The Saylor Strategy? Desparation.

The Illusion Breaks: Bitcoin, Recession, and the Final Act of the Stimulus Age

Bitcoin is tired. Stocks are rolling over. And the recession scare isn’t just back; it’s metastasizing.

But here’s the real story: the entire scaffolding of post 2008 financial engineering is creaking under its own weight. Governments that promised infinite stimulus and central banks that hallucinated stability have run out of tricks. What remains is debt, leverage, and a fragile belief that someone else, somewhere, still has control.

That belief is dying.

Look no further than MicroStrategy; or rather, Strategy, as it now styles itself in a branding exercise that smells more of desperation than innovation. Michael Saylor’s corporate Bitcoin cult just issued a 10% perpetual preferred share offering. That’s two points higher than the one they sold barely a month ago. Why? Because dilution through convertible debt ran its course, and now they're stuck paying nearly junk-tier dividends to keep the game going.

This isn’t innovation. It’s survival.

Their underlying business? Functionally irrelevant. Strategy is a Bitcoin ETF in corporate cosplay, sitting on billions in unrealized crypto gains while treading water with a balance sheet that looks increasingly like a leveraged time bomb. If Bitcoin falls too far, they will be forced to sell coins simply to make interest payments. If it falls further, they’ll have to sell all the more. The moment the market stops buying their desperation offerings, they’re cornered. And all of it: every press release, every tweet, every policy proposal to have the U.S. Treasury “strategically” hit the bid and HODL is about propping up the one thing that can’t be allowed to fall… the price.

Because price is the only story left.

The Collapse of the Commercial Use Case

Bitcoin was supposed to be a revolution. A peer-to-peer cash system, stateless and resilient. Today, it’s a NASDAQ tracker in a black hoodie.

The institutions have arrived, yes. But they didn’t bring innovation. They brought options desks, structured products, and index flows. They brought in the professional rounders. In a world awash in speculative financial “assets”, Bitcoin has become just another yield-bearing asset, one whose underlying utility has stagnated while its price narrative gets leveraged to infinity.

Meanwhile, the real world, the commercial world, continues to shrug. Ask El Salvador, where Bitcoin was crowned legal tender four years ago and now barely registers in day-to-day transactions. The government just walked back key elements of the Bitcoin law: it’s no longer considered currency, can’t be used to pay taxes, and the state-run wallet is being phased out. A recent poll? 92% of Salvadorans haven’t used Bitcoin in the past year. After four years.

And still, the true believers keep doubling down. Michael Saylor is knocking on the White House door with a 40-page plan proposing the U.S. government acquire up to 25% of the Bitcoin network via daily Treasury purchases. He wants the government to borrow Eurodollars, that is, real usable currency, to buy a digital asset that, commercially, no one uses.

This isn’t monetary reform. It’s a bailout disguised as strategy.

What the Market Really Wants

The irony is brutal: the free market already solved this problem decades ago. The Eurodollar system, born without government coercion, was the world’s first digital ledger-based currency. A fluid, decentralized medium of exchange used in real transactions by real businesses across the planet. The commercial world didn’t need Satoshi to tell it what it needed. It wanted mobility, flexibility, and dynamism. It got them.

Bitcoin, by contrast, became obsessed with store of value mythology. It tethered itself to gold bugs, Fed critics, and inflation truthers who never noticed that the real problem wasn’t as simple as fiat: it was the fundamental substitution of price action for productivity.

Now, in its moment of supposed triumph, Bitcoin is chained to the fate of the very financial system it was meant to escape. A leveraged derivative of NASDAQ liquidity, sensitive not to monetary innovation but to interest rate expectations.

The Global Contagion and the End of Stimulus Illusions

This isn’t just an American problem. It’s not just a Powell problem, or a Trump problem, or even a Bitcoin problem. This is systemic, synchronized failure. The entire post-2008 global economy was built on a single assumption: that governments and central banks could paper over structural decline with debt, asset bubbles, and institutional optimism. That assumption is now collapsing in real time.

China, once the great engine of global recovery, is sputtering under the weight of its own contradictions. A 29-month streak of falling producer prices. Imports down 8.4%. Oil demand is back to lockdown-era levels. Consumer prices in outright deflation; even after trillion-yuan “stimulus” packages. Beijing is throwing everything it has at the problem, and the result is less than nothing. Every new bazooka only confirms that the last one failed. Every rescue package is proof of a deeper, more intractable crisis. The world’s second-largest economy is trying to spend its way out of a silent depression that it can no longer deny; and has no one left to sell to.

