IN-DEPTH: TRANSCRIPTION - UnderTheLens - 01-22-25 - FEBRUARY - Macro Themes for 2025
SLIDE DECK
TRANSCRIPTION
SLIDE 2
Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
SLIDE 3 – COVER
Every year we like to take a moment to share with you, in the first UnderTheLens video of the year, what we feel will be the six major Macro Themes for the year. We will follow that with the first LONGWave video of the year taking those Macro Themes and extending them to what the Investment Themes are then likely to come from them.
SLIDE 4
The Themes often reflect thinking that stems from the just completed research for the Thesis paper for the year just published.
In 2013 it was the unfolding “Great Stagflation” …
SLIDE 5
Last year it was the “The New Regulatory State”.
Both had concerning tones of what lies ahead.
SLIDE 6
It was refreshing this year therefore to write the much more optimist Thesis Paper on the “Unshackling of America”. One of; Hope, Optimism and even a little excitement!
Though the headwinds of achieving much of what is in this year’ paper are incredibly large, our research suggests that at least we are heading in a sounder economic direction.
SLIDE 7
The last two years of Themes are summarized here.
We got 4 of the 6 right. As is often the case we were early on one and believe government reporting distorted the other.
What we got right:
- The US Debt exploded and has become a systemic problem for the nation.
- Over 50 Global Banks began aggressively cutting rates with the US kicking them off with a jumbo 0.5 percentage point reduction in September, followed by a 25 percentage point cutat its November meeting and a 25 point in December. The Fed has lowered rates by a full percentage point since September.
- Global Geo-Political tensions heightened taking us back to the Cold War Era
- The slowdown in China is worse than most anticipated and is now a major drag of global growth.
What we got wrong:
- We never got a recession based on Government Deflator reporting of Real GDP
- Scarcities and Blackouts were not as serious as we anticipated, though some areas would disagree with that.
SLIDE 8
This year we anticipate the following:
- A fallout between Credit Growth and the Wealth Effect will show itself stemming from the blowback from Global Tariffs and sustainable National Debt levels.
- The 4th Turning has arrived and we will see it through the global populist leadership shock already underway lead by the US.
- The negative fallout from Global Immigration will be felt.
- A New Cold War will become a hard reality.
- The Global Economy will slow.
- We will see the emergence of shortages and scarcities.
Before you might immediately dismiss some of them, let me go through them so you know what I am specifically identifying.
SLIDE 9
Let’s start with what I mean when I differentiate between the Wealth Effect versus Credit. It may not be what you think.
SLIDE 10
You have seen this chart many times, which is shown here to remind you that today the global economy, and the US specifically, is dependent on Credit growth where credit and debt are opposite sides of the same coin.
Without real credit growth of over 2% annually the wheels soon come off the GDP economic engine.
SLIDE 11
As it is now real credit growth is falling below 2% while US GDP growth is not keeping up with the growth of the national debt and its incumbent exploding financing burden.
SLIDE 12
What is keeping the machine greased is that the growth in Wealth is making up for organic economic credit growth as new market exchange wealth is fostering credit through both its newly created collateral value and foundational leverage.
The red circle shows the impact in 2008 of a small impact on credit having on wealth.
Today the exposure is falling wealth seizing up credit and a potential uncontrollable symbiotic spiral occurring because of the magnitude and dependency built into the system through the vast derivative complex.
SLIDE 13
With this in mind we also need to remember that the US consumes vastly more than it produces. The imbalance in Trade and Fiscal Deficits which must be financed by borrowed capital is now draining global capital growth.
This has become so accepted that it all just old news to everyone!
However, the US just elected a new Trump administration.
SLIDE 14
We believe President Donald J Trump not only recognizes this problem, but believes the only longer term solution for the US is Trade Tariffs.
The world is living off and dependent on the US Consumer’s willingness to take on unprecedented debt levels. Trump believes placing a TOLL on that access in the form of a Tariff to the US market is the first step in avoiding a US debt crisis in the near term.
To Trump, Tariffs are effectively a toll for access which is but Step 1 in his Trump Card Strategy.
The second step is to give foreign manufacturing corporations tax incentives to move final assembly and elements of their manufacturing back to the – both to avoid the tariffs and to take advantage of tax incentives for hiring US workers.
SLIDE 15
Step 3 is the revitalization of the American economy by repatriating some of the 54,000 manufacturing facilities that left the US 25 years ago.
We have talked about Trump’s potential reshoring strategy in a prior video for new subscribers who may have missed it.
SLIDE 16
This all sounds theoretically possible; however the “fly in the ointment” is resurgence in Inflation while this is potentially occurring.
Even if this is possible, the transition will highly likely bring increased inflation and US debt levels.
It is a highly risky gamble which we lay out in this year’s Thesis paper.
It is a major risk to the 2025 Macro outlook.
SLIDE 17
Our second theme is impact of what we term a “Global Populist Leadership Shock”.
SLIDE 18
We are in the midst of the well documented by Neil Howe & William Strauss of the Fourth Turning. The Fourth Turning aligns with many other longer cycles developed by both Harry Dent and Martin Armstrong.
