The two massive current market questions are about liquidity and rates: maybe that’s just one question.

So, do we now question our long-held assumptions?

The storm in a teacup in a short trading week over UK Gilts is of little interest, we all know where it leads, I am sorry to say.

STILL ENOUGH LIQUIDITY?

Liquidity is the scary issue, and bond yields rising indicates a loss of liquidity, but is it serious?

I don’t think so; the usual sequence is a panic causes a loss of liquidity, so settlement starts to fail, causing technical defaults, and then the frightened regulators crash the system. None of that is visible.

There are real strains, no doubt, Russia is struggling to finance war, China is suffering a property bust, but notably rates there are falling. Saudi Arabia can’t fund expansion on less than 90$ oil, and both France and the wider EU are in very deep. But none of that is causing disastrous rate rises. Indeed, currencies, as intended, are taking some of the strain.

Gold and bitcoin are building vast, useless, liquid supplies of wealth. While a strong tech market is luring funds away from bonds, and of course the US Federal debt is vast.

Nor does anyone want to be in the market, when the inevitable happens, liquidity crises are a persistent feature of the system.

But for all that I see Central Banks still holding the line reasonably well. No one state has seen a dramatic failure, even the UK, always the weakest, is not yet really offering an enticing rate on ten-year money, given its failure to stop inflation.

So, the current liquidity action still looks, on balance, like bets for and against rate cuts, not distress.

And Trump has profoundly disrupted global markets, by offering a genuine, large-scale alternative to secular decline.

BACK TO RATE CUTS

What about rate cuts then? And inflation.

Inflation is clearly a problem, Biden has been running the US economy hot, to try to win the election, and now Trump optimism is doing the same.

US NON FARM PAYROLL – DECEMBER 2024

A GRAPH OF THE USA PAYROLL - NON FARM EMPLOYEES

From this website

 

 

And the Fed rate cuts now look ahead of the curve. Indeed, the pre-election 50-basis point one always was.

We felt it was politically motivated, so a sharp kick through a reversal and a rate rise is indeed possible, but with real US rates still positive, it would also feel gratuitous.

The rest of the world has the opposite problem. True it will now import US dollar inflation, especially on energy, and its exports pre-tariffs will look more competitive, but I doubt if either matters, when austerity looms once more.

They just serve to disguise the underlying issues. Although it is possible Germany gets a Trumpian boost, post-election.

However, it will still be really hard for the European old guard to resist rate cuts, let alone allow rate rises. Taking down an already non-functioning banking system, would be reckless.

The UK is very vulnerable; that’s why avoiding the Euro made so little sense, if we were set on swallowing the other nonsense.

I have never seen other outcomes, given Labour election promises and the need for some attempt to steady the ship before implementing real reforms. But nor have I ever seen other exits bar Truss II. If Reeves and her team let up on real service cuts, they have signed their own resignations. Spending money and raising taxes is instant, so never the hard part. Cutting bloated budgets is also easy, but does need nerve, time and skill. The jury is still out on if Labour has those.

WINTER BLUES

All the market turbulence relates to the holiday period, which in the US now spills over into late January with Martin Luther King Day, and the added impact of various Presidential comings and goings, so I think it can still be ignored.

Thin trading encourages stunts. While Q1 data is usually terrible, the most adjusted season of the year.

The first “live” Fed meeting therefore looks to be on March 19th. Which is well after earnings season.

So yes, volatility and reasons to be fearful, but overall, I fail to see this derails the Trump boom. Also, at some point the UK mood will change, if only for shares with high dollar earnings.

Adequate liquidity and on-going rate cuts therefore remain supportive narratives, but both are currently on a winter break.

Assuming no disasters on their return, the year ahead looks fine.

OTHER PLACES

India

I have had a longer look at the Indian economy.

In aggregate  India remains impressive, with plenty of money being made and invested. However, it can in the end go no faster than the average voter, and for some of those, life remains tough.

Modernisation and urbanisation look great on the IMF charts, but always come with a cost, in particular for the urban poor. To be clear, there is no old-style deprivation, no lack of food or clean water, no loss of civil order, there is some basic healthcare, but for all that a lot of surplus marginal labour still. Navigating those strains, while building a modern state, is no small feat. So, India looks great, but only if it can hold a basic policy line through and beyond the retirement of Narendra Modi. Here is a summary of India’s 2025 issues, as taught to its civil servants.

Pakistan, Argentina, Poland, Hungary

Of the true frontier markets, which is the tier below emerging, the best Asian performer last year was Pakistan at +83%, but even they failed to match Argentina at + 91%. While closer to home the expected ending of the disaster that is the Ukraine War, let Poland achieve +46% and Hungary +36%.

None of these have much depth, all feel like recoveries from oversold positions.

Yet at some point Europe needs a single functioning capital market, not a string of small historic ones. Within that, the great advantages of New Europe, low state debt, plentiful land, skilled labour and big EU spend, could be attractive in the multi-year boom that will follow the end of hostilities.