem in Private Equity when a slowdown in sales of PE companies is now eating into the flow of money available to invest. Increasing funds are flowing into the private credit markets. However, the market is vulnerable to a liquidity event – which could come from anywhere and be triggered by something quite innocuous. Watch this space – as they say..
Global Climate?
Lest you missed it – global weather systems remain in turmoil. Warmer oceans are fuelling extreme weather patterns and chronic events, but are catching little attention in markets except in terms of rising insurance risks. Wet and warmer weather, more flooding and more fires. Anyone paying attention?
No need to panic. Yet. But be aware. 2025 – incidentally my 40th year in markets – is shaping up to be “interesting”….
Out of time and back to the day job…
Bill Blain
Author of The Morning Porridge