Europe? The Berlin Bazooka fizzled before it left the barrel. Growth projections are quietly being revised lower, while governments tiptoe around austerity ghosts they swore they buried. And Japan has returned to form, clinging to yield curve control and praying the rest of the world doesn’t notice.

There’s a reason El Salvador’s Bitcoin experiment has quietly unraveled. There’s a reason MicroStrategy, excuse me, Strategy, is issuing 10% perpetual preferred shares like it’s 2008 all over again. The common thread isn’t volatility or interest rates or “transitory” disinflation. The thread is desperation.

Everyone is leveraged to a story that is starting to no longer sell.

The free market didn’t cease to grow. It was never allowed to. Growth was replaced with simulation via “stimulation”. With narrative. With spreadsheet hallucinations and machinations from central banks and endless PowerPoints from monetary visionaries who never had to turn a profit. Now, the simulation is breaking. And the cracks aren’t isolated; they’re global, they’re widening, and they’re being papered over with ever-higher piles of debt that produce ever-declining returns.

The question isn’t whether we’re heading into a recession. We’re already living through the consequences of a global economy that can’t seem to remember how to produce real value and instead relies on price manipulation and speculative “capital allocation”; i.e. trading.

So what comes next?

Likely another round of rate cuts. More “emergency” liquidity. Perhaps even a white paper on how blockchain will save the bond market. But the commercial system, the real economy, knows better now. It’s not just beginning to see through the illusion. It’s starting to buckle against it.

This necessary revolt, when it comes, won’t be led by tech billionaires or central bankers. It will begin at the checkout counter, in the factory, in the labor force participation rate no one wants to talk about. The old models are dying. The new ones haven’t been born yet. But the clearing process is inevitable.
Until next time: Stay skeptical. Stay liquid. Stay out of the narrative.

The Blame Game is Only a Symptom - The Problems are Still Unaddressed.

Silicon Valley Bank’s collapse in March 2023 was assumed to be a contained event, a momentary banking scare that didn’t metastasize into anything close to 2008. Yet, the evidence has always been that that this wasn’t just a regional banking issue or a case of poor risk management by a few unlucky institutions. It was a broader systemic event that highlighted the already determined trajectory of the global financial system, the monetary order, and, by extension, the real economy. This was just one of the first "few bumps" down a derelict road. And while the immediate panic was subdued thanks to quick action by way of financial firefighting on behalf of the arsonists, i.e. policymakers and central bankers, the factors that led to SVB’s failure were not resolved; they merely allowed advanced further, creeping further into every facet of global finance. What continues to be portrayed as localized bank runs and deposit flights was in fact the metastasis of our financial malignancy into great bouts of credit stagnation, liquidity hoarding, and an entrenched real "on the ground" economic malaise that still grips the system today. People seem to think that because this was "so long ago," it can't have anything to do with what we are experiencing now. They couldn't be further from the truth.

The prevailing belief, that the crisis was successfully managed and left no lasting damage, is completely detached from reality and any sound economic / financial intelligence. Bond markets, global lending patterns, labor market stagnation, and credit availability all point to a persistent deterioration that has deepened ever since. If anything, this was one of, if not the, key moments where the financial markets and the banking sector conceded that the post-pandemic economic trajectory was unsustainable. This being said, policymakers were quick to prevent the screams and hide the bodies. So when we're asking ourselves why things are the way they are today and why they are likely to deteriorate further, it will be easy to blame the symptoms. But it's not a new administration, tariffs, inflation, deflation, rising or lowering interest rates that have caused these problems. The root of the issue is ongoing and structurally systemic monetary issues that all these new "symptoms" will only exacerbate, making the potential day of reckoning much, and I stress much, worse.

SVB’s implosion did not occur in a vacuum. Credit Suisse’s failure was a parallel event that should have shattered the illusion that this was strictly a problem of U.S. regional banks mismanaging their risk in a rising rate environment. Credit Suisse was a globally significant financial institution, deeply embedded in the European banking system. Its collapse was not about deposit flight due to interest rates; it was about a structurally weak institution finally reaching its breaking point in an environment where the systemic imbalances built up over years could no longer be ignored. This was the real warning: a fundamental shift in the monetary order was occurring, and the market knew it even if policymakers refused to admit it. If SVB was the match, Credit Suisse was the proof that the fire was not just a local blaze, it was a structural inferno.

