Newsletter - 2025 Predictions
Max Rudolph
Rudolph Financial Consulting, Sr ERM Actuary at ARM, adjunct faculty at Creighton University and University of Nebraska. No retail clients. Podcast - Crossing Thin Ice
My name is Max Rudolph. My interests are the interplay of economics with investing and enterprise risk management. I have also studied topics like climate change, pandemics, economic growth and demographics. I am an actuary and value investor focused on individual stock selection and value investing techniques, challenged for many years by the massive subsidization government has provided to the markets.
I contribute to a podcast and other CE under the Crossing Thin Ice banner for Actuarial Risk Management. I live in Omaha so have followed Warren Buffett for over 40 years. I believe you can manage risk and return within a growing economic pie, that win-win with customers should be the goal. ?
I have a history of anticipating material risks long before they appear, using experience and a respect for history and trends to provide foresight. In 1999 it was an essay about falling interest rates. In 2004 I first wrote about pandemics and their likely shocks to the economy. In 2005 I expressed concern about RMBS securities and deferred annuities. In 2015 interest rate scenarios (both directions) were a concern, leading to a 2019 discussion of low economic growth scenarios and one in 2023 about deteriorating demographics and the impact on growth. I’m currently looking at regime changes and what causes them, economic and geopolitical cycles, climate change, and threat multipliers due to emerging risks.
Each January I post these predictions. Treat them as scenarios that you would use to build resilience and reduce fragility. Late in the year I review the results.
Disclosure - please remember that these predictions are for fun and to encourage deeper thinking across topics and their interactions, over long time horizons where mean reversion and trends have time to play out. If I really knew what was going to happen, I would not share that information with you! My writing is meant to be educational and thought provoking. It does not constitute investment advice. You must do your own research to make personal investment and risk decisions, considering your unique financial circumstances, and not hold others (especially me) responsible for your own financial planning or lack thereof. There are lots of excellent fee-based financial planners who would be happy to help you. If you don’t accept these conditions, you should stop reading now. Keep in mind that this is NOT investment advice. For those still with me, Enjoy!
Predictions for events tied to the next few years
Risk managers should consider activities with unanticipated consequences – learn about higher order thinking and complex adaptive systems. The future will not trend linearly from the past as these risks interact with each other.
You can find these topics throughout this essay, but here are my top concerns today. Many of these will remain for at least the next four years of the presidential cycle. I expect that some will have material impact on our lives and the economy.
?I continue to see similarities today with the late 1930s, when isolationist policies were last popular. Republicans hold the presidency, House and Senate, with the House margin very slim. Will Trump actively remain in the office for all four years or will he check out and spend his time in Florida? Can you lead without empathy? The lack of experience in the new administration makes instability and unintended consequences more likely. Attempts to control media is a red flag, especially when a “big lie” is being pushed by government. Potential tariffs and crackdowns on working immigrants create inflationary pressures, especially relating to food and housing. Isolationist tendencies mean trade is more risky and economic growth slows or declines.
Potential pandemics abound with H5N1 and Ebola type diseases active in Africa. Will Trump close down the pandemic preparedness office (again)? Long COVID is a big concern. Vaccine avoidance led to avoidable deaths during COVID and now measles and other vaccines are being challenged (even polio!). Scientists are the key to solutions and should be encouraged to search.
Extreme weather events occur nearly every day. Most are made worse by climate change and voters won’t allow money to mitigate proactively. Wars, permafrost and albedo feedback loops are creating a warmer planet with changed ecosystems and more acidic oceans. Continued warming is likely as energy usage increases due to economic growth, digital coin mining and artificial intelligence. Climate change also creates threat multipliers with food insecurity, freshwater scarcity and regional conflicts.
Inflation may be reaccelerating and unemployment rising. Stagflation could be in the cards soon as growth slows. Why Treasury didn’t sell long bonds when rates were near zero is not clear. I’ll be watching the velocity of money metric for signs of accelerating inflation. ?
High levels of government debt and increasing defaults are likely to dominate financial news cycles over the next several years. Historically we have seen debt increase during periods of war and emergencies, but then reduced during times of stability and growth. This has changed over the last 25 years. Politicians have implemented Modern Monetary Theory but ignored the constraint to balance budgets in order to avoid inflation. Those who avoid leverage and credit risk will outperform when confronted with a depressed economy. Hoping for the best but preparing for the worst seems like good advice at all times.
Fiscal policy is the signal, monetary policy only noise. There has been much discussion recently about the proper level of the neutral interest rate. I believe it must be higher to offset existing stimulus created by government deficits.
General happenings
I see many potential scenarios that scare me over not-too-distant time horizons. I worry about the rule of law being overrun by those confusing politics with gun ownership and politics. Moving from worst case to possible in the next 50 years includes a Mad Max scenario, with climate change and social breakdown interacting. Feedback loops are real in a complex adaptive system. Demographics and debt do not favor China (or many other developed countries), so those who want to encourage a near-term war with China are not helping. Extremism appears part of each century’s cycle, so a review of Germany in the 1930s and America in the 1850s is in order. I’m not sure it can be avoided but I think survivor bias has led Neil Howe to think every fourth turning comes out okay – it’s not guaranteed. Science wins wars and economic battles – those who innovate come out ahead. As in WW2, existing capabilities will be found obsolete during new conflicts. Ukraine is teaching us new tactics for drones based on the susceptibility of ships and tanks.
