Inflation is officially back, baby !

GEOPOLITICS

Eastern Europe

No real change on the Ukraine-Russia front: Russia is still making slow but steady progress in the East of Ukraine, while Ukraine continues its strategy of isolated raids in the Kursk region.

Tensions are growing around natural gas in Eastern Europe as Ukraine stopped transit of Russian gas to Europe (which Slovakia prime minister Fico officially complained about), and Moldova stopped paying the Russian gas company Gazprom which then stopped deliveries.

Middle East?

The focus has now turned to the Middle East, now that Syria is split between winners: the US is building a new base in Aleppo, Israel invaded the south, and Russia has reached an agreement to keep its bases in Syria.

However, Russia is now building a major military base in Libya, near a gold mine and the Sudan-Chad border. Russia (and China) are reinforcing their influence in Africa for natural resources, as historical colonial powers like France are being expelled.

Now that the Syria lock is cleared, especially for the gas pipeline from Qatar to Europe through Syria and Turkey, Iran is next on the list.

This becomes critical for the West as a strategic relationship developed between Moscow and Tehran is increasing the likelihood that Iran will become a nuclear power sooner rather than later.

Asia

For New Year’s speech, China’s President Xi reiterated that "No one can stop China's reunification with Taiwan", emphasizing the inevitability of mainland China's reunification with the island. Contrary to the Western world with short election cycles, China’s non democratic system can play the long term game, and choose the right moment and opportunity.

ECONOMY

Following loss of access to cheap Russian energy, Germany has now officially faced three years without economic growth, which had not happened since WW2. Oops.

As the Fed cut rates, Treasury yields continue to soar: the Fed cut rates by 100 basis points this year, when the 10-year Treasury yield surged by 100 basis points since September. Inflation is officially back on the rise, with the Fed raising its PCE inflation forecast for 2025, and postponing its expectation to come down to the 2% target.

You had been warned.

Meanwhile, Chicago PMI plunged for December, with over half of respondents seeing new orders drop for the 1st time since June 2020 at the time of lock-downs.

The sentiment has risen with Trump's win, but conditions are deteriorating fast.

At the same time, the private sector employment is falling in the US, at a pace that never occurred outside of recessions, and is close to 1990s and 2001 recessions.

The government tried to cover it up with state and local government full-time jobs that have risen by? about 400,000 year-over-year, or twice as much as the pre-pandemic period.

The consumer side doesn’t look any better, with US credit card defaults jumping to the highest since 2010, and now being up over 50% year-over-year.

Additionally, the savings rate of the bottom third is now 0%, according to Moody’s.

In short, the economy is deteriorating on all accounts.

Friendly reminder: the stock market is loosely connected to the economy. The main driver is always the Fed policy (access to cheap money, or not), and bad news can be good news, good news, bad news, etc …

The stock market is also not a reflection of the situation but a consensus on anticipations.

China’s economy is also struggling, with industrial profits falling year-over-year in November for the 4th consecutive month. Profits saw double-digit declines in the 3 previous months, and industrial profits are down for the first 11 months of 2024. Despite a widespread stimulus, domestic demand remains low.

MARKETS

The leap from 2024 to 2025 was mixed on financial markets.

US Equities are getting more concentrated to the mega caps in Tech, , with the 10 largest stocks in the S&P 500 now representing 39.9% of the index's market cap (the top 3 stocks alone even reflect a record 21% of the index's market cap).

These top 10 stocks have accounted for 59% of the S&P 500’s gains since the October 2022 bottom, when the next 10 stocks only have contributed just 11%, and the remaining 480 stocks have contributed only 30%.

What is true at the US level is also true at a global level.

The US stock market's market cap has doubled in just 4.5 years. Comparatively, China, Hong Kong, and Europe markets combined are worth about 50% less than the US. The Mag7 stocks' market cap alone is larger than the European market.

Extreme concentration in markets, and stocks makes markets riskier, not safer, and performance of any index is not an indicator of risk.

For more market comments, come join us on the Croissant Files Live, every Saturday morning.

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