Take the case of global sovereign debt markets. Germany’s two-year bond yield peaked on March 9, 2023, the day before SVB collapsed. Since then, it has steadily declined, even as the ECB continued to raise rates for months afterward. The same pattern repeated across the yield curves of major economies, with rates beginning a slow descent despite central banks maintaining their tightening stance. This wasn’t merely a reflection of monetary policy expectations; it was a signal that markets had fundamentally reassessed the economic outlook. The sharp inversion of yield curves globally, particularly in European bonds and U.S. Treasuries, became an unignorable warning that stagnation, not expansion, was the dominant force ahead.

The disconnect between policy rates and actual economic conditions has been growing ever since. The Federal Reserve and ECB continued to hike rates well into the second half of 2023, yet bank lending did not expand. Instead, the banking sector shifted dramatically toward hoarding liquidity and risk aversion. The weeks following SVB’s collapse saw a record contraction in U.S. bank credit, and while some nominal recovery occurred by late 2023, the composition of that recovery tells the real story. 

Instead of lending to businesses or households, banks funneled their balance sheets into government securities and agency debt, an unmistakable sign that they were prioritizing safety over economic expansion. The credit impulse, a key driver of economic growth, turned negative across major economies.

This is particularly evident in the United States, where total bank credit stalled in March 2023 and has remained essentially flat ever since. A temporary uptick in late 2023 was not due to a resumption of lending but an accumulation of U.S. Treasuries. When filtering out loans to financial intermediaries, the reality becomes even starker: lending to the real economy has outright contracted. This is a banking system in full retreat, unwilling to take on risk despite nominally high interest rates that should, under normal circumstances, incentivize lending.

Labor markets, too, have been quietly deteriorating in step with this contraction. The U.S. unemployment rate reached its cycle low in April 2023, only to begin rising by May. Job openings, a key indicator of labor demand, have trended lower, while job growth has decelerated across the board. Most importantly, hiring has been almost non-existent. Wage growth, once touted as evidence of economic resilience, has steadily slowed in real terms, tracking the broader deceleration in economic activity. There just is no meaningful demand for workers. 

In Europe, the situation is even more pronounced. Germany, once the engine of the Eurozone economy, has seen industrial production contract for months on end, with PMI surveys deeply entrenched in contractionary territory. The supposed post-pandemic economic recovery was never a recovery at all, it was an unsustainable rebound driven by supply chain distortions, fiscal stimulus, and a misallocation of capital into speculative ventures that could not be sustained in a normalized monetary environment.

The Federal Reserve’s handling of the crisis was, in retrospect, a textbook case of winning the battle but losing the war. They successfully prevented a full-scale banking meltdown, but at the cost of further entrenching a system-wide retreat from risk-taking. A shallow and pyrrhic victory. The consequence has been a slow but inexorable tightening of financial conditions, despite the Fed’s insistence that the crisis had been contained. This is precisely why bond yields began falling long before rate cuts were even discussed, markets understood that the damage had already been done.

The critical moment came not just with SVB’s failure but in its immediate aftermath. Banks did not resume lending; instead, they sought safety, while market expectations shifted toward economic stagnation. The yield curve has remained deeply inverted, signaling a long and grinding slowdown ahead. Even as the Fed kept rates high through 2023, the market increasingly ignored them. By the time Powell & Co. acknowledged the need for rate cuts in early 2024, it was already too late, the trajectory had been set. The fed, yet again history shows, does not control interest rates. 

This is the deeper reality: the banking crisis of March 2023 wasn’t a contained event. It was part of an unmistakable confirmation that the economy was not on stable footing, that the very distortions, i.e. policy responses, of the pandemic era had left behind a structurally weak financial system addicted to even more cheap and artificial credit, and that the transition back to normalcy was going to be anything but smooth. This being said, the aftermath, or inevitable rebalancing, is still unfolding, whether policymakers choose to acknowledge it or not.

Where does this leave us now, under Trump’s return to office? The structural weaknesses that SVB and Credit Suisse exposed have not been addressed. Further, Trump will not be an answer or a panacea. Instead, the political and economic narrative has shifted toward trade wars, tariffs, and further towards economic nationalism. While the administration pushes aggressive trade measures, 25% tariffs on Canadian and Mexican imports, 10% on Chinese goods, the deeper issue remains unresolved. These protectionist policies, justified under the guise of border security and national sovereignty, are layered on top of an already deteriorating economic environment. They are not the cause of the decline but will undoubtedly accelerate it. The last thing an economy struggling with weak credit expansion and rising financial stress needs is an added layer of trade distortions that will only further increase unemployment and weaken global demand.

