2024 #52 Happy New Year?

MARKET UPDATE 24.52

WEEKLY REVIEW

New Year 2025 Incoming!

Marking the end of December 2024 we had little news to go on. Some interesting developments, especially in currency markets to be sure --wink wink India Rupee--, but much was a focus on the Holidays. So, as we close out 2024, I'll leave with a broad opinion piece note. 

The global economy today offers a sobering revelation: the recovery, such as it was, has been largely illusory. Beneath the surface, the symptoms of deeper systemic fragility grow more apparent, as decades of interventionist policies collide with the cold realities of an over-leveraged, structurally imbalanced global economy.

Take the U.S. housing market, for instance, where marginal gains in new home sales—a 5.9% uptick in November—came at the steep cost of heavy discounts. Builders grapple with a glut of oversupplied apartments even as affordability crumbles under the weight of inflated prices and rising borrowing costs. This market, once the reliable engine of economic growth, now serves as a stark indictment of monetary policy’s failure to address structural constraints. 

Rate cuts, heralded as a panacea, have done little more than prolong the agony of an overbuilt, over-financed sector teetering on the brink of inertia.

The labor market, too, reveals the limits of these "economist's" and policymaker's illusions (or delusions?). While unemployment claims remain historically low, continued claims quietly surged to a three-year high, exposing a labor market that is far from "tight." Job openings have stagnated, and wage growth remains lackluster. Rather than signaling resilience, this data points to a labor market in retreat—a slow erosion of opportunities masked by headline numbers that policymakers trumpet as victories. 

It is not inflationary pressure we’re seeing here, but the early rumblings of economic contraction, with hiring freezes and restrained investment leading the way.

For consumers, the squeeze is unmistakable. Retail sales reflect a growing bifurcation: e-commerce thrives, while brick-and-mortar retail faces declining revenues and waning foot traffic. Meanwhile, the savings rate has plummeted to 4.4%, the lowest in years, as households burn through reserves to finance everyday expenses. Rising prices in essential categories leave little room for discretion, forcing trade-offs that underscore the unsustainable nature of current consumer behavior. 

The erosion of purchasing power is not the result of some organic economic cycle but the predictable outcome of policies that distort incentives and misallocate resources.

In the industrial sector, the narrative is one of persistent decline. Capacity utilization in the U.S. has sunk to new cycle lows, with the year-to-date index down 0.9%. Globally, the picture is even bleaker. China’s industrial profits collapsed 7.5% year-over-year in November, the worst annual performance of the 21st century. Europe’s manufacturing PMIs remain in contraction, and Japan struggles with weak export markets and retail stagnation. The global goods economy has become a shadow of its former self, dragged down by speculative overbuilding and evaporating demand.

Markets, far from providing clarity, mirror the underlying malaise. Commodities and shipping indices languish, while energy prices remain subdued despite geopolitical disruptions. Gasoline prices, a perennial barometer of seasonal demand, failed to rise as expected, reflecting a demand-side weakness that policymakers cannot easily manipulate away. Even gold, the historical refuge in times of turmoil, has been steady rather than surging, signaling a deepening caution starting to betray the false narrative of security.

And what of inflation? Here lies perhaps the greatest illusion of all. The PCE deflator slowed to just 0.13% in November, but this moderation belies the strain felt by households contending with persistent service costs and stagnant wages. What we are witnessing is not the success of anti-inflationary policy but the natural unwinding of temporary distortions. Policymakers have focused so intently on inflation metrics that they have ignored the deeper problem: a stagnating global economy burdened by decades of malinvestment and interventionism.

Nowhere is this clearer than in monetary policy. December’s rate cuts by the Federal Reserve and the European Central Bank underscore the growing impotence of traditional tools. The Fed’s erratic adjustments only heightened market uncertainty, while the ECB’s steady hand failed to inspire growth. 

Institutions and policymakers remain trapped in a cycle of their own making, mistaking liquidity for solvency and their interventions and "tools" for stability.

As we look to 2025, the lesson is clear: the supposed recovery has been built on the same faulty foundations that led to the crises of the past. We are left not with a stable economy but with a house of cards—precarious, brittle, and destined for collapse under the weight of its own contradictions. The cure is not more of the same tinkering, rate cutting, and money and credit creation. 

The cure is unfortunately a reckoning with the distortions that have long plagued the system. Something the doctors will forestall as long as possible. Effective medicine, it seems, isn't good for business.