As expected from cusps in these cycles we are seeing societal shifts in attitudes to governance.
Today this is taking the form of a shift towards what we can best describe as populist beliefs that the ruling institutions are no longer serving the needs of the people.
SLIDE 19
In the top list of countries we highlight just some of the larger countries facing societal turmoil with the emergence of new parties that are challenging the status quo.
A sense of anxiety is showing in election polls where the old is being replaced with new emerging populist parties. There is something happening across the planet.
What seems to be unfolding around us is nothing less than an ongoing collapse of the world’s globalist regime.
The first clear sign that something truly big may be happening was the historic comeback and victory of Donald Trump in last November’s election.
Donald J Trump's victory stems from the takeover of the Republican party by his America First political Movement. Eight weeks later the Canadian Prime Minister Justin Trudeau has announced his resignation.
It now appears increasingly likely that in the coming weeks we will see the fall of ruling governments and coalitions in Austria, Germany, France, and Britain. Others, such as Romania, are likely to follow.
In the bottom we show China and Japan as examples of large countries under turmoil from Economic policies that are becoming societal hot spots.
In a recent newsletter we went though all these so we would refer you to it. Free newsletter signup and archives are available at the MATASII.com web site.
SLIDE 20
Global leaders and technocrats that run these western governments are losing their grip on power.
The pool of popular discontent has been filled to the brim by the self-serving actions of the globalist elite.
It seems to be reaching the point of boiling over.
They are being roundly booted out by the populist movements across the world.
A CRISIS OF POLITICAL LEADERSHIP & POLICY PARALYSIS
There are two central social issues for incumbent global governments that are causing massive "populist" resurgence at the polls: Inflation and Immigration.
A resurgence which is altering policies that foster globalization, financialization and modern mercantilism.
SLIDE 21
INCUMBENTS BEING PUNISHED FOR INFLATION & IMMIGRATION
Incumbent governments were given a kicking by furious electorates who had suffered a huge drop in their standard of living. And it made not the slightest difference whether the incumbents were left-of-centre Democrats in the US, centrist Macronists in France, or right-of-centre Conservatives in the UK.
In the case of excess immigration, the loss of well-being was feared. In the case of excess inflation, the loss of well-being was genuine. Yet since peaking in 2022 at close to 10 percent, inflation has plunged to the low-single digits. So, why is everybody still so angry?
It’s Cumulative Inflation That Matters
One of the main reasons that central banks target 2 percent inflation is that 2 percent is the highest rate of inflation that goes largely unnoticed. Going largely unnoticed, households and firms do not consciously factor sub-2 percent inflation into their price and wage setting processes. This prevents an ‘inflation spiral’ taking hold.
The reason that sub-2 percent inflation goes largely unnoticed is that economic productivity also tends to rise at 1-2 percent. And to the extent that wages rise in line with productivity, people will not suffer a loss of purchasing power when prices rise at 2 percent or below. So, the inflation goes unnoticed.
The thing that people notice and hate, is the cumulative loss of purchasing power when prices keep rising at above 2 percent.
Telling people that inflation is back down in the low-single digits will not make them feel any better when they have just suffered a cumulative loss of purchasing power of 25 percent!
SLIDE 22
Our third Theme for 2025 is the fallout from Immigration. Here too the title may be a little misleading.
To be clear a major problem in the developed countries is actually too low a level of immigration. The issue we see today is not immigration but rather how it is being handled!
SLIDE 23
Too understand why we say the fallout from Immigration is to start with Fertility rates.
Fertility rates are declining everywhere.
In North America the Fertility Rate per women is 1.6. Unless it is above 2 the population will shrink.
If the population shrinks then productivity will fall.
SLIDE 24
If productivity falls then Standards of Living will fall!!
This chart from the UK Financial Times shows recent productivity growth is insufficient to sustain improvements in living standards in most large advanced economies.
The pink lines show what productivity growth is required to maintain GDP per capita growth!
- A McKinsey report investigating the economic impact of declines in birth rates found that the UK, Germany, Japan and the US would all have to see productivity rise at double the pace seen over the past decade to maintain the same growth in living standards witnessed since the 1990s.
- The consultancy’s report showed that to match GDP per capita growth between 1997 and 2023, productivity growth in France and Italy would need to triple over the coming three decades. In Spain, it would need to rise fourfold between now and 2050.
- Without action, “younger people will inherit lower economic growth and shoulder the cost of more retirees, while the traditional flow of wealth between generations erodes”
- Governments globally are struggling to contain a demographic crisis amid rising costs for housing and childcare, as well as social factors such as fewer young people being in relationships.
SLIDE 25
- Two-thirds of people now live in countries with birth rates per woman below the so-called “replacement rate” of 2.1, while populations are already shrinking in several OECD member states — including Japan, Italy and Greece — along with China and many central and eastern European countries.
- The report follows similar warnings by the Paris-based OECD, which last year said declining birth rates were putting the “prosperity of future generations at risk” and urged governments to prepare for a “low-fertility future”.