So while the Fed and policymakers still scramble to present a picture of stability, the reality is that the crisis never ended. It's merely rolling itself out slowly; until it ends suddenly. Alas, however, inevitable does not imply imminence. 

SVB and Credit Suisse were symptoms of a much deeper, ongoing process, one that is still playing out across financial markets, labor markets, and global trade today. The reckoning that was delayed is still coming. The only question left is when.

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.

2024 #51 WEEKLY REVIEW - DECEMBER 16TH - 22TH

MARKET UPDATE 24.51

WEEKLY REVIEW

US Economic Insights

Housing Market:

The housing market offers a revealing snapshot of broader economic fragility. Despite lower mortgage rates, sales have risen only marginally, and new housing starts remain subdued, particularly in multifamily projects. High prices persist, not simply as a result of supply and demand, but due to the structural constraints of limited inventory and cautious developer behavior. These dynamics suggest a market struggling to adjust under the weight of elevated borrowing costs and affordability challenges.

From a macro perspective, this stagnation underscores the limited impact of monetary policy in addressing underlying issues. Rate cuts have done little to spur meaningful activity, exposing the gap between financial incentives and real-world constraints like relatively flat to falling REAL wages and consumer confidence. Developers’ hesitation to expand new projects implies a broader caution, aligning with other indicators of economic uncertainty, such as declining manufacturing output and weak labor market trends.

While housing has historically served as a key driver of economic recovery, its current trajectory points to a more constrained role. The housing market risks remaining a drag on broader growth. The housing sector, far from signaling resilience, reflects an economy navigating persistent headwinds and limited by unresolved imbalances. The iatrogenic folly here is that policy makers continue the prescriptions and interventions despite the results.

• Existing home sales rose marginally in November, with a seasonally adjusted annual rate of 4.15 million. Inventory remains tight, keeping prices elevated.
  (Source: National Association of Realtors - Existing Home Sales for 11/2024: https://www.nar.realtor/sites/default/files/2024-12/ehs-11-2024-summary-2024-12-19.pdf)
• Housing permits increased by 6.1% in November, while housing starts declined 1.8%.
  (Source: US Census Bureau - New Residential Construction for 11/2024: https://www.census.gov/construction/nrc/pdf/newresconst.pdf)

Labor Market:

The labor market presents a mixed and increasingly fragile picture, as evidenced by the data. Initial unemployment claims fell slightly to 220,000 for the week of December 14, but this decline remains out of sync with historical seasonal patterns, where claims typically dip more substantially during the holiday hiring season. The four-week moving average, hovering at 225,500, indicates a modestly higher baseline than last year, signaling underlying labor market weakness. The labor market, contra the narrative, by no means implies inflationary pressure. In fact, one could argue the opposite.

Continued claims, reflecting ongoing joblessness, remained nearly static at 1.87 million, marking little progress despite this broader narrative of a "tight labor market." This underscores the labor market's inability to absorb displaced workers or generate sufficient new positions to meaningfully improve conditions. What the figures suggest is that even in the seasonally strongest hiring period, demand for labor is lackluster, with limited opportunities and increasing signs of economic strain.

Employers, particularly in interest rate-sensitive industries like manufacturing, have reduced hiring and maintained a cautious stance, further exacerbating the labor market's vulnerability. While layoffs remain muted, the absence of significant new hiring or wage growth underscores broader concerns about stagnant income levels and declining consumer confidence.​ Economic retrenchment doesn't start with mass unemployment and layoffs, the concerns are borne out in hiring activity (Shimer).

• Initial unemployment claims fell to 220,000 for the week of December 14 but remained higher year-over-year, signaling weaker holiday hiring.
  (Source: US Department of Labor - Unemployment Insurance Claims published 12/19/2024: https://www.dol.gov/ui/data.pdf)
• Robert Shimer, Reassessing the Ins and Outs of Unemployment

  Review of Economic Dynamics, Volume 15, Issue 2, 2012, Pages 127-148, ISSN 1094-2025, https://doi.org/10.1016/j.red.2012.02.001.

Consumer Behavior:

Retail sales growth in November, driven largely by a 2.63% surge in auto sales, offered little reassurance as spending outside this category remains stagnant, growing a mere 0.2% month-over-month. Stripping away inflationary effects, real spending reveals a consumer increasingly paying more to get less. All the while wage growth and opportunities stagnate. Clearly, an unsustainable dynamic. Squeezed disposable incomes and diminishing purchasing power can only tolerate elevating/elevated prices for so long before trade offs are made. Industry at the margin of consumer preferences will be hit first. As we can see with McDonalds, Starbucks, Target and the like.

