Category: zerohedge

The US Securities and Exchange Commission (SEC) has sued Elon Musk in connection to his $44 billion purchase of Twitter (now X) in October 2022. 

In a Tuesday press release, the agency claims that by delaying the filing of a beneficial ownership report by 11 days, Musk saved $150 million, or 0.34% on several subsequent tranches of stock he bought before filing the disclosure on April 4, 2022.

According to the agency, Twitter shares surged by 27% after Musk filed the ownership report – by which time he already owned 9% of the company’s shares.

“Investors who sold Twitter common stock during this period did so at artificially low prices and thus suffered substantial economic harm,” reads the complaint.

The agency wants Musk to disgorge any profits he incurred due to the late filing, along with pay a civil fine.

In response, Musk’s attorney, Alex Spiro, told the Epoch Times that Musk did nothing wrong – calling the SEC’s lawsuit a “sham.”

“Today’s action is an admission by the SEC that they cannot bring an actual case,” he said, adding that Musk “has done nothing wrong and everyone sees this sham for what it is.”

As the Epoch Times notes further, Spiro accused the SEC of running a “multi-year campaign of harassment” against Musk and insisted the agency was blowing the alleged late disclosure filing out of proportion, adding that this type of infraction carries a nominal penalty.

The lawsuit is the latest chapter in Musk’s contentious relationship with the SEC. In 2018, the agency sued him for posting on social media that he had “funding secured” to take Tesla private at $420 per share, a claim that was later revealed to be exaggerated. The SEC contended that Musk’s “misleading” post caused Tesla’s stock price to jump by over 6 percent and led to “significant market disruption.” That case was settled with Musk agreeing to pay a $20 million fine and step down as Tesla’s chairman for three years. The settlement did not require Musk to admit to any wrongdoing.

Musk’s “funding secured” post also sparked another lawsuit by a group of Tesla investors, who claimed that it was materially misleading and led them to suffer as much as $12 billion in financial losses. During a three-week trial in the case, Musk’s attorneys argued that he believed his statements about taking Tesla private were truthful, citing discussions with Saudi Arabia’s Public Investment Fund (PIF) as evidence of potential funding. Musk testified that PIF representatives showed strong interest in the deal, which led him to claim that the funding was secured.

“I had no ill motive,” Musk said in court. “My intent was to do the right thing for all shareholders.”

The jury sided with Musk in the case. Jurors delivered a unanimous verdict in February 2023, finding that Musk and Tesla were not liable for misleading investors with the posts. The investors appealed the decision, arguing that the judge gave erroneous instructions to the jurors. The appellate court upheld the jury’s decision, clearing Musk of securities fraud.

The SEC’s current chair, Gary Gensler, plans to step down from his post on Jan. 20, the day President-elect Donald Trump will be inaugurated for a second term.

Meanwhile, SEC Chief Accountant Paul Munter will retire from the agency effective Jan. 25 – making it unclear if the agency will even proceed with its filing against Musk.

Authored by Guy Birchall via The Epoch Times (emphasis ours),

Extra firefighters and water tankers have arrived in Los Angeles, as the city braces for more high winds.

The tankers are replenishing water supplies after fire hydrants ran dry last week as the city battled to rein in the flames, with the additional firefighters drawn from across the United States, Canada and Mexico.

The infernos have destroyed thousands of homes and killed at least 24 people in the City of Angels and nearby areas.

Los Angeles County Sheriff Robert Luna said on Monday that figure was likely to rise, with at least two dozen other people still missing.

Luna went on to say that he understands people were keen to return to their homes but asked them to be patient, adding, “We have people literally looking for the remains of your neighbors.”

In less than a week, an area of more than 62 square miles, roughly three times the size of the island of Manhattan, has been charred by four separate blazes.

As it stands, the Eaton Fire near Pasadena is around one-third contained, while containment on the largest blaze in Pacific Palisades on the coast is only about 17 percent.

During an operational briefing on Tuesday morning involving all departments dealing with the blaze, it was revealed that the Palisades Fire now had a containment line all around its perimeter, thanks to the efforts of some 5,200 personnel.

Monday saw planes douse homes and hillsides around the city with pink fire-retardant chemicals, while crews and fire engines were being placed near areas where the brush was particularly dry.

The Santa Ana winds which contributed to the destruction last week are predicted to pick up again early on Tuesday and continue through midday Wednesday, according to the National Weather Service (NWS).

The NWS warned the weather will be “particularly dangerous” on Tuesday, with gusts potentially reaching 65 mph.

The winds are not expected to reach the same hurricane-force strengths as last week, but could ground aircraft involved in the response, according to LA County Fire Chief Anthony Marrone, who said that if winds reach 70 mph, “it’s going to be very difficult to contain that fire.”

As a result, fire officials have advised residents in high-risk areas to just leave home if they feel they are in danger, rather than waiting for formal evacuation orders.

Currently, less than 100,000 people in Los Angeles County remain under evacuation orders, half the number from last week.

However, a large swathe of Southern California around Los Angeles is under this extreme fire danger warning through Wednesday, including the densely populated areas of Thousand Oaks, Northridge and Simi Valley.

After facing criticism for the response to the fires last week, Marrone said that his department were “absolutely better prepared.”

“We’re absolutely better prepared,” Marrone said when asked what will be different from a week ago, when hurricane-force winds propelled multiple fires across the parched, brush-filled region that hasn’t seen rain in more than eight months.

More than 8,500 firefighters attacked the fires from the air and on the ground, preventing conflagrations at either end of Los Angeles from spreading overnight from Monday into Tuesday.

There have been more than a dozen wildfires in Southern California, which hasn’t seen significant rainfall in more than eight months, since Jan. 1, mostly in the greater Los Angeles area.

The latest started late on Monday in a dry riverbed in an agricultural area of Oxnard, about 55 miles northwest of Los Angeles.

In the aftermath of the flames, dozens have been arrested for looting, and officials warned that they are also seeing the beginning of price gouging and scams, relating to hotels, short-term rentals, and medical supplies, Los Angeles County District Attorney Nathan Hochman said.

Three others have also been arrested on suspicion of arson, according to Los Angeles Police Chief Jim McDonnell.

One person was allegedly using a barbecue lighter to start fires, while another set a trash can ablaze, and a third was caught lighting brush on fire.

He said that all those small fires had been swiftly extinguished.

More than 12,000 homes, cars, and other structures have been destroyed by the blazes, for which authorities are yet to determine a cause.

Southern California Edison, the electrical utility for Los Angeles, has acknowledged agencies are investigating whether its equipment may have sparked a smaller blaze, however, a lawsuit filed on Monday claims the utility’s equipment lit the far larger Eaton Fire.

Edison said last week that it had not received any suggestions that its equipment ignited that blaze.

The infernos could prove to be the costliest fires to ever burn in the United States, according to early estimates from AccuWeather, which suggests economic damage could rise to over $250 billion.

President Joe Biden expressed his and First Lady Jill Biden’s sorrow over the loss of 24 lives, saying on Monday: “Our hearts ache for the 24 innocent souls we have lost in the wildfires across Los Angeles. Jill and I pray for them and their loved ones.”

The Associated Press contributed to this report.

After rising for 5 straight months, analysts expected headline consumer prices to continue accelerating in December (+0.4% MoM exp) and it did exactly that – the highest MoM print since March, leading the YoY CPI to rise 2.9% (the highest since July)…

Source: Bloomberg

CPI details:

Food

The index for food increased 0.3% in December, after rising 0.4% in November. The food at home index also rose 0.3% over the month. Four of the six major grocery store food group indexes increased in December. The index for cereals and bakery products rose 1.2% over the month, after falling 1.1% in November. The meats, poultry, fish, and eggs index increased 0.6 percent in December, as the eggs index rose 3.2 percent. The index for other food at home rose 0.3 percent over the month and the index for dairy and related products increased 0.2 percent.

Energy

The energy index increased 2.6% in December, after rising 0.2% in November. The gasoline index increased 4.4% over the month. (Before seasonal adjustment, gasoline prices decreased 1.1 percent in December.) The natural gas index rose 2.4 percent over the month and the index for electricity rose 0.3 percent in December. The energy index decreased 0.5 percent over the past 12 months. The gasoline index fell 3.4% over this 12-month span and the fuel oil index fell 13.1 percent over that period. In contrast, the index for electricity increased 2.8 percent over the last 12 months and the index for natural gas rose 4.9 percent.