- McKinsey calculated that in western Europe, the decline in the proportion of people of working age could dent GDP per capita over the next quarter century by an average of $10,000 per person.
- The consultancy argued that more countries will have to encourage people to work for longer, following the example of Japan, where the labor force participation rate among people 65 years and older is 26 per cent, compared with 19 per cent in the US and 4 per cent in France.
- The consultancy calculated that to keep living standards rising at the same rate, a German worker would have to work 5.2 additional hours per week or the share of the population in work would need to increase by nearly 10 percentage points from its current level of nearly 80 per cent among people aged 15 to 64 years.
- The UK and the US required a lower level of additional work thanks to more favorable demographic prospects. But Spain and Italy would also need an increase in the share of people in the labor force by double-digit figures.
SLIDE 26
The fourth Theme is a New Cold War
SLIDE 27
Whether it’s the Ukraine and Russia; Taiwan and China; or the Middle East and Iran we have serious conflicts amongst the major powers globally as well as regional issues in Africa, the Arctic and emerging issues in South America.
As a consequence we have
- MILITARY BUILD-UP
- China has officially placed itself on a War Footing & is preparing accordingly,
- Russia has walked away from long held Nuclear Arms agreements
- A well financed Iran from oil revenues is moving towards nuclear weapons,
- North Korea has troops in Ukraine Supporting Russia
- The US is sending missiles to the Ukraine and increasing the size of the US Navy
All signs of escalating conflicts. We also have …
- NATO EXPANSION & FUNDING INCREASES
- NATO is strengthening dialogue and cooperation with its partners in the Indo-Pacific region – Australia, Japan, the Republic of Korea and New Zealand.
- NATO is looking at increasing defense budgets by member countries to 5% from 2%
As well we have..
- A 21ST CENTURY MONROE DOCTRINE
- The US is moving towards a Monroe Doctrine 2.0 with taking back the Panama Canal from stealth Chinese control and potential annexing control of Greenland
SLIDE 28
A lot of this is the further escalation of many of the trends we outlined in our 2020 Thesis Paper Global Conflict.
SLIDE 29
Our 5th 2025 Macro Theme is a Slower Global Economy.
SLIDE 30
This is most clearly evident with the deterioration in China’s global Imports / Export trade. Global demand growth is weakening.
As this chart shows earnings sentiment is in the early stages of turning down.
SLIDE 31
Sustained elevated equity markets valuations are causing analysts like Goldman Sachs to now take down annualized 10Y returns quite significantly.
SLIDE 32
We have reached the point where Credit growth is becoming problematic. We discussed this earlier concerning specifically the Wealth Effect’s influence on Credit.
SLIDE 33
This Yield Curve Chart which guided us during the 2000 Dotcom Bubble Implosion on the left, as well as the 2008 Financial Crisis is now giving us the same earlier warnings we received then as indicated by the red arrow on the right.
All three panels match almost perfectly.
SLIDE 34
Additionally, the High Yield rredit market as represented by Junk bonds has begun to turn down rather hard.
This was the area the Federal Reserve had to immediately bail out during the 2008 Financial Crisis when Zombie Corporations were only a fraction of what they are. Over 20% of the major market participants are now considered Zombies where earnings no long support debt payments and must borrow to stave off bankruptcies.
This area could get ugly fast in 2025 if interest rates don’t fall quickly and the credit markets maintain liquidity.
SLIDE 35
The concentration of market cap by only 7 corporations has always been a warning sign to markets. We have never has this sort of concentration before within the US nor within Global markets.
If the Magnificent Seven even hiccup we will have serious disruptions.
SLIDE 36
With markets tracking earnings per share so closely while buybacks are employed to reduce shares to boost earnings per share it is hard to see how this can continue by either increasing margins or the borrowing to finance share buybacks?
SLIDE 37
Our sixth Theme is one we carry over from 2024 – the Emergence of Shortages and Scarcities!
SLIDE 38
We are already seeing the beginning of the Wave II we have called for in Inflation. Service Inflation continues to be problematic for the Federal Reserve.
As some of the prior Themes begin to unfold as we expect in 2025 then Scarcities and Shortage can be expected not to dis-similar to what happened to the Supply Chains during the pandemic.
SLIDE 39
This time it won’t be a Pandemic but rather a shortage of Credit, Liquidity and Supporting Collateral for a highly leverage derivative complex driven financial structure.
SLIDE 40
So what can we conclude?
SLIDE 41
It really comes down to the Trump Administration’s ability to pull the “rabbit out of the hat”!
The headwinds and potential facing the new US administration are daunting to say the least.
The risk they are assuming with their Tariff Strategy appears to be an almost “Hail Mary” in the face of what America faces.
Let’s pray that my calls are least than the 4 out of six from last year!!
SLIDE 42
As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
SLIDE 43
I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed professional financial advisor.
So until we talk again, may 2025 turn out to be an outstanding investment year for you and your family?
I sincerely thank you for listening!