E-commerce platforms saw robust activity during the holiday shopping season, indicating a shift toward price-sensitive purchasing behavior. However, traditional brick-and-mortar retailers continued to report bleak outlooks, signaling broader structural shifts in consumption patterns that leave "old economy" retail struggling to maintain relevance (Cyber Monday Reports; Retail Surveys).

November’s slight increase in personal spending coincided with a decline in the savings rate to 4.4%, underscoring a troubling reliance on savings to sustain even modest expenditure growth (Bureau of Economic Analysis). This erosion of financial cushions, paired with tepid income gains, reflects an economy straining under the weight of persistent inflation and labor market fragility.

In aggregate, the data paints a picture of a consumer stretched thin, attempting to balance rising costs, stagnant wages, and eroded savings. While headline numbers may suggest stability, the underlying fundamentals reveal a far more tenuous reality—one that casts doubt on the consumer’s ability to sustain economic momentum without significant structural relief​. They are certainly mindful and making trade-offs and trading down.

• "The company’s results were primarily driven by softness in North America’s revenues in the quarter, specifically a 6% decline in U.S. comparable store sales, driven by a 10% decline in comparable transactions, partially offset by a 4% increase in average ticket."
  (Starbucks Q4: https://s203.q4cdn.com/326826266/files/doc_financials/2024/q4/4Q24-Early-Announcement-10-22-24.pdf)
• Retail sales grew 0.69% in November, driven by a 2.63% increase in auto sales. Excluding autos, sales grew only 0.2%.
  (Source: US Census Bureau - Monthly Retail Trade Report Published 12/17/2024: https://www.census.gov/retail/marts/www/marts_current.pdf)
• Real Disposable Personal Income increased slightly by 0.15% in November, but the savings rate dipped to 4.4%.

  (Source: Bureau of Economic Analysis - Personal Income and Outlays: https://www.bea.gov/data/income-saving/personal-income)
• "[D]espite the new tide of optimism, consumers across income levels and generations said they plan to keep their spending habits relatively subdued, particularly in discretionary and luxury categories. Their reported spending intentions suggest consumers are willing to delay immediate gratification in favor of long-term financial stability."

  "The share of consumers trading down—opting for lower-priced goods, delaying purchases, or taking another action to save money or get more value from a purchase—remained persistently high. (....) [B]ut 74 percent said they continued to trade down, suggesting that this behavior is stickier than experts expected."
  

  (Source: McKinsey & Company - An Update on US Consumer Sentiment published 12/11/2024: https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/the-state-of-the-us-consumer#/)

Industrial and Manufacturing Activity:

The industrial sector continues to contract under the weight of systemic pressures and stumbling global demand. November marked the third consecutive month of declining industrial production according to the PMI, falling 0.15% after sharper drops in prior months, leaving the year-to-date index down 0.9%. Capacity utilization sank to 76.79%, a new cycle low, highlighting the sector’s growing slack as production scales back to align with weakening consumer and business demand.

Manufacturing PMIs reflect similar struggles, with December’s S&P Global index sliding further into contraction at 48.3—a sharp divergence from the services sector’s relative optimism. This bifurcation between manufacturing and services underscores an economy where structural imbalances are becoming increasingly evident. For manufacturers, particularly those reliant on consumer goods production, lower output and eroding sentiment point to persistent demand shortfalls, even in a climate of slightly easing borrowing costs.

Auto manufacturing presents a rare bright spot, buoyed by modest rebounds in sales, but this sector alone cannot offset the broader malaise. Outside of autos, production volumes are in decline, compounding the sector’s challenges as cost pressures collide with cooling demand. Employers in manufacturing, already cautious in hiring, may face growing pressures to reduce headcounts, further amplifying economic headwinds.

In sum, the industrial and manufacturing sectors reveal an economy losing steam at its core. The persistence of contractionary forces and the absence of a clear catalyst for recovery suggest that these sectors will remain a drag on economic performance, exposing the fragility of the post-pandemic rebound and the limits of rate-driven stimulus​.

• Manufacturing PMIs remained weak; the S&P Global PMI for December slid to 48.3 (S&P Global). 
  (Source: S&P Global - PMI Data Published 12/16/2024: https://www.pmi.spglobal.com/Public/Home/PressRelease/8537676804634a8b9243c2911f2243a)
• Industrial production also declined for the third consecutive month, down 0.15% in November.

