New Trading Year. What's Changing?

Now that we are starting a new year, there are going to be a few things to think about. Naturally, the initial consideration is that liquidity will begin to fluctuate over the course of a week or two. However, there are some bigger thoughts that I have about the first few months of 2025, which may not be in line with most Wall Street and Canary Wharf consensus.

The United States

The United States is poised for significant growth. This isn’t a political statement, although Trump will be more business-friendly. However, as we have growth likely to continue in the US, unfortunately there will be inflation. This means more of the “K-shaped recovery” that we had seen after the pandemic, where the rich got richer and the poor continued to struggle. I think this is the case for the foreseeable future. However, the common person can fight this by owning “things.”

Some of these things will include:

• Commodities, energy stocks, and US dollars.

• Technology stocks and financial stocks.

I believe that the stock market will continue to rally the way it did in the previous year. I know this seems unlikely when you look at a chart at times, but quite frankly, this is a situation where the truly astute will want to own things as inflation will make them grow in value naturally. This will be especially true with foreign inflows into New York. This is a theme that is going to continue, as the only real choice at this point is America.

Emerging Markets

I think the emerging markets around the world are going to be in trouble, in varying degrees. There are already some places that are struggling to begin with, such as South Korea, as they have had weak growth. In fact, the BoK recently cut rates from 3.25% to 3% as a result of the GDP for the year likely to be about 1.5% or less. The GDP year-on-year growth started the year at 3.3% and reported 1.5% in Q3.

You can see how the Korean Won has been hammered over the last several months. This is a situation that you will continue to see.

However, there are other places that are struggling as well. This included places like Brazil and Mexico. In fact, the USD/MXN pair is threatening a break above the 21 MXN level. This area being broken could be like a “beach ball being held underwater being released.” I can repeat all of this info for most emerging markets. Therefore, emerging market currencies are to be avoided for the moment, and most certainly most EM funds and stocks. While some places may do a bit better, the overall attitude will be sour at best.

Europe

I am not a fan of the European Union currently. I suspect that the EU has a lot of terminal issues that are going to continue to boil. We are seeing such issues as the east ignoring the desires of the west and looking to cooperate with the Russians. They have no real choice unless they wish to follow the deindustrial aspirations of Germany and France. This will become a bigger issue this year, as the war in Ukraine will likely end. The question is, “How does the EU get cheap energy now? Buy it from the Russians?” There isn’t a huge argument to be made for this to happen, although it eventually will.

• Germany is expected to have a GDP of just 0.1% for 2025, according to the Bundesbank.

• France is expected to have a GDP of just 0.9% for 2025, according to the Banque de France.

Neither of these estimates, which are almost always a bit hopeful at best, should bring in a lot of confidence. I believe the suffering in Europe is still far from over. Who benefits? America, comme d’habitude. This will continue to drive the euro lower, and we will see parity in the EUR/USD pair soon. An exchange rate of 1.00 is my base case scenario.

China

This is an area that is always difficult to look into, mainly because the CCP isn’t exactly known for its transparency. However, according to the World Bank, the estimated forecast for Chinese GDP growth is 4.9% for the year coming up. While this is a great reading for advanced economies such as the UK or America, this is a bit of a letdown for China. It shows a global deceleration overall. This leads me to believe that investing in the Chinese equity market is not something to do. At this point, China is overinvested by Wall Street, and if they leave, look out.

Look at the bond yields in China. People are piling into the ten year, driving yields down. This is not a sign of strength.

The rest of the world is watching also. Check out the offshore Chinese Yuan chart against the USD.

Ultimately, I am Watching

I am looking at the recent action in oil as a sign that inflation is going to continue. I am a buyer of WTI (US Oil), as the market looks ready to go higher for months. This makes sense, as the US is about to boom again. Also, I prefer WTI because it is more US-centric. Other grades will do well, but the momentum is here.

The US dollar will continue to be strong. There will be pullbacks occasionally. Look at those as opportunities. This is especially true with currencies like the ill-fated EUR, the overly Chinese-dependent AUD and NZD, and anything involving an emerging market. However, the British pound still has a chance at this point. I don’t think it will dominate the USD, but it will perform “okay” against it and pummel lessers in the FX arena. I like pairs like the GBP/CHF, GBP/JPY, GBP/AUD, and so on.

Stocks are going to run higher, especially in America. The outlook remains unchanged. Expect high achievers in the US to remain consistent. In other regions, the situation will typically be positive, although it can occasionally be unpredictable. With central banks around the world cutting rates, this could get interesting quickly.

Bitcoin will eventually go higher again, but I think this year hinges far too much on a handful of people in the DC area and what they do about adoption. The Trump administration seems to be pro-crypto, but being ok with it and actually doing something isn’t the same thing. While I think Bitcoin goes higher, I also suspect there is a correction coming. We have entered the “Have fun staying poor” phase of the cycle again, where people with $200 worth of Bitcoin suddenly become emboldened. However, what is different this time is that Wall Street is shilling it. This makes this year potentially volatile, to say the least. I just read that MicroStrategy is something like 24% of the buying this past year. I don’t know if that’s true, but if it is, that isn’t a great thing. If this ends up being the case, I would highly recommend you Google “Hunt Brothers and Silver” for an idea of what can happen.

Trade well,

Chris