All items less food and energy

The index for all items less food and energy rose 0.2 percent in December, after rising 0.3 percent in each of the 4 preceding months.

• The shelter index increased 0.3 percent in December, as it did in November.
  • The index for owners’ equivalent rent also rose 0.3 percent over the month, as did the index for rent.
  • The lodging away from home index fell 1.0 percent in December, after rising 3.2 percent in November.
• The medical care index increased 0.1 percent over the month, after rising 0.3 percent in October and November.
• The index for physicians’ services increased 0.1 percent in December and the index for hospital services rose 0.2 percent over the month.
• The airline fares index rose 3.9 percent in December, after rising 0.4 percent in the previous month.
• The index for used cars and trucks rose 1.2 percent over the month and the index for new vehicles increased 0.5 percent.
• Other indexes that increased in December include motor vehicle insurance, recreation, apparel, and education.
• In contrast, the index for personal care fell 0.2 percent in December after rising 0.4 percent in November. The indexes for communication and alcoholic beverages also declined over the month. The household furnishings and operations index was unchanged in December

The resurgence of energy costs drove the hot headline CPI along with Core Services…

Source: Bloomberg

Core CPI (ex Food and Energy) dipped to +0.2% MoM (below the 0.3% exp) and the YoY pace of inflation slowed to 3.24% YoY. Core CPI rose EVERY month under Biden…

Source: Bloomberg

Core Goods price inflation slowed MoM (but deflation is gone on a YoY basis)…

Source: Bloomberg

The Fed’s favorite indicator of the CPI bunch – SuperCore or Services CPI ex-Shelter – rose 0.28% MoM (slowing the pace of annual inflation to +4.17%)…

Source: Bloomberg

Transportation Services were not MoM…

Source: Bloomberg

Overall, it’s energy costs that are re-emerging as a drive of inflation… thanks Joe!

Source: Bloomberg

…and Energy prices aren’t going down anytime soon in the CPI world… thanks Joe!

Source: Bloomberg

…and don’t expect headline CPI (or PPI or PCE) to slowdown anytime soon, given the growth in the money supply…

Source: Bloomberg

The question is – will corporates ‘eat’ the input cost pain or pass them on to consumers?

Source: Bloomberg

While Producer Prices under Biden rose at triple the rate they did under Trump, Consumer Prices soared 21.25% under Biden (+4.9% p.a.) vs 8%, 1.94% p.a. under Trump…

Source: Bloomberg

Finally, equity traders were braced for a volatile day ahead of the print, with options implying moves of 1.1% in either direction for the S&P 500, the most for a CPI day since March 2023.

US equity futures are higher, led by small-caps with the rally strengthening after the cooler than expected UK CPI print. As of 8:20am, S&P and Nasdaq futures are up 0.4%, with banking shares advancing in premarket trading after markets inched out a positive close on Tues following firm underlying PPI components & yields continuing to march higher. BlackRock, Bank of New York Mellon, JPMorgan and Goldman Sachs all beat estimates for the fourth quarter, with trading revenues performing strongly. All Mag7 names are also higher. Otherwise, it’s fairly quiet from a headline perspective overnight into CPI, although US reportedly will unveil more regulations to prevent advanced chips from being sold to China, with the planned rules, targeting producers TSMC, Samsung, and Intel. Bond yields are down 1-2bps as the USD is being offered, largely a function of yen strength following comment from BoJ Governor Ueda who said the BoJ will raise rates and adjust the degree of monetary support if improvement in the economy and price conditions continues, while he added that he wants to discuss and decide whether to raise rates at next week’s policy meeting. In commodities, Energy and Metals are leading the complex higher.  Today’s focus is on CPI/Bank Earnings but keep an eye on the Beige Book release.

In premarket trading, Mag 7 names were mostly higher: Alphabet (GOOGL) +0.6%, Amazon (AMZN) +0.5%, Apple (AAPL) +0.4%, Microsoft (MSFT) +0.2% , Meta Platforms (META) +0.7%, Nvidia (NVDA) +0.1%, and Tesla (TSLA) +0.6%. Here are some other notable premarket movers:

• BlackRock shares gain 2.8% in premarket trading, after it reported adjusted earnings that exceeded analyst expectations in the fourth quarter. Assets under management missed the average analyst estimate. Shares are up 1.8%.
• Goldman Sachs reported FICC sales and trading revenue for the fourth quarter that beat the average analyst estimate.
• JPMorgan shares are little changed after the bank recorded 4Q FICC sales and trading revenue above expectations. The bank also gave a forecast for 2025 net interest income above the average analyst estimate.
• Wells Fargo shares rise 3.26% after the bank reported net interest income for the fourth quarter that beat the average analyst estimate. The bank also forecast an increase in 2025 net interest income, beating analyst expectations.
• BNY Mellon (BK) rises 2% as 4Q profit, net interest income top expectations.
• Amplify Energy (AMPY) gains 2% after agreeing to combine with some Juniper Capital portfolio companies.
• Compass (COMP) gains 8% after the residential real estate brokerage boosted its revenue guidance for the fourth quarter.
• Keros Therapeutics (KROS) falls 13% after the drug developer said it is halting all dosing in a combination trial of its experimental therapy for patients with a lung disorder, citing side effect concerns. Company is also terminating the trial early.
• NeoGenomics (NEO) rises 3% after forecasting revenue for 2025 of $735 million to $745 million.

Traders remain wary of making big bets ahead of the “pivotal” CPI data (our full preview is here), which comes at a time when investors are paring their expectations of rate-cuts from the Federal Reserve. Forecasters predict CPI to show a fifth month of increases, with so-called core CPI up 0.3%. However, hopes of a benign print have been fanned by lower-than-expected US wholesale prices and slowing inflation in Britain.

“We need to see a more welcome print on the inflation front today,” said Laura Cooper, global investment strategist at Nuveen. “Today’s print will be crucial for the near-term price action as it could trigger another leg in the rate selloff, if we see a hotter-than-expected print.”

Equity traders are braced for a volatile day, with options implying moves of 1.1% in either direction for the S&P 500, the most for a CPI day since March 2023. They are also watching to see if 10-year Treasury yields could move closer to the psychologically key 5% level. Treasury 10-year yields slipped about 3.5 basis points to trade around 4.76% and Bloomberg’s dollar gauge extended Tuesday’s 0.4% drop. Thirty-year rates also eased after hitting new highs above 5% in the previous session.

European markets are trading mostly higher (Stoxx 600 index rose 0.7% while London’s FTSE 350 rallied as much as 1.6%) looking to snap a three-day losing streak. Real estate, telecommunication and retail stocks are leading gains. S&P futures rise 0.1% while Nasdaq 100 contracts add 0.2%. Inflation reading from UK unexpectedly dipped to 2.5% versus 2.6% expected. Services inflation at 3-year low, with markets now discounting 50bps of BoE easing in 2025. Germany’s economy shrank for the second consecutive year in 2024, with a 0.2% decline in GDP. Here are some of the biggest movers on Wednesday:

• Bureau Veritas shares gain 3.6%, while SGS slides, after the testing and certification firms said they’re in talks to combine, a deal that would create a company with a market value of more than $33 billion.
• Vistry shares rise as much as 8.6%, helping the housebuilder extend its recent rebound after closing at its lowest level since April 2020 on Monday.
• UK Rate-Sensitive stocks rise as inflation unexpectedly declined for the first time in three months in December, keeping alive hopes of a Bank of England interest-rate cut next month.
• Nordex shares gain as much as 5.1% after the German wind turbine producer’s fourth-quarter orders came in 30% ahead of consensus, according to Citi.
• Genus shares surge as much as 20%, the biggest jump since 2001, after the cattle breeding company said its full-year adj. pretax profit will likely come in at the top-end of forecasts.
• Currys shares jump as much as 14%, rebounding from a one-month low, after the electrical retailer said its annual adjusted pretax profit will top consensus estimates.
• Serco shares rise as much as 3.3% after the outsourcing company won a new contract from the US Army, adding to its recent wins in the US defense market.
• Hays rises as much as 3%, with the company’s warning that adjusted operating profit will be at the low-end of expectations in the first half already baked-in following recent weakness across the staffing industry that has led to consensus downgrades, according to analysts.
• Partners Group shares fall as much as 3.2% after the Swiss private equity firm’s full-year assets under management and fundraising missed consensus estimates.
• Anglo American shares fall as much as 2.3% after RBC downgraded to underperform from sector perform.