  (Source: Federal Reserve - Industrial Production Published 12/17/2024: https://www.federalreserve.gov/releases/g17/Current/g17.pdf)

Global Economic Highlights

China:

China’s economic narrative remains one of muted growth and structural vulnerability, where the veneer of stability masks deeper systemic fragilities. Industrial production grew 5.4% year-over-year in November, a rate that appears steady on the surface but offers little reassurance when viewed against the backdrop of tepid global demand and limited domestic consumption. Further, retail sales growth slowed sharply to just 3%, erasing prior upward revisions and signaling a consumer sector still struggling under the weight of weak income growth and fading confidence.

As has become quite usual for Xi and Company, housing market concerns persisted with home prices falling another 0.5% month-over-month, extending an entrenched decline that underscores the broader fragility of China’s real estate sector—a linchpin of its economic engine. Efforts to stabilize prices and activity appear increasingly ineffectual, as speculative demand evaporates and structural overbuilding limits any meaningful recovery.

In the financial sphere, record-low bond yields highlight mounting distress in the banking system and a lack of confidence in Beijing’s ability to orchestrate a turnaround. The so-called “Beijing bazooka” stimulus measures introduced in September have already fizzled, leaving China with little to show for its policy experimentation beyond deeper questions about its economic trajectory.

China’s challenges are not confined within its borders. With its economy closely tied to global supply chains and trade, these internal weaknesses ripple outward, constraining growth prospects for trading partners and further amplifying global economic uncertainty. The picture this is painting is one of an economy struggling to find its footing, with limited tools and diminishing returns from traditional interventions, posturing, and stimulus.

• Industrial production grew 5.4% year-over-year in November, but retail sales growth slowed to 3%. Housing prices declined 0.5% month-over-month.
  
  (Source: National Bureau of Statistics of China: http://www.stats.gov.cn/english/)
• Bond yields reached record lows, signaling distress in the banking sector and ineffective stimulus.
  

  (Source: Trading Economics / https://tradingeconomics.com/china/government-bond-yield)

Europe:

Europe’s economic picture remains one of persistent stagnation, where fleeting signs of improvement are consistently overshadowed by entrenched structural challenges. Manufacturing PMIs for December stayed firmly in contraction at 45.2, highlighting the continued struggles of the continent’s industrial backbone, while services PMIs offered a modest uptick to 51.4, i.e. barely breaching expansion territory. This divergence highlights the fragility of Europe’s economic recovery, with any optimism confined to sentiment rather than substantive growth.

Germany, the region’s economic engine, remains mired in recessionary conditions. The IFO Business Climate Index dropped to 84.7, its lowest level since May 2020, signaling that expectations for a turnaround are fading. Consumer confidence across Europe has also declined for the second consecutive month, reflecting growing concerns over labor markets and incomes that even the European Central Bank’s steady rate cuts have failed to alleviate. There we go again, by the way, evidence of falling GLOBAL demand impulse.

The broader European economy shows little evidence that policy interventions have meaningfully shifted the trajectory. While rate cuts aim to stimulate activity, their impact has been dulled by persistently weak demand, labor market fragility, and ongoing structural imbalances. Industrial activity remains subdued, and consumer spending offers no meaningful offset, as households continue to grapple with inflationary pressures and eroded purchasing power.

Europe’s economic stagnation increasingly appears self-reinforcing. The lack of robust recovery momentum, coupled with fragile consumer and business sentiment, leaves the region exposed to further shocks. Europe here risks remaining in a prolonged state of economic limbo if not downright contraction. Their incremental "adjustments" continue to fail to address systemic weaknesses​. 

• Eurozone manufacturing PMIs remained at 45.2, signaling contraction, while services rebounded slightly to 51.4.
  

  (Source: S&P Global published 12/16/2024: https://www.pmi.spglobal.com/Public/Home/PressRelease/3c0960ce1e11416ab4b360f75f9d7701)
• German sentiment indices showed ongoing recession-like conditions; the IFO Business Climate Index dropped to 84.7.
  

  (Source: IFO Institute - Business Climate Index: https://www.ifo.de/en/facts/2024-12-17/ifo-business-climate-index-falls-december-2024)

Emerging Markets:

Emerging markets find themselves increasingly at the mercy of global economic turbulence, as local vulnerabilities collide with external pressures. Brazil’s real and India’s rupee are emblematic of the mounting challenges, both currencies hitting record lows despite aggressive central bank interventions. In Brazil, the central bank raised its benchmark rate by 100 basis points and engaged in direct market interventions, yet these measures proved fleeting in their effect as the real continued to slide, underscoring deeper structural economic weaknesses.

