2024 was a year with many surprises, as has been usual the last many years. 2025 looks to become even more interesting, volatile, and maybe chaotic, which is why I choose to label the year 2025 as The Year of Reckoning and Disruption.
In investments, we operate from conviction, which should be based on facts, but never in certainties. Estimates of economical and investment outcomes should be looked upon as probabilities and sometimes with reason, reason though tends to get investors in trouble, because trends persist much longer than can be argued rationally or sometimes identified in real-time.
I think though it’s safe to say that the next four years should be nothing short of interesting and most probable different, not to say outright volatile and disruptive.
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Elegant, eloquent, or elephant?
Incoming president Trump will be seeking to fly out of the gate and try to turn everything upside down, or he himself might be turned upside down, by forces from the background in the US, who are not willing to give up their long-time privileges, and just follow Trump’s ideas. Trump will bring in transactional behaviour and less leadership from a global welfare perspective. A President needs to be elegant and eloquent, and not elephant. Let’s see how Trump goes about it.
Trump’s powershift away from the established oil and gas oligarchy over to the new West Coast oligarchs like “Vice President” Elon Musk, Peter Thiel and their people, could very well turn into a fight that will be everything other than pretty. The US probably needs this process because its current economic situation, and their global position, is under threat.
Trump seems to be wanting to seek salvage in tariffs, the famous external enemy, when there are domestic problems. Where this will end and what tariffs will bring is still an open question. Trump seems to think that import tariffs can cover some other taxes, but he does not seem to understand the impact tariffs have on inflation and growth, very important factors if he seeks to reduce the US double deficits (trade and budget), and the US´s future ability to refinance its old deeds at reasonable yields – very interesting dynamics that will impact financial market immensely going forward.
Investors will charge higher real yields on lower credit quality, also from Europe. In my view, Trump´s math does not add up. Just consider this – Trump’s tariffs are the same tools that the US have used on Russia, Iran and China with a very different purpose, so what is Trump really seeking here?
As are customs, I will look into the charts to find more clues, tactical target and break points where my scenarios are either right or wrong.
Four tactical resolutions
Our possible tactical resolutions from our proxy the S&P 500 are;
- We just had the final long-term top on December 6th, 2024, at 6,107 as a wave 5 in 5 of 5.
- Or, we are in the last 5th wave up, expected to end in Q1-2025, after the inauguration somewhere around 6.240 to 6.350
- Or we are in the crazy phase where the last trend moves up and takes the form of an “Extended” 9 wave structure of about 50% up, opening for targets just below 7.000 and even higher.
- Or, a resolution we have not identified yet, maybe some kind of internals or an external shock.
See the possible first three scenarios below
Chart: S&P 500 on Weekly resolution, Source: TradingView
A weakness supporting my less positive outlooks is also the lack of Small-Cap participation seen here through the Russell 2000 Index. R2000 failed to carry through end of November 2024, which is a clear sign of weakness among the “soldiers”.
Chart: Russell 2000 Mid and Small Cap on Weekly resolution, Source: TradingView
No matter which of the above resolutions we end up in, I believe that stock markets are in their final phases up, and that it is now time to start reducing long risk. Concentrating and rotating your portfolio will not do it anymore. Cash, shorts and tail risk hedges are to be included in your asset allocation going forward, probably very soon.
Just as important. The bear market that we might roll into, will not be like 2020 or 2008. Because the West´s fiscal and monetary servants (Politicians, Central Bankers and Treasurers) have already overextended their goodwill, and they could very well be out of ideas and gunpowder this time, left with nothing more than fiscal discipline, why this next crisis could be of a very different kind and much longer duration, especially in Europe and North America. Worst case it could be the kind of crisis that will trigger domestic riot’s, more wars or social upheavals like we saw in Germany 90 years ago, not in any way pleasant nor constructive.
On the Technical internal side, leverage is at a record high. The broader participation in the indices is low, why the ice is thin. On the other hand, the US earnings machines of today are so much stronger than at any other time in history, why one still needs to be patient, diligent and aware.
Global tactics
If you’re asking yourself, why my driving charts are US and why I am focussing on the US equity markets, my answer is; These briefs are tactical equity briefs, and;
Europe has rendered itself economically and politically irrelevant. “The Divided Kingdom” is spiralling, Western Continental Europe has literally been asleep behind the wheel and let other foreign agents run the state of their foreign policies, which can ruin Europe. Europe is slowly turning itself into an open museum, their largest industries are in structural decline, and not willing to change, partially because old leaders are not willing to give up privilege and unions are not seeing what is coming. Until Europe starts standing on its own, it will not drive anything and will stay tactically irrelevant in the investment world.
Asia, and China especially, are somewhat open questions, and somehow a closed book with lack of transparency. Some fear China is on the brink of collapse, but Asia’s long-term opportunity is undeniable. From a growth and valuation perspective Asia looks very attractive on the term, and their demographic development and stage in their economic life, makes Asia a serious contender for our investment money in the future.
Japan has their fiscal imbalance, but an even larger surplus on their trade account, hence why they can keep printing as long as the financing of their fiscal experiment can happen internally in Yen. Japanese stocks hold some interesting tech and robotics opportunities, and their company debt levels after cash are close to zero, something that will become important going forward, when we enter a less robust world. Yen risk can be hedged away with a positive income (carry) from it.