Earlier in the session, Asian stocks gained, as a rally in Indonesian shares after a surprise interest-rate cut helped to counter losses in Taiwan and mainland China. The MSCI Asia Pacific Index was up as much as 0.5%, with Japanese banks among the biggest boosts to the gains given expectations that the Bank of Japan will raise interest rates next week. The Jakarta Composite Index climbed 1.8%, the most in Asia, after Bank Indonesia defied market forecasts by cutting its key interest rate. Chinese equities were mixed, with a gauge of mainland-listed shares declining 0.6% while Hong Kong benchmarks ticked higher, as investors gauged local policymakers’ efforts to revive the economy amid the threat of higher US tariffs. The People’s Bank of China injected a near-historic amount of short-term funds into its financial system Wednesday amid a cash squeeze ahead of Lunar New Year holidays.

In rates, UK government bonds jump as traders add to their Bank of England interest-rate cut bets after data showed UK inflation eased more than expected in December. UK 10-year yields fall 8 bps to 4.81%. Treasuries also rise, albeit to a lesser extent with US and German 10-year borrowing costs dropping 2 bps each.

In FX, the pound reaction was choppy with cable printing fresh session highs and lows since the figures hit. It’s settled a few pips higher at ~$1.22. The yen is the notable mover in currency space, rising 0.7% against the greenback after comments from Bank of Japan Governor Ueda and his deputy his deputy strengthened market expectations for a potential interest-rate hike next week. USD/JPY falls to ~156.80. The Bloomberg Dollar Spot Index falls 0.2%.

Oil prices advance, with WTI rising 0.3% to $77.70 a barrel. Spot gold climbs $8 to $2,686/oz. Bitcoin rises above $97,000.

Looking to the day ahead now, and data releases include the US and UK CPI reports for December, along with Euro Area industrial production for November. From central banks, the Fed will release their Beige Book, and we’ll hear from the Fed’s Barkin, Kashkari, Williams and Goolsbee, ECB Vice President de Guindos and the ECB’s Villeroy and Vujcic, and the BoE’s Taylor. Today’s earnings releases include JPMorgan, Goldman Sachs, Citigroup and BlackRock.

Market Snapshot

• S&P 500 futures little changed at 5,886.25
• STOXX Europe 600 up 0.4% to 510.17
• MXAP up 0.3% to 177.03
• MXAPJ little changed at 556.66
• Nikkei little changed at 38,444.58
• Topix up 0.3% to 2,690.81
• Hang Seng Index up 0.3% to 19,286.07
• Shanghai Composite down 0.4% to 3,227.12
• Sensex up 0.3% to 76,735.87
• Australia S&P/ASX 200 down 0.2% to 8,213.27
• Kospi little changed at 2,496.81
• German 10Y yield down 2.6 bps at 2.63%
• Euro little changed at $1.0309
• Brent Futures down 0.2% to $79.75/bbl
• Gold spot up 0.3% to $2,685.95
• US Dollar Index down 0.20% to 109.05

Top Overnight News

• US President-elect Trump announced on Truth Social that Keith Sonderling will serve as the next United States Deputy Secretary of Labor.
• US Treasury Secretary Yellen says the US economy is doing well, but more work needed to invest in infrastructure, labour force and R&D
• Hegseth’s odds of being confirmed as Secretary of Defense jumped after his hearing on Tues (Sen. Ernst came out Tues night and said she would back him for the role, a key endorsement). Politico
• The US is planning to unveil additional regulations designed to keep advanced chips made by TSMC (2330 TT/TSM) and Samsung Electronics (005930 KS) from flowing to China: BBG
• China’s central bank injected a near record-high amount of liquidity into the banking system to help meet demand for cash even as it looks to support the yuan. The People’s Bank of China on Wednesday pumped 959.5 billion yuan, or about $130.9 billion, worth of liquidity via seven-day reverse repurchase agreement and the second highest amount on record. WSJ
• The Bank of Japan will debate whether to raise interest rates next week, Governor Kazuo Ueda said on Wednesday, signaling its intention to take borrowing costs higher barring a Trump-driven market shock. The remarks, which echo those made by BOJ Deputy Governor Ryozo Himino on Tuesday, pushed up the yen as markets continued to price in the chance of a rate hike at the bank’s next policy meeting on Jan. 23-24. RTRS
• South Korean President Yoon Suk Yeol was arrested in a pre-dawn operation for questioning over his martial law move. Yoon can be held for 48 hours and, with a warrant, could be detained for up to 20 days. BBG
• UK inflation undershoots the Street, w/the December headline CPI coming in at +2.5% (vs. the Street +2.6%), core CPI at +3.2% (vs. the Street +3.4%), and services CPI +4.4% (vs. the Street +4.8%). RTRS
• Germany’s economy shrank 0.2% in 2024, as expected, marking the first time GDP fell for two years in a row since 1950. BBG
• Global oil markets face a surplus of 725,000 b/d this year, smaller than an earlier forecast, amid stronger demand and new risks to supply, the IEA said. BBG
• Equal-weight S&P ETF sees a spike of inflows as investors worry about the market being increasingly imbalanced due to huge gains from mega-cap tech stocks. The Invesco S&P 500 Equal Weight exchange traded fund took in about $14.4bn in the second half of 2024, and $17bn for the total year. FT

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were choppy after a similar performance stateside where PPI data printed cooler-than-expected ahead of the incoming US CPI report. ASX 200 failed to sustain early gains with upside in consumer stocks, real estate and financials offset by losses in tech and miners. Nikkei 225 faded its opening advances with price action indecisive amid a lack of notable drivers and ongoing uncertainty regarding BoJ policy. Hang Seng and Shanghai Comp were softer as trade frictions lingered with the US finalising rules to effectively ban Chinese vehicles and it also banned imports for over 30 entities over Uyghur forced labour, while China placed 7 US firms on the unreliable entity list for involvement in arms sales to Taiwan. Nonetheless, some of the downside was stemmed following the PBoC’s firm liquidity effort in which it conducted a CNY 960bln 7-day reverse repo operation.

Top Asian News

• BoJ Governor Ueda said they will raise rates and adjust the degree of monetary support if improvement in economy and price conditions continues, while he wants to discuss and decide whether to raise rates at next week’s policy meeting. Furthermore, he said the US economy and momentum towards Spring wage talks are key points and noted that the branch managers’ meeting showed an encouraging view on pay, as well as stated that the timing of adjusting monetary policy is up to future economy, price and financial conditions.
• South Korean authorities have arrested impeached President Yoon, while Yoon said it is deplorable to see a series of illegal acts of law enforcement including his arrest and noted he agreed to attend investigators’ questioning to prevent bloodshed despite its illegality.

Top European News

• ECB’s Lane said they are essentially still in economic recovery mode and Eurozone GDP grew 1.1% in 2024, while they will have some improvement in investment in 2025 and the savings rate will come down in Eurozone though not massively. Furthermore, Lane said the labour market is resilient for now and services inflation will come down in the coming months, as well as noted that if inflation stabilises around 2%, rates will go to neutral.
• ECB’s de Guindos says the disinflation process is well on track. The balance of macroeconomic risks has shifted from concerns about inflation to concerns about low growth. The high level of uncertainty calls for prudence in setting rates. Severe global trade frictions could increase the fragmentation of the world economy. Uncertainty about fiscal policy and its present challenges could weight on the borrowing costs. Will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. The risks to economic growth remain tilted to the downside. Not committing to any particular rate path.
• ECB’s Villeroy says practically won battle against inflation; on France, says risks to 0.9% French growth forecast for 2025 are on the downside, but we do not see a recessionGovernment needs to detail savings and tax measures needed to achieve its new deficit forecasts of 5.4% of GDP this year.
• Riksbank’s Bunge says making it easier to borrow will not solve challenges in the housing market. Economy is close to a turning point but risks remain. Sweden is in a mild recession but 2025 outlook is favourable. Forecast is that rates may be cut one more time during H1 2025; judges that it is better to cut in the near term rather than wait.
• Germany Economy Minister says outlook for exports is modest; consumer recovery not in sight. Inflation dampening factors should dominate over the course of the year.