India’s trade balance provides another stark example of fragility. In November, exports fell sharply by 5.3% year-over-year, while imports surged to a record $70 billion, driven by geopolitical and supply-chain uncertainties - AND GOLD. This ballooning trade deficit adds significant downward pressure on the rupee, further complicating the Reserve Bank of India’s ability to stabilize the currency. Both economies illustrate the broader challenge of navigating global dollar scarcity in a rising risk-premium environment, where traditional policy tools like rate hikes and direct interventions increasingly fail to deliver stability.

Across emerging markets, these trends reflect the dual burdens of internal economic imbalances and an unforgiving global financial system. The persistence of strong dollar dynamics exacerbates capital flight and funding costs, leaving these economies more exposed to the ripple effects of weak global demand and investor risk aversion. As the world’s growth engines sputter—China’s malaise, Europe’s stagnation—the burden falls disproportionately on emerging markets, amplifying their vulnerabilities and limiting their ability to chart an independent course. The artificial credit driven business cycle is exposed at the margins. Without significant global stabilization or coordinated relief measures, these markets are likely to remain mired in cyclical fragility and structural disadvantage.

• Brazil's raises benchmark by 1.0% to 12.25%.
  
  (Source: Agencia Brasil: https://agenciabrasil.ebc.com.br/en/economia/noticia/2024-12/brazils-central-bank-increases-basic-interest-rate-1225-year#:~:text=The%20Monetary%20Policy%20Committee%20(Copom,smaller%20increase%20of%200.75%20points.)
• This is telling: India's rupee faced significant pressures due to trade deficits and central bank struggles to stabilize currencies as imports of gold surge.
  (Source: The Hindu - Merchandise exports touch 25-month low; trade deficit at new high of $37.84 billion amid gold rush: https://www.thehindu.com/business/Economy/indias-imports-rises-to-27-touches-to-record-high-of-almost-70-billion/article68991463.ece)

Key Market Movements

Copper

The markets continue to reflect the pervasive uncertainties of the global economic environment, with commodities and shipping indices signaling broad-based weakness. Copper, often regarded as a barometer of industrial health, saw its worst performance in over a month, dropping nearly 3% as demand from China faltered alongside sluggish global manufacturing activity. Similarly, aluminum and iron ore prices remain suppressed, unable to sustain any meaningful upward momentum, reflecting tepid construction activity and constrained demand across major economies.
(Source: CME Copper Futures Settlements: https://www.cmegroup.com/markets/metals/base/copper.settlements.html)

Baltic Dry Index

The Baltic Dry Index, a critical measure of shipping activity, has plummeted to new seasonal lows and an overall 17 month low, approaching levels last seen during the pandemic-induced collapses of 2020. This steep decline underscores the persistent slowdown in global trade flows, particularly as China’s economic recovery stumbles and European manufacturing struggles to regain footing . The broader implications for global supply chains and logistics networks are increasingly negative, with no clear catalysts for a turnaround.
(Source: MarineLink.com - Broad Sector Decline puts Baltic Index at 17-Month Low: https://www.marinelink.com/news/broad-sector-declines-puts-baltic-index-520421)

Gold

In the inflation-sensitive corners of the market, gold prices have remained steady, while the copper-to-gold ratio has approached multi-year lows, a clear signal of investors’ pivot toward safe-haven assets amid deepening concerns over economic stagnation. These movements reflect not just localized economic struggles but the overarching hesitancy of global markets to commit to risk amid persistent headwinds. I expect strength to persist in the gold price, but many should be surprised in the short to medium term in regards to dollar strength. In paradox to conventional though, I don't expect gold to respond poorly to dollar strength.

In aggregate, the market movements of late tell a clear story: optimism remains in scarce supply, with commodity prices, shipping activity, and investor behavior all pointing to a world economy grappling with the aftershocks of past crises and the weight of unresolved structural challenges. Until clarity emerges from key economic drivers—China’s recovery, the efficacy of monetary easing, and labor market stabilization—the markets are likely to remain in this holding pattern of restrained activity and muted expectations.

Inflation

The price inflation narrative remains tangled, with signals pointing to both persistence and decline depending on the metric of choice. Years ago, in 2019 to 2020, I told my subscribers to expect a kaleidoscopic outcome regarding price inflation. Up here, down there, stagnant here. This has certainly been playing out.

The PCE deflator for November slowed to 0.13% month-over-month, its smallest increase since August, while the annual rate ticked up slightly. Core inflation also decelerated, rising just 0.11% for the month, offering a reprieve for policymakers eager to downplay the "stickiness" observed in other measures like the CPI.