Africa and South America are surely great consumer and commodity opportunities, but they are riddled with poor political discipline and fiscal management, corruption in the government apparatus and lack financial centres and competences. Long term they surely need to become a part of your portfolio also, if for no other reason, then as an inflation hedge via their commodity upside against bond exposure.
Leaving the US on the table as the main tactical driver. No matter how dire the US outlooks are, it should not be forgotten that the US Federal Reserve is still The Lender of Last Liquidity Resource, the US corporate bond market is by far the largest and best functioning source of financing, the US´s physical location is unique and safe, and the US is still the home to the world’s financial centres and institutions. This is why the US is still primary to your portfolio, be it the US Dollar, their bonds or stocks. One day a tectonic shift will arrive, and change things, but till then, the US economy and stock market are the driving force in the economic world, also for tactical decision making.
The US trade imbalance will become the #1 driver of the market
This brings me to the most important point economically going forward, if we can avoid new wars on a larger scale.
The US will soon arrive at the point where their trade imbalance, budget deficit and budget discipline, transformed into (real) yields on their Treasuries, will become the main catalysts for the future welfare of the US employment, the bond yields, the US Dollar, and thereby the stock market, AKA the US economy and “wealth-fare”, if not the USA’s standing in the world. The current externally financed investment party and its guests (investors) will have to adjust to the demands from the surroundings at some point, and I believe that point could arrive in 2025. When this happens one or two parts will have to give. Will it be the Bonds or the Stock market, or the USD?
The current rise in US 10-year treasuries can well enter a plus 5% scenario, which would become a problem. The US Q3-2024 budget deficit status was resting at 121% of GDP on federal debt alone. With an expected expansion of 7% yearly for the next many years, not dissimilar to Italian and Spanish crisis level numbers, allocating close to 20% of their federal budget for refinancing yield costs from their federal debt – alone. This is a result of the largest financing blunders in modern economical history, not to mention fiscal mismanagement.
In the last 10-15 years the US has put on a massive bond position through their EQ portfolio, with a very long duration, at historic low yields, AND they have financed their budget deficits with short term bills rolling forward into historic rising yields. A duration mismatch not seen in history, resulting in the largest financing blunders in history. We are talking two times multiple trillions of US$ in combined losses. And Trump is talking about lowering taxes?
So, I think it’s safe to say that the US (the US are not alone) are facing some serious financial and fiscal challenges going forward, and maybe Trump will be the catalyst to solve them, or maybe he will implode the economy. With this rather gloomy intro it should not surprise anyone that I advise to be faring with less risk going forward.
2025 will be written in black and white
2025 will be the year where Trump promises and ideas will have to surface and materialise. It will be a very black and white year, where things either will work out for the investors, or it will bring chaos, but we will most probably get to one for the history books.
The world is probably in dire need of disruption. The widespread governmental debt-financed recovery and growth from 2008 have yet to face up to the unpaid bill. 2025 could be the year where the debt man will come collect.
To take on some view here yourself, you need to ask yourself a few questions, like:
- Will the US government debt increase or decrease under a Trump Presidency?
- Will the US run a reasonable budget in the foreseeable future?
- Will the US continue to print more money?
The positive economic scenario – Trump succeeding and stocks flying
To get things under control, and keep the crowd partying, Trump needs to get shorter term yields down – I know that is really the job of Powell, but I am sure Trump will try to have a word on this as well. BUT – Trump can push things in the right direction.
The factor that matters the most to people in their minds is the “Drill baby drill” oil cost effect. Getting the oil price below $60/brl, is the single most important factor that can drag inflation down. Tariff’s on foreign goods have the opposite effect on inflation!
The second, and broader, factor, is to reduce the USA´s fiscal deficit. This has gotten to “Italian 2010” levels of above 7%, and is – in a low unemployment environment – simply unsustainable.
The demand push from fiscal deficits creates widespread inflation and concerns about the US economy and the USD. Trying to implement savings to lower the deficit will not be popular, but are the politicians of this Western world able and willing to do that? Many sponsors of the new White House and the Capitol (Washington) expect high returns on their “campaign contributions”. Maybe the new Tsar and de facto Vice President Elon Musk, and his Department of Government Efficiency (DOGE) will succeed, who knows. We know that Musk is not incapable of driving ideas around efficiency. This is exactly the medicine the US needs, so it will be interesting to follow this.
The negative economic scenario – A long-term top is emerging
The other side of this coin is that the DOGE department and its people become a source of chaos and the catalyst for “the crumpling of the empire”. Too much ‘elephant’ here will stop trade and progress, and the world becomes unproductive.
Could we have Trump succeeding, or are we in the last innings of a long, government-spending driven bull market? I am not optimistic, but I thinks it’s sage to say THE NEXT FOUR YEARS WILL BE NOTHING SHORT OF INTERESTING, SO TREAD CAREFULLY GOING INTO 2025.
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Henrik Mikkelsen is a Strategist, Investment Advisor and Business Developer with Iridis AG, an investment management and corporate advisory firm in Zug, Switzerland. Henrik has more than 30 years of experience from investment banking and commodity trading, running strategies for clients and himself, as well as writing about markets and giving lectures on technical analysis and risk management.