FX

• DXY is lower, largely as a by-product of JPY strength in the run up to US CPI data. On which, headline US CPI is expected to rise +0.3% M/M in December. The release follows hot on the heels of yesterday’s softer-than-expected outturn for PPI. DXY has returned to a 108 handle with a session trough at 108.96.
• EUR is flat vs. the USD as EZ-specific drivers remain light aside from various ECB commentary. On which, ECB’s de Guindos has been on the wires noting that the disinflation process is well on track. EUR/USD is currently treading water above the 1.03 mark vs. yesterday’s 1.0238 low. The next upside target comes via the 9th Jan high at 1.0321.
• JPY is the clear outperformer across the majors following comment from BoJ Governor Ueda who said the BoJ will raise rates and adjust the degree of monetary support if improvement in the economy and price conditions continues, while he added that he wants to discuss and decide whether to raise rates at next week’s policy meeting. USD/JPY has slipped onto a 156 handle for the first time since 6th January; current session low at 156.72 vs YTD trough at 156.23.
• GBP marginally weaker vs. peers following soft UK inflation metrics which saw Y/Y CPI print @ 2.5% vs. Exp. 2.6%, core Y/Y 3.2% vs. Exp. 3.4%, services 4.4% vs. exp. 4.9% and MPC 4.7%. Typically, such a soft outturn would trigger more pronounced softness in GBP. However, given concerns surrounding the UK’s fiscal position, the subsequent pullback in yields has been seen as a positive for the domestic economy. Price action for the GBP was relatively choppy, with a brief dip reversed to a session high of 1.2241; upside which faded a touch to current 1.2219.
• Antipodeans are both marginally firmer vs. the USD alongside a quiet antipodean calendar. AUD is now up for a third session in a row after printing a multi-year low on Monday at 0.6130.
• PBoC set USD/CNY mid-point at 7.1883 vs exp. 7.3240 (prev. 7.1878).

Fixed Income

• USTs are in the green and just off the session highs of 107-16+. Yields lower across the curve with the long-end leading and the curve as a whole flattening a touch. The session’s main event is US CPI, the headline M/M is expected to remain at 0.3%.
• Gilts were inflated by 68 ticks at the open and have since lifted to a 90.19 peak. From the data, the main point of focus is on the Services metric which eased below market and BoE forecasts to the lowest rate since March 2022 – this led market pricing to shift dovishly. The jump in Gilts has sparked an associated pullback in yields with the 10yr moving from 4.89% at end-of-play on Tuesday to a 4.80% low this morning.
• Modest two-way action on the UK’s 2034 auction results but with Gilts ultimately coming under some very modest pressure and veering back towards the 90.00 handle – despite a decent outing.
• JGBs came under pressure overnight after remarks from BoJ Governor Ueda in which he said he wants to discuss and decide on whether to increase rates at the January meeting. More broadly, he added that the US economy and momentum towards Spring wage talks are key points and branch managers’ views on the latter have been encouraging. Remarks which took a 140.55 low, just above the week’s 140.51 base, posting downside of a handful of ticks.
• Bunds are firmer on the session in-fitting with global peers. 2024 growth data for Germany was bleak as expected with the prelim. figures pointing to a consecutive year of contraction. Furthermore, forward-looking remarks from the Economy Ministry were also downbeat. At the top-end of a 130.32-74 band, if the upside continues then we look to 130.98 from Monday before the WTD high at 131.09.
• UK sells GBP 4bln 4.25% 2034 Gilt Auction: b/c 2.80x (prev. 2.87x), avg yield 4.808% (prev. 4.332%) & tail 0.9bps (prev. 1.3bps).
• Germany sells EUR 1.19bln vs exp. EUR 1.5bln 2.50% 2054 Bund and EUR 0.754bln vs exp. EUR 1bln 1.80% 2053 Bund.

Commodities

• Crude price action has been choppy today with participants awaiting US CPI for a larger impulse, although geopolitical risks remain as Russia and Ukraine target each others’ energy infrastructure whilst an Israel-Hamas ceasefire deal is seemingly imminent, although sticking points remain. Some weakness in the complex was seen after the EIA OMR, which trimmed its 2025 world oil demand growth forecast. Brent Mar sits in a 79.62-80.64/bbl parameter at the time of writing.
• Modest gains for precious metals with prices supported by a softer Dollar and a lack of macro newsflow at the time of writing. Spot gold currently resides in a USD 2,669.36-2,688.56/oz range.
• Mixed trade across base metals with copper prices indecisive since APAC trade amid the mixed and choppy sentiment seen across global markets.
• Private inventory data (bbls): Crude -2.6mln (exp. -1.0mln), Distillate +4.9mln (exp. +0.8mln), Gasoline +5.4mln (exp. -2mln), Cushing +0.6mln.
• EU is considering a gradual ban on Russian LNG and aluminium, according to Bloomberg. It was earlier reported that the EU Commission intends to propose a ban on imports of Russian primary aluminium in the latest package of sanctions.
• IEA OMR: Trims 2025 world oil demand growth forecast to 1.05mln BPD (prev. 1.1mln BPD); says new US sanctions on Russia could significantly disrupt Russian oil supply and distribution chains. Global oil supply is projected to rise by 1.8mln BPD in 2025 to 104.7mln BPD, compared with an increase of 660k BPD in 2024. While it is too early to fully quantify the potential impact from these new measures, some operators have reportedly already started to pull back from Iranian and Russian oil.
• Russia to provide crude oil and LNG to Vietnam, according to a statement cited by Reuters.
• India’s December Gold imports at USD 4.7bln, according to Trade Ministry.
• Russia’s Kremlin says possible EU sanctions on Russian aluminium could destabilise an “already fragile market”. Says “nothing can be ruled out” when it comes to Russia’s response to the latest US sanctions on the energy sector.

Geopolitics: Middle East

• “Security sources: The IDF has not been instructed to change the methods of fighting in Gaza despite the progress of negotiations”, according to Al Jazeera.
• Israel gov’t has reportedly set new conditions which could undermine the Gaza negotiations, via Sky News Arabia citing sources; among those is that the Israeli Army would remain 700 metres into Rafah.
• White House National Security Adviser Sullivan said hopefully we will close out a Gaza hostage deal this week, while he also commented that Iran’s weakness is a concern because it may force them to rethink nuclear weapons posture.
• Iranian President Pezeshkian said Iran never plotted to kill Trump during the US election campaign and will never do that, according to NBC News.
• “Iranian Vice President: We discovered Israel’s planting of explosives inside centrifuges”, according to Al Arabiya.

Geopolitics: Ukraine

• Russian Defence Ministry say they have struck critical energy infrastructure in Ukraine.
• Ukrainian President Zelensky says Russia targeted Ukraine’s gas infrastructure in air strikes today.
• Russia said its forces captured two settlements in eastern Ukraine.

Geopolitics: Otter

• US President-elect Trump’s incoming National Security Adviser Waltz said he wants to deal with the backlog of weapons to Taiwan.

US event calendar

• 07:00: Jan. MBA Mortgage Applications, prior -3.7%
• 08:30: Dec. CPI MoM, est. 0.4%, prior 0.3%
• 08:30: Dec. CPI YoY, est. 2.9%, prior 2.7%
• 08:30: Dec. CPI Ex Food and Energy MoM, est. 0.3%, prior 0.3%
• 08:30: Dec. CPI Ex Food and Energy YoY, est. 3.3%, prior 3.3%
• 08:30: Dec. Real Avg Hourly Earning YoY, prior 1.3%
• 08:30: Dec. Real Avg Weekly Earnings YoY, prior 1.0%, revised 0.9%
• 08:30: Jan. Empire Manufacturing, est. 3.0, prior 0.2
• 14:00: Federal Reserve Releases Beige Book

DB’s Jim Reid concludes the overnight wrap

Welcome to a big US CPI day with the added sprinkle of UK CPI (out just after this hits the press) and the start of US Q4 earnings season to contend with. A selection of large US financials, including JPM, Goldman Sachs, Citigroup and Blackrock report.

We arrive at this big day with markets a little trepidatious. After signs of a rebound in equities on Monday and global bonds into the Asian and early European session yesterday, the rest of the day was a little over all the place. Similarly to Monday, the S&P 500 (+0.11%) climbed from earlier losses with a broad number of advancers narrowly outweighing tech weakness. Meanwhile bond yields mostly edged higher to, in many cases, fresh multi-month or multi-year highs. For instance, the 10yr Treasury yield (+1.3bps to 4.79%) closed at its highest since October 2023, whilst the 30yr real yield (+1.8bps) hit another post-2008 high of 2.61%. 30yr gilts (5.45%) hit another 27-year high. To be fair it wasn’t all bad news, and a downside surprise in the US PPI reading made a change from the consistently hawkish newsflow over recent days. But even there, the details weren’t as positive on further inspection.