The disconnect between headline and core measures reveals the limits of aggregate indicators in capturing the nuanced pressures faced by consumers and businesses. Inflation in services, for example, continues to erode disposable incomes, while goods prices stabilize—leaving households in a precarious position. The consumer is caught between rising costs in non-negotiable categories and an inability to maintain spending levels, as evidenced by declining savings rates and real wage stagnation.

I must insist that we treat price inflation metrics as a rear-view mirror rather than a forward indicator. The deceleration in price increases does not equate to an easing of economic strain for households or businesses. Policymakers and market participants should focus on the structural elements underpinning price inflation, such as supply chain resilience, labor market conditions, and credit dynamics, rather than fixating on headline figures that offer only partial truths.

For investors and operators, the current environment warrants a cautious stance. Real assets with intrinsic value, such as commodities or infrastructure, may hedge against inflation's lingering uncertainties, while high-growth sectors reliant on cheap credit remain vulnerable when said credit is contracting. Ultimately, a clear resolution to the narrative will require stabilization in key global economies—China, Europe, and the United States—none of which appears imminent. Until then, vigilance and diversification remain the best tools for navigating an opaque inflation landscape.

To circle back, with the PCE deflator slowing to its smallest monthly increase since August and core inflation decelerating further there is evidence of a moderating trend. I would argue that these measures reveal transient disinflationary processes rather than entrenched inflationary pressures. The persistence of higher service costs underscores inefficiencies rather than systemic inflation, pointing to temporary factors like base effects and lingering distortions from supply chain disruptions.

Therefore, from a broader perspective, I consider it that inflation is less a dominant economic force and more a symptom of deeper structural weaknesses. Stagnant real incomes, constrained consumer demand, and global trade imbalances further bolster and reinforce disinflationary undercurrents. The focus on inflation as a primary concern risks overshadowing the more pressing issue: the stagnation of global economic growth. 

Yes. You read that from me. Disinflation. Disinflation. Disinflation.

For now....

Monetary Policy Trends

A fitting way to conclude this update would be to focus on where these troubles are find their source - the monetary system and the policy that shed's some light, on what policy makers believe and what they are doing about it. The December rate cuts by the Federal Reserve and the European Central Bank encapsulate the prevailing uncertainty and divergence in global monetary policy. Both institutions reduced rates by 25 basis points, yet the market’s interpretation of their actions could not have been more different. The ECB’s deliberate and steady approach to easing was perceived as "hawkish," reflecting a focus on managing expectations, while the Federal Reserve’s more erratic adjustments revealed persistent indecision and an inability to establish a coherent narrative. Seems to me that Mr. Magoo is firmly behind the wheel.

In the United States, the Fed’s policy swings continue to underscore its reactive posture, driven by short-term data points rather than a clear strategic framework. This inconsistency has created a volatility premium in Treasury markets, with Gundlach's favorite two-year yields oscillating wildly as investors attempt to decipher the Fed’s next move. The “dots,” which are anything but reliable, only serve to amplify confusion, as policymakers struggle to reconcile a deteriorating labor market with inflationary pressures that appear more entrenched than transitory.

In contrast, the ECB’s measured actions reflect a clearer, if limited, strategy. By maintaining tighter control over market expectations, the ECB has avoided the kind of volatility seen in US Treasury yields, with European bond markets exhibiting relative stability. However, this steadiness belies the reality that the ECB’s rate cuts have so far failed to generate meaningful economic momentum. Across Europe, the labor market remains fragile, consumer confidence wanes, and industrial activity is stagnant—signs that monetary policy alone cannot address deeper structural issues.

These divergent paths highlight the broader challenge of contemporary central banking: the diminishing returns of rate-driven policy tools. As both institutions grapple with the constraints of their mandates, the underlying question remains whether monetary easing, in its current form, is capable of fostering sustained economic recovery—or if it has become yet another instance of prescribing the disease as the cure​. I opine it's the latter. 

• The Federal Reserve and ECB both cut rates by 25 basis points in December, but markets perceived the ECB’s approach as steadier compared to the Fed’s erratic messaging.
  (Source: Federal Reserve - FOMC Statement: https://www.federalreserve.gov/monetarypolicy/files/monetary20241218a1.pdf
  (Source: ECB - Monetary Policy: https://www.ecb.europa.eu/press/press_conference/visual-mps/2024/html/mopo_statement_explained_december.en.html)