Scorched earth policy and Bitcoin

GEOPOLITICS

USA

Trump is going full deep state annihilation with the nomination of RFK Jr as health secretary, Tulsi Gabard leading national intelligence, Pete Hegseth as defense secretary and Matt Gaetz as AG (Rubio as secretary of state is surprising in this context). His choices appear to be based on the loyalty he missed in his first term to achieve the mandate he was given by the US people, winning the electoral college, the popular vote, the senate and the house.

Trump wants to take advantage of controlling all the levers of government to reach objectives for July 2026 and the 250th birthday of the United States, and before the mid-term elections.

Eastern Europe

Major escalation this weekend with Joe Biden approving the use of long range missiles to strike inside Russia. There is no clear objective besides escalating the conflict a little further with potentially dramatic consequences by a president that has just been disavowed.

Earlier last week, Secretary of State Blinken declared rushing the financial aid to Ukraine before the new administration gets in charge in January.

Ukraine’s minister of Defense also suggested Kiev could drop 'rudimentary nuclear bomb’ on Russia if the US funding was cut.

Feels like scorched earth policy and desperation by the outgoing administration and Ukraine.

Middle East?

Trump’s foreign policy will be very supportive of Israel, especially in its opposition against Iran. The Middle East will be the hottest spot in the world.

ECONOMY

The US budget deficit went through the roof in October with another $257 billion, when it was expected at $73 billion, and was $67 billion last year.

Did I mention “scorched earth policy” already?

The 2024 fiscal year budget deficit eventually came in at $1.832 trillion, with the first year with over $1 trillion of annual interest expense on US debt.

The ticking time bomb is running.

Unsurprisingly , this huge deficit leads to inflation. October CPI inflation rose to 2.6%, and Core CPI inflation rose 3.3%, both higher than they were 2 months ago.

This again questions the Fed’s 50 basis point rate in September, very likely another epic fail.

On top of that, the US economy added the least amount of jobs in October since the pandemic in 2020, and the Fed's worst nightmare has begun: stagflation.

The 2% inflation target is a pipe dream, yet the Fed keeps cutting interest rates. This might be a good time to check again the similarity with the situation in the seventies.

If it continues, the question is how long before it starts impacting Equities.

Now, Fed Chair Powell says the Fed does not need to be "in a hurry" to reduce interest rates.

In short, Powell has no idea what he’s doing, and markets are losing confidence in the Fed. It has been a stream of contradictory statements since the infamous “transitory inflation”.

No wonder treasury yields are rising as the Fed cuts rates (still expected to cut 25bps in December).

MARKETS

Trump's victory increased investment managers risk appetite, now the second strongest in survey history, behind only Apr '21.

Last week was a welcome breather after the election week surge.

Meanwhile, gold suffered its worst week since Jun 2021, falling back to two-month lows after Trump’s election.

Most often cited explanations are:

1/ buying the rumor and selling the fact of Trump's presidency. Actually, gold reacts exactly how it did after the 2016 election

2/ correlation of gold with VIX (both tend to rise in periods of uncertainty), and both have tumbled after Trump's victory

3/ less US credit risk with an administration expecting to control deficit

4/ demand for gold reserves from central banks is going down. Trump's policy is expected to strengthen the US$ (and weaken foreign currencies). In this context, many emerging currencies and central banks may now spend their dollar reserves to defend their FX from capital outflows and prevent excessive weakening, rather than buying gold.

Bitcoin was the single biggest winner of the 2024 election.

Interestingly, 50 out of the 58 candidates for US Congress backed by pro-crypto PACs have won their races, and the remaining 8 races that have yet to be called have pro-crypto candidates in the lead. This will be a major pro-crypto shift in congress compared to the current situation.

Btw, Gary Gensler released a statement suggesting he may be leaving the SEC. Eighteen US states have sued the SEC immediately for unconstitutional overreach and unfair persecution of the crypto industry that has infringed upon states’ rights to regulate their economies.

There is also speculation about a strategic Bitcoin reserve, although Trump didn't explicitly support the idea on the campaign trail. He also mentioned he would not allow the government to sell Bitcoin holdings.

Meanwhile, the main Bitcoin ETF, $IBIT, saw over $5 billion in daily volume today for the first time in history.

$IBIT also became the fastest ETF in history to hit $40 billion in assets under management, in only 211 days. The second fastest ETF took 1,253 days to hit $40 billion, or about 6 times longer.

Which reminds us of the now famous Michael Saylor quote: “There is no second best !”

Thanks for reading, and see you next week !