In terms of that PPI release, the main numbers all surprised on the downside, which triggered a reflexive move lower in Treasury yields straight afterwards. In particular, headline PPI inflation was running at a monthly pace of +0.2% (vs. +0.4% expected), which meant the year-on-year rate only rose to +3.3% (vs. +3.5% expected). Core PPI was also lower than expected, with the measure excluding food, energy and trade services up just +0.1% (vs. +0.3% expected). But as markets began to inspect the numbers in a bit more depth, it became clear that the components which feed into PCE (the Fed’s target measure) were more robust. One notable upside surprise came on airfares, which rose by a monthly +7.2% in December. So that limited the scale of the rally in Treasuries, as ultimately the Fed are looking for 2% inflation on the PCE measure, rather than CPI or PPI.

In terms of what to expect today, our US economists are projecting headline CPI to come in at a monthly +0.40%, thanks to strong seasonally adjusted gains in food and energy prices. If realised, that would be the fastest pace in 10 months, and push up the year-on-year rate by two-tenths to 2.9%. However, they see core falling to +0.23%, the slowest pace in five months, which would keep the year-on-year rate steady at 3.3%.

With the PPI release in hand, and even with the long-end sell-off, there was a bit more confidence, or maybe hope, that the Fed would still manage to cut rates this year. So that meant the 2yr Treasury yield (-1.3bps) pared back its initial increase yesterday to close at 4.37%. But other than front-end US Treasury yields, the overwhelming trend was still towards higher borrowing costs in both the US and Europe yesterday.

For once, the UK saw a comparatively smaller increase, with the 10yr gilt yield only up +0.5bps to 4.89%. But even so, that was still the highest 10yr yield since 2008, whilst the 30yr gilt yield (+1.2bps) hit a post-1998 high of 5.45%. That means all eyes are now on the UK CPI report this morning. Meanwhile in Germany, 10yr bund yields (+3.8bps) moved up for a 9th consecutive session, and reached their highest level since June at 2.65%.

In France, there were some fresh announcements on the budget as Prime Minister François Bayrou spoke to the National Assembly. Specifically, Bayrou said that he would aim for a 2025 deficit at 5.4% of GDP, which is a bit higher than Barnier’s budget which had sought to bring down the deficit to 5% of GDP this year. However, Bayrou is still planning to keep the target of reducing the deficit to 3% by 2029. When it came to French bonds, the rise in yields was in keeping with the global moves, with the 10yr yield (+1.3bps) at its highest since October 2023, at 3.47%.

When it came to equities, the S&P 500 (+0.11%) posted a narrow advance after an up-and-down session. The broader equity mood was more positive as the equal-weighted S&P 500 gained +0.78% with three quarters of the index’s constituents higher on the day. And the small-cap Russell 2000 advanced +1.13%. On the other hand, the Magnificent 7 (-1.02%) fell back for a 5th consecutive session. Weakness was also visible in healthcare stocks (-0.94%) after underwhelming Q4 results from pharma giant Eli Lilly (-6.59%). Meanwhile in Europe, the STOXX 600 (-0.08%) lost ground for a third consecutive session. This was also mostly driven by healthcare (-1.35%), while geographically UK equities underperformed, with the FTSE 100 falling -0.28%. By contrast, Germany’s DAX (+0.69%), France’s CAC 40 (+0.20%) and Italy’s FTSE MIB (+0.93%) all posted decent gains.

In geopolitical news, prospects for a ceasefire in Gaza look to be improving, with CBS reporting yesterday evening that Israel and Hamas had agreed in principle to a draft deal while Qatari officials mediating the talks said that a ceasefire was at its “closest point” yet. The headlines helped oil prices retreat from their near 5-month highs, with Brent crude down -1.35% to $79.92/bbl, and saw the broad dollar index (-0.62%) decline for the first time in six sessions.

Asian equity markets are generally a bit lower this morning. The Nikkei (-0.25%) has been swinging between gains and losses while the Shanghai Composite (-0.46%), S&P/ASX 200 (-0.22%) and KOSPI (-0.15%) are also lower. The Hang Seng is flat alongside S&P futures with NASDAQ futures up a tenth of a percent. 10yr US yields are rallying -1.8bps. Overnight reports suggest the Biden administration is planning one last round of regulations tightening up the flow of advanced chips to China which could be announced today.

In central bank news, the People’s Bank of China (PBOC) injected significant amount of funds into its financial system, marking the second highest on record in data compiled by Bloomberg since 2004. The central bank pumped a net +958.4 billion yuan ($131 billion) via 7-day reverse repurchase agreement during daily open market operations. This seemingly is aimed at offsetting facilities rolling off, peak tax season and cash demand ahead of the upcoming Lunar New Year holidays.

There wasn’t much in the way of other data yesterday, but the NFIB’s small business optimism index from the US was up to a 6-year high of 105.1 in December (vs. 102.1 expected).

To the day ahead now, and data releases include the US and UK CPI reports for December, along with Euro Area industrial production for November. From central banks, the Fed will release their Beige Book, and we’ll hear from the Fed’s Barkin, Kashkari, Williams and Goolsbee, ECB Vice President de Guindos and the ECB’s Villeroy and Vujcic, and the BoE’s Taylor. Today’s earnings releases include JPMorgan, Goldman Sachs, Citigroup and BlackRock.

After last week’s earnings debacle by Jefferies, which is the bank widely viewed as a harbinger of how the rest of Wall Street does in any given quarter, some expected modest results from the big banks when they began reported Q4 earnings today. However, concerns proved to be unfounded based on the solid results by the largest US bank, JPMorgan, which just reported stellar earnings and officially launched Q4 earnings season. Here is a snapshot of what JPM reported for Q4:

• Q4 EPS $4.81, beating estimates of $4.11 and up a whopping $1.77 from a year ago.
• Q4 net interest income dropped 3% but still surpassed expectations, coming in at $23.4 billion in the quarter, beating estimates of $23.1BN. The company said this year’s haul could be about $94 billion, more than the $89.8 billion analysts had been expecting.
• Q4 Adjusted revenue $43.74 billion, beating estimates of $42.01 billion
  • FICC sales & trading revenue $5.01 billion, beating estimate $4.37 billion
  • Equities sales & trading revenue $2.04 billion, missing estimates of $2.32 billion
  • Investment banking revenue $2.60 billion, beating estimates of $2.56 billion
  • Advisory revenue $1.06 billion, beating estimates of $921.7 million
  • Equity underwriting rev. $498 million, beating estimates of $445.9 million
  • Debt underwriting rev. $921 million, missing estimates of $1.03 billion
• Net yield on interest-earning assets 2.61%, beating estimates of 2.53%
• JPM’s provision for credit losses was $2.63 billion, below the estimate $3.04 billion, and was the result of $2.36BN in chargoffs (also below the $2.39BN estimated) coupled with another $267 million reserve build (which however was well below last quarter’s $1 billion)

Not surprisingly, the balance sheet of the largest US bank, remains “fortress” and how can it not when the government hands the bank the best assets of failed banks on a silver platter, which keeping the toxic sludge for US taxpayers. Here are the details:

• Total deposits $2.41 trillion, below the estimate $2.44 trillion
• Loans $1.35 trillion, matching the estimate $1.35 trillion
• Return on tangible common equity 21%, beating the estimate 17.2%
• Return on equity 17%, beating estimates of 14.1%
• Standardized CET1 ratio 15.7%, beating the estimate 15.2%
• Managed overhead ratio 52%, missing estimate 54.7%
• Tangible book value per share $97.30, beating the estimate $97.10
• Book value per share $116.07, missing the estimate $116.65
• Cash and due from banks $23.37 billion, beating the estimate $22.86 billion

What is notable is that for the first time in a while, JPM’s total asset base shrank, with total assets down to exactly $4.0 trillion, down from $4.2 trillion last quarter, even as deposits rose again from $2.383 trillion to $2.417 trillion.

Looking at the expense side of things, here too there was good news with JPM reporting…

• Total compensation expenses of $12.47 billion, below the estimate $12.71 billion
• Non-interest expenses $22.76 billion, below the estimate of $22.96 billion

Turning to the all important Commercial and Investment bank group, as noted above, here things were generally stronger than expected, with JPM beating on FICC, Investment banking, advisory, and equity underwriting, while missing on Equity sales and trading and on debt underwriting. Overall, net income for the group was $6.6BN, up 59% YoY on revenue of $17.6BN, up 18% YoY. Of these, Markets revenue was $7.0 billion, up an impressive 22% YoY with the details as follows.