Climate change is the driver this century, as a threat multiplier interacting with economic and geopolitical uncertainty along with demographics. Both the natural and financial ecosystems are very fragile. How will history judge digital currencies? The new administration is likely to reduce regulations and encourage acquisitions, initially fueling a stock market surge but leaving the world less safe and more unstable.
There are many past periods where I see similarities to our current situation, some for economic and others for geopolitical reasons. For the ones I am most concerned about, similarities include a combination of the 1850s (civil war), late 1930s (war), late 1920s (economic) and 1970s (debt and lack of political will). We have borrowed from future generations – this will have to be repaid.
In the US, potential scenarios range from recession to stagflation to a civil war. Many want to portray an image of strength where previous approaches like the Marshall Plan viewed cooperation by choice as the better approach. With a trading mentality this can work temporarily, but eventually you create enemies eager to harm you and what you stand for. It will take a generation to rebuild trust after such a period ends. Military strength and tariffs are both tools in this arsenal likely to be used instead of economic growth and globalization. The lack of defaults over the last 15 years has created the stability necessary for Ponzi schemes to flourish. A recession will flush them out.
Some argue that the next world war has already begun, with conflicts in Ukraine, the Middle East and Africa, with Taiwan and parts of Europe at risk. The US has expressed interest in Greenland and the Panama Canal. This drives enemies to Cuba, a much more significant threat. US isolation might cause Europe to re-arm and become nuclear powers.
With the current president many changes are driven by one person and his financial supporters. He is following Project 2025 so far, but it appears much was designed around photo ops rather than a sound strategy as the judiciary and court of public opinion is pushing back. Trump operates based on quickly negotiated transactions that are a type of central planning rather than longer term strategies driven by the invisible hand, and that will have ramifications long after he has left. Initially, fear of tariffs has increased consumerism so 1Q2025 should have strong growth but later in 2025 economic results will be more reflective of new policies.
References are being made to 1930s Germany, but there the starting financial point was not nearly as strong as what is present today. If that model is followed it will be important not to “obey in advance” and challenge outcomes that don’t make sense. It may also drive allies away to form pacts with those who respect their values (or at least pretend to). Guest worker status could be easily expanded but the tactics shown to date could result in poor outcomes for all.
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Outlier (Qualitative) Scenarios
Here are some outlier scenarios I think are more likely to happen than consensus in the next several years (some may not happen for a decade or more). Due to the long-term nature of these scenarios, in some years this list might not change or only slightly be tweaked. Examples focus on the US but these are worldwide risks. Insurers should think about these scenarios at least qualitatively. Links are provided for articles I have written on similar topics.
?Current Concerns/Predictions
These comments are made in January 2025.
Top Actuarial Issues
As I move farther away from traditional actuarial work, I don’t feel comfortable making a bullet list of detailed concerns but I do still have concerns.
2020 Predictions
I posted my first annual financial predictions in 2007. Each year I look back five years and share comments I made that seem interesting in hindsight. I have deleted sections but not changed the wording in what remains. In many respects my thoughts are similar today as in January 2020, just as the COVID pandemic was firing up. The remainder of this section is from my 2020 “predictions.”
The financial markets continue to confuse me. I see lots of warning signs; geopolitical risk, monetary policy tightening, reduced covenants, higher leverage (especially margin debt), new offerings (buy now pay later BNPL, leverage loans). We may see a GDP surge early in 2025 in an attempt to avoid tariffs and expected inflation, but anticipation will slow job growth and lead to lower economic growth later in the year.
I tend to think farther out on the time horizon than most, and I can see a scenario that scares me very much. One where bullies with guns take what they want with immunity, destroying the economy and civilization as we know it.
1973 and the nifty fifty have many similarities with the current environment, with guns and butter making a comeback in economic analysis. We have use debt to fund growth that must be paid back - deficits cannot continue without ramifications. There are also similarities to other 4th turning cycles such as right before the Civil War. Perhaps another similarity is to 1928-9, when President Coolidge talked up the market each time it tried to correct. How many melt-ups can we have?
Immigration is an issue that is not going to get better for a long time. The worse we treat people who want to come to the US, the more likely we are creating future terrorists through our actions.
?The world is susceptible to novel viruses, especially now due to warming temperatures. A new coronavirus is evolving from Wuhan in China, with potential clusters forming. The 2020 election will be interesting, and the Democrats will make a mistake by moving further to the left. A moderate candidate, perhaps Biden or Bloomberg, would more easily take votes from the Republican base.
Climate change is real and scary. It is fascinating how little we really know about how it will play out, and how often when something new is learned that it makes things worse.?
The accounting system is broken. It needs to account for resource depletion and impacts on society like pollution. Today there is no charge for either.?
Farmers are being (willingly) taken advantage of. Never trust a politician from the city to look out for rural citizens.
Here are some outlier scenarios I think are more likely to happen than consensus in the next several years (some may not happen for a decade or more).?
Emerging Risks – Concerns
Hopefully these annual letters look at things from a slightly different perspective than you see from others and make you think. That is my goal.
Warning and disclaimer: The information provided in this newsletter is the opinion of Max Rudolph and is provided for general information only. It should not be considered investment advice. Information from a variety of sources should be reviewed and considered before decisions are made by the individual investor. My opinions may have already changed, so you don’t want to rely on them. Have fun!