• FICC sales & trading revenue $5.01 billion, beating estimates $4.37 billion, and up 20% YoY, largely “driven by higher revenue in Credit and Currencies & Emerging Markets”
• Equities sales & trading revenue $2.04 billion, missing estimates of $2.32 billion, and up 22% YoY, predominantly driven by higher client activity in Derivatives and Cash
• Securities Services revenue of $1.3B, up 10% YoY, driven by “fee growth on higher client activity and market levels, as well as higher deposit balances”
• Investment banking revenue $2.60 billion, beating estimates of $2.56 billion
• Advisory revenue $1.06 billion, beating estimates of $921.7 million
• Equity underwriting rev. $498 million, beating estimates of $445.9 million
• Debt underwriting rev. $921 million, missing estimates of $1.03 billion

On the expense side, JPM reported $8.7B, up 7% YoY, predominantly driven by higher brokerage, technology and legal expense; As for credit costs., they were $61mm, driven by net downgrade activity and the net impact of charge-offs, largely offset by a reserve release due to an update to loss assumptions on certain loans in Markets.

Commenting on the quarter, CEO Jamie Dimon said that “the US economy has been resilient” however, “two significant risks remain. Ongoing and future spending requirements will likely be inflationary, and therefore, inflation may persist for some time. Additionally, geopolitical conditions remain the most dangerous and complicated since World War II.”

Dimon also said that client asset net inflows totaled $486B in 2024, adding that “we have consistently said that regulation should be designed to effectively balance promoting economic growth and maintaining a safe and sound banking system.”

Looking ahead, JPM said that it expects $90BN in Net Interest Income ex markets for 2025, as its “balance sheet growth offsets the drop in rates.” Including markets, NII would be $94 billion, well above the $89.8BN analyst estimate.

On the expense side, JPM sees about $95 billion in total adjusted expense, up from $91.1BN in 2024, due to expenses increases across all sectors.

JPMorgan did a U-turn on 2025 NII guidance in the quarter. In October, Chief Financial Officer Jeremy Barnum said the $87 billion consensus estimate at the time was “a little toppy.” By December, however, the interest-rate outlook was higher, and Marianne Lake, who runs the lender’s sprawling consumer unit, told investors that 2025 NII could come in about $2 billion higher.

Finally, the bank also expects an card service NCO rate of 3.6% for the full year.

Commenting on the results, Goldman bank analyst Richard Ramsden gave it a thumbs up, saying “we expect a positive market reaction to results, as JPM: 1) delivered better NII and fees; 2) increased the 2025 NII ex Markets guidance and implied all in NII guidance; and 3) kept flat 2025 expense guidance.”

Some more highlights from his note:

• Summary of key quarterly trends: The quarterly core ROTCE of 20.2% came in 230bps above the Street, and 325bps above management’s medium-term ROTCE guidance of 17%. JPM’s NII came in better than GSe/consensus, driven by a 9bps NIM beat, on much lower deposit costs, despite 2% lower avg. earning assets (lower loans, but higher cash and securities). Core fee income was 4% higher, on higher capital markets, and consumer fees. The core efficiency ratio was 230bps better than like consensus. The company repurchased $4.3bn of stock (gross) in the quarter, with a CET1 ratio of 15.7%, vs. a 13.5% target.
• Summary of guidance and vs. expectations: Management increased the 2025 NII ex Markets guide to $90bn vs. ~$89bn previously, and rolled out an all in NII guidance of $94bn, which was vs. an implied guidance of ~$92bn, in our view, and compared to GSe/Street of $92.7bn/$91.1bn. They also kept the 2025 expense guidance flat at ~$95bn, and vs. GSe/Street of $95.9bn/$95.3bn.
• We look for further clarity on: 1) the key assumptions underpinning the NII guide into 2025, given the much better 4Q24 ($424mn better than consensus, or ~$1.7bn annualized), and much lower deposit costs; 2) the capital markets outlook, given questions around the pace of the build in investment banking (aside from in DCM); 3) the ability to generate efficiency improvements over the next two years, after continued, robust expense discipline in the quarter, combined with better revenue (higher fees and higher NII vs. the Street, and lower expenses); 4) the path and speed of credit normalization; and 5) an early read on uses of excess capital, given the potential for regulatory reform under the new US presidential administration.

Without any major red flags in the earnings which generally beat across the board, shares of JPMorgan, up 46% in the 12 months through Tuesday, gained 2.2% in early trading.

JPM’s Q4 investor presentation can be found here.

Authored by Lance Roberts via RealInvestmentAdvice.com,

In last week’s discussion with Thoughtful Money, I noted that we are becoming more “tactically bearish” as we progress into 2025. While we have remained primarily bullish in equity positioning over the last two years, several risks are now worth considering.

However, it is critical to note that being “tactically bearish” does NOT mean we are expecting a bear market or a severe market crash. Regarding portfolio management, the difference between being “tactically bullish” or “tactically bearish” is the level of equity risk we take in client portfolios. Over the last two years, we have been “tactically bullish” and have held more significant weightings in equities that have benefitted from market momentum and investor sentiment. However, shifting toward a “tactically bearish” position would suggest rebalancing exposure to more fundamental, value-oriented, dividend-paying companies that will reduce overall portfolio volatility. It also may mean owning less equity exposure and increasing cash levels.

Could a “crash” happen? Yes. However, bear markets rarely happen all at once. In most bear markets, the market showed plenty of warning signs well before the “bear” came out of hibernation. Such gave investors ample time to exit the market, reduce risks, and raise cash to minimize the eventual reversion to capital. Even a simple technical signal, such as when the market violates the 48-week simple moving average, allowed investors to exit risk well before the rest of the correction occurred. Did you get out right at the top? No. Did you get back in at the exact bottom? No. Did you participate in most of the advance and avoid most declines? Yes.

Furthermore, as discussed in “Credit Spreads,” the difference between Treasury and Junk bond yields tends to be one of the earliest signals that credit markets are pricing in higher risks. Unlike stock markets, which can often remain buoyant due to short-term optimism or speculative trading, the credit market is more sensitive to fundamental shifts in economic conditions.

Currently, Wall Street analysts are very optimistic about 2025. Notably, earnings estimates for 2025 remain well deviated from historical long-term growth trends. That in and of itself is not a reason to be more cautious. However, current valuations suggest that stocks are priced for perfection as asset prices are well ahead of what a declining economic growth rate can deliver. This leaves little room for error. In other words, investors are essentially betting on corporations’ flawless execution in a year when macroeconomic uncertainties loom large.

In the short term, valuations are a terrible timing tool for investors. However, there are times when valuations collide with other factors, making them a more significant short-term risk.

Interest rates are one of those factors.

Interest Rates Are An Unappreciated Risk

Over the last two months, interest rates have risen sharply due to fears of “tariffs” under the new Administration. Furthermore, there is concern that stronger-than-expected economic data might stall the Federal Reserve from cutting rates further. Notably, the rate increase is primarily a function of short-term sentiment, as economic data remains in a longer-term reversion process. Michael Lebowitz recently discussed the impact of sentiment on rates. The model below combines the Cleveland Fed Inflation Expectations Index and GDP into a model. (Economic activity is what creates inflation: supply vs demand). That model historically dictates where interest rates should be. While interest rates are nearing 5%, the economic and sentiment model says rates should be closer to 3%.

The next chart correlates the model and presents the “term” premium and discount. The orange dot shows where yields trade currently relative to the model, which is the highest in its 35-year history. Mike has also highlighted the 2018-2019 range when the Trump Administration previously imposed tariffs. While the bond market has sold off on fears of inflation from tariffs, the previous period resulted in lower yields, not higher.

However, in the near term, higher yields present an unappreciated market risk to the market and the economy in general. Interest rates are a function of economic growth and inflation. Inflation is a byproduct of economic growth, which is curtailed by higher rates. Furthermore, increases in interest rates negatively impact corporate earnings as borrowing costs increase. Therefore, while rising interest rates do not immediately impair earnings growth, eventually, they do as economic growth slows.

Given that higher borrowing costs divert income into debt service, the negative impact on businesses is evident in an economy and financial market supported by rising debt levels. Over the last two years, corporate bankruptcies have increased sharply as borrowing costs have risen. While credit spreads have yet to reflect this reality, borrowers will eventually become more “risk averse.” This is why credit spreads, as shown above, are an important leading indicator of market risk.

Lastly, valuations are a function of earnings growth and investor sentiment. Therefore, rate increases pose a significant threat if earnings growth becomes impaired due to higher costs and slowing economic demand. Historically, rising interest rates have triggered more significant mean reverting events. This is because investors must reprice assets for lower expected earnings growth rates. With valuations at the highest level since the stimulus-induced frenzy in 2021, the risk of a reversion has increased. Such is particularly true if Wall Street’s bullish forecasts fail to become reality.

The good news is that during economic and earnings contraction periods, yields fall substantially as the markets are repriced to a new reality. Such eventually provides the base for the next bull market cycle.

But that will be a conversation for a later article.

Technicals Suggest Being More Tactically Bearish

While there are certainly some more significant macroeconomic concerns heading into 2025, the technical backdrop supports being more “tactically bearish” into the new year.

The following chart has provided a strong basis for our portfolio risk-management protocols over the years. It is a weekly price chart of the S&P 500 index showing the current bullish price trend channel that started in 2009 on a logarithmic scale. Whenever that market has traded at the top or bottom of that channel, it has been a significant indication to begin changing allocation levels in portfolio models. The bottom two panels are a short—and longer-term weekly Moving Average Convergence Divergence Indicator (MACD). Notably, the deviation of those indicators from the long-term norms post-2020 has been significant due to the flood of stimulus and surge in market speculation. Notably, both indicators are topping and beginning to signal a market warning. While these indicators can remain elevated for some time, the market will be in a more corrective process when the trends become consistently lower, as seen in 2022.

With the market still trading above longer-term means, it is not yet time to sound the warning bell to reduce portfolio risk significantly. However, given the combination of higher rates, excessive valuations, and the risk of slower earnings growth, focusing on risk heading into 2025 seems prudent. Therefore, it seems appropriate to restate something I wrote the last time we saw these divergences.

“Our job as investors is to navigate the waters within which we currently sail, not the waters we think we will sail in later. Higher returns come from the management of ‘risks’ rather than the attempt to create returns by chasing markets. Robert Rubin, former Secretary of the Treasury, defined this philosophy when he stated;

‘As I think back over the years, I have been guided by four principles for decision making. The only certainty is that there is no certainty. Second, every decision, as a consequence, is a matter of weighing probabilities. Third, despite uncertainty, we must decide and we must act. And lastly, we need to judge decisions not only on the results but also on how we made them.

Most people are in denial about uncertainty. They assume they’re lucky, and that the unpredictable can be reliably forecasted. Such keeps business brisk for palm readers, psychics, and stockbrokers, but it’s a terrible way to deal with uncertainty. If there are no absolutes, all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each. Then, on that basis, you can make a good decision.’”

An Honest Assessment

For all of these reasons, we are becoming more “tactically bearish” as we ponder the outcomes of 2025. It should be evident that an honest assessment of uncertainty leads to better decisions. Still, the benefits of Rubin’s approach, and ours, go beyond that. Although it may seem contradictory, embracing uncertainty reduces risk, while denial increases it. Another benefit of acknowledging uncertainty is it keeps you honest.

“A healthy respect for uncertainty and focus on probability drives you never to be satisfied with your conclusions.  It keeps you moving forward to seek out more information, to question conventional thinking and to continually refine your judgments and understanding that difference between certainty and likelihood can make all the difference.” – Robert Rubin

We must recognize and respond to changes in underlying market dynamics. If they change for the worse, we must be aware of the inherent risks in portfolio allocation models. The reality is that we can’t control outcomes. The most we can do is influence the probability of specific outcomes. Such is why we manage risk by investing in probabilities rather than possibilities. 

Such is essential to capital preservation and investment success over time.

*  *  *

For more in-depth analysis and actionable investment strategies, visit RealInvestmentAdvice.com. Stay ahead of the markets with expert insights tailored to help you achieve your financial goals.

A week after a devastating inferno leveled large swaths of Pacific Palisades and Altadena to ash, Los Angeles County remained under a severe fire threat on Wednesday morning. Residents have been left in a state of shock, expressing frustration over what many see as possible negligence by county and/or state officials to mitigate the spread of the fires. The fires have become the region’s worst fire disaster in history, with new damage and economic loss estimates between $250 billion and $275 billion, according to AccuWeather. 

“These fast-moving, wind-driven infernos have created one of the costliest wildfire disasters in modern U.S. history,” AccuWeather Chief Meteorologist Jonathan Porter said, adding, “Hurricane-force winds sent flames ripping through neighborhoods filled with multi-million-dollar homes. The devastation left behind is heartbreaking, and the economic toll is staggering.”

AccuWeather predicted economic damages between $250 billion and $275 billion had eclipsed inflation-adjusted damages of $200 billion from Hurricane Katrina, according to JPM analysts. 

“Nonetheless, we think the short-term effect on national GDP growth, employment, and inflation will be small, though this could change if the fires worsen substantially,” the analysts said. 

At the end of last week, AccuWeather estimated total economic damages to be around $150 billion, while analysts from other desks expected insured losses north of $20 billion. 

The analysts noted, “That is a significant volume of insured losses, but it also suggests the majority of economic losses are uninsured.” 

The concentration of wealth in Pacific Palisades is high. According to IRS data analyzed by JPM, the average home in the area is valued at $3.5 million, yet more than half of tax returns report an adjusted gross income under $200,000. In Altadena, where the average home value exceeds $1.2 million, over 80% of tax filings show incomes below $200,000, with more than 60% reporting less than $100,000.

“Construction costs will be lower than home values though: in 2019, Redfin estimated that land value was 60% of the price of a home in Los Angeles, the highest share among any major metro area,” the analysts pointed out. 

As of Wednesday morning, many parts of Pacific Palisades, Malibu, Calabasas, Brentwood, and Encino remain under evacuation orders or warnings. At least 12,000 building structures have burned, displacing thousands of households. 

Here’s the latest information on the fires (courtesy of L.A. Times):

Palisades Fire:

Burned 23,713 acres and numerous homes, businesses and landmarks in Pacific Palisades and westward along Pacific Coast Highway, toward Malibu. As of 7:00 a.m. Tuesday morning, the fire was 17% contained, up from 14% early Monday. Many parts of Pacific Palisades, Malibu, Calabasas, Brentwood and Encino are under evacuation orders or warnings. More than 12,000 structures remain threatened. Santa Monica has downgraded its mandatory evacuation orders to warnings. Officials estimate that more than 5,300 structures, including many homes, have been damaged or destroyed.

Eaton Fire:

Burned 14,117 acres and many structures in Altadena and Pasadena. As of 7 a.m. Tuesday morning, the fire was 35% contained, up from 33% early Monday. Officials say 7,000 structures have been damaged in the fire. Most of Altadena was under an evacuation order, as was unincorporated Kinneloa Mesa. In Pasadena, a mandatory evacuation order was in place in the northern half of the neighborhood of Hastings Ranch. In Sierra Madre, mandatory evacuations were in effect in some areas north of Grand View Avenue, and voluntary evacuations were in place in other portions of the city.

Latest Zero Hedge headlines:

• 10 Dead, 10,000 Structures Burned In Los Angeles Area Inferno As Fire Damage Could Exceed $150 Billion

• “Do Not Panic Buy”: Officials Urge Calm As LA Fire Crisis Disrupts Main Fuel Pipeline To Las Vegas

• “We’re Not Screwing Around”: L.A. Sheriff Declares Curfew Amid Arson & Looting Chaos

• California-Based Insurer Crashes Amid Billions In LA Area Fire-Damage Losses

• Arson Threats A “Major Issue” In Wildfire-Ravaged Los Angeles County

• California Imposes 1-Year Insurance Cancellation Freeze In Areas Ravaged By Wildfires

• Palisades Fire Crisis Intensifies Ahead Of Windstorm Event Early Next Week

• Three Military Humvees, Machine Gun Mounts, Stolen Outside Of Los Angeles

• Palisades Fire Threatens New Upscale Communities As Santa Ana Winds Return

• California’s Insurance Crisis Just Got A Whole Lot Worse

• AP News Heavily Ratioed For Blaming Palisades Fire On Climate Change

• Why Was Pacific Palisades Reservoir Empty? It Gets Worse…

• L.A. Residents Sue Edison Utility Over Potential Role In Palisades Fire

• Blaming ‘Climate Change’ For LA Fires Only Makes Newsom Look Criminally Incompetent

• Return Of Strong Winds Spark “Dangerous Situation” Across Fire-Ravaged Palisades

• Wildfire Woes: California Regulators Halted Palisades Fire Prevention Project to Save Rare Shrub

Headlines via L.A. Times (local paper not thrilled with mayor & other city officials who failed the taxpayers): 

• L.A. fire officials could have put engines in the Palisades before the fire broke out. They didn’t

• Mayor Karen Bass was at embassy cocktail party in Ghana as Palisades fire exploded

• L.A. City Council seeks transparency on empty reservoir, dry fire hydrants

• A week after the L.A. firestorms began, the threat continues as the unprecedented losses sink in

Wonder why…

Los Angeles Mayor Karen Bass was all smiles enjoying a cocktail party in Ghana as Pacific Palisades burned to the ground. pic.twitter.com/RErrCrfH6O

— Libs of TikTok (@libsoftiktok) January 15, 2025

Here’s Karen Bass at a cocktail party in Africa as Pacific Palisades was burning. pic.twitter.com/z7iSCYC1mi

— Libs of TikTok (@libsoftiktok) January 15, 2025

The total economic cost of the fires is likely to move higher as containment levels remain low and rebuilding efforts are expected to take years. The financial burden of reconstruction will likely be shared among local and federal governments, insurers, and residents.

On Monday, Palisades homeowners sued the city of Los Angeles’ electric and water utility for not supplying enough water to firefighters. The plaintiffs claim that a reservoir in the area was drained, causing low pressure in fire hydrants.

“This was supposed to be the water to put out the Palisades fire.”

The FP’s Austyn Jeffs visits the Santa Ynez Reservoir that has reportedly been empty since February 2024. pic.twitter.com/DwO5OrYhWk

— The Free Press (@TheFP) January 11, 2025

Soaring insured and total economic costs only means taxes and insurance are expected to jump for residents.

Authored by George Citroner via The Epoch Times (emphasis ours),

People who spend most of their day on social media show significantly higher levels of irritability than nonusers, scoring more than three points higher on a standard irritability test, according to a major new study of more than 42,000 adults.

Dose-Dependent Response

A new study published in JAMA Network Open on Jan. 8 examined the relationship between social media use and irritability, moving beyond previous research that focused primarily on depression and anxiety.

Conducted between November 2023 and January 2024, the study surveyed more than 42,500 U.S. adults from 50 states and the District of Columbia.

The research found that around 80 percent of respondents engaged with at least one social media platform daily. Using the Brief Irritability Test, researchers found that people who used social media multiple times daily scored 1.43 points higher than nonusers.

Those who reported using social media “most of the day” showed an even more dramatic increase, scoring 3.37 points higher than nonusers.

This pattern suggests a dose-response relationship: The more frequently people used social media, the higher their irritability scores climbed, according to the authors.

Social media often frequently shows a heavily filtered and highly curated version of reality. Constantly seeing others portray happy lives, vacations, relationships, and idealistic bodies can lead to feelings of inadequacy, envy, and frustration with one’s own life. This constant comparison can fuel feelings of resentment and irritability.

Additionally, screen entertainment through social media can be overly stimulating, which may increase baseline stress, leading to feelings of anxiety and irritation.

Also, the blue light emitted from electronic devices can interfere with sleep patterns. Lack of sleep can significantly affect mood and increase irritability.

Frequent TikTok, Facebook, Instagram Use Highlighted

The effect was particularly pronounced on specific platforms. For instance, TikTok users who engaged with the platform most of the day showed a 1.69-point increase in irritability scores, while frequent Facebook users showed a 1.40-point increase.

The researchers also examined whether political engagement on social media might explain the increased irritability. While more frequent political discussions on social media platforms were linked to greater irritability, the findings still suggest that social media usage, in general, remained a significant factor in rising irritability scores, even after controlling for political engagement.

Key Limitations

Irritability deserves focused attention as a distinct mental health concern, separate from its known associations with depression and anxiety, the study authors noted.

However, they acknowledged several important limitations in their research, including the inability to assess causation and the reliance on self-reported data, which may be subject to recall bias on the part of participants.

“The association between social media and mood is likely to be complex and potentially bidirectional,” the study authors wrote.

For example, while some platforms’ algorithms may be designed to “elicit outrage” for increased engagement, researchers couldn’t link irritability to specific aspects of social media use.

The researchers called for additional studies to investigate the mechanisms behind this relationship and to develop potential interventions to mitigate adverse effects.

Authored by David Hebert via TheDailyEconomy.org,

What explains the curious lack of economic progress in the EU over the past 16 years?

In 2008, the economies of the European Union and the United States were roughly equal in size in terms of GDP. Fast forward through a global financial crisis and pandemic and the US economy has nearly doubled while Europe’s has barely grown at all. How can we explain this?

One answer is to point out the glaring problem with comparing EU GDP in 2008 to EU GDP in 2023: Brexit. Recall that GDP is defined as the value of all the production that takes place within an economy. In 2016, the EU lost its second largest economy and with it, a significant portion of its overall GDP. Still, with a GDP of between $2.5 and 3 trillion, Britain’s exit from the EU cannot, by itself, explain the nearly $10 trillion gap in GDP.

First, we must remind ourselves that wealth does not happen automatically, bestowed from above as if it were manna from heaven. It has to be created through the conscious and deliberate efforts of workers, business leaders, and entrepreneurs. Notice one group of people missing from this list: policymakers. Despite their claims to the contrary, policymakers cannot create wealth. Indeed, they cannot do so. However, their role in wealth-creation cannot be understated, for they wield the simultaneous power to foster growth and to inhibit it.

Adam Smith gave us the blueprint for growth all the way back in 1776. He writes, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.”

Comparing the US and the EU on these dimensions reveals differences.

Peace

To classify the current US climate as “peaceful” seems disingenuous, especially considering recent attacks, murders, and the bellicose election cycle. Indeed, “reducing crime” is a growing concern for all Americans across the entire political spectrum. Interestingly, crime rates have fallen precipitously in the last several decades. Despite the growing concerns, in a very real sense, Americans have never been safer in their homes and their communities.

Internationally, the US is also much more peacefully engaged than it has been in decades. The US is not currently engaged in any large-scale, direct combat roles in any international conflicts. To the extent that the US is involved (in Ukraine or the Israel-Hamas War), it is through providing political backing, economic aid, military intelligence, and diplomatic support. In other words, the US is engaged in supportive activities, not combative.

Looking at the EU, we see similar results. Crime rates, in general, have mostly fallen throughout the Union, with some cross-country variation. Though, it should be noted that rates of some crimes have been rising in recent years in the EU and some have fallen only slightly and nowhere near the levels to which they have fallen in the US.

Advantage: United States

Easy Taxes

“Easy taxes” could be interpreted many ways. The most obvious interpretation would be the overall tax rate. Because the EU is made up of so many different countries, each of which has their own constellation of policies, direct comparisons can be difficult to make. Looking at top marginal income tax rates, the US comes in at roughly 42.3 percent. Countries in the EU range from 55.9 percent (Denmark) to 10 percent in Romania and Bulgaria, with the average being 42.8 percent. On this dimension, taxes seem to be roughly similar in terms of ease.

One could also consider taxes “easy” if the compliance costs are relatively low and do not disproportionately benefit political cronies or large corporations. Here, both countries largely fail. The US Chamber of Commerce reported in 2024 that 73 percent of small businesses spent either “a great deal” or “a fair amount” of time on issues related to tax compliance. The European Parliament itself, in a 2023 report (PDF), admits as much, saying, “smaller enterprises are burdened with relatively larger compliance costs. Such additional burden does not appear to stem from special allowances for small firms, rather from the general design of a tax system.” Smaller businesses typically do not have access to a dedicated, in-house team of tax experts who are able to handle the administrative and compliance burdens of a tax system.

Finally, we could also consider taxes to be “easy” if they are applied in a way that is equitable. In this context, “equitable” means that people or companies in similar financial or economic situations pay the same amount of taxes. In the US, it is no secret that many companies enjoy special tax abatements and exemptions and that many will choose to incorporate in Delaware for certain tax and business advantages. But the same is true of countries in the EU, especially if we consider that companies can locate their headquarters in a particularly tax-advantaged country and that workers can come from neighboring countries with relative ease. Since tax rates, exemptions, and interpretations of statute vary by country in the EU, it can easily be the case that clever companies can find (unintended or not) loopholes allowing them to save on their tax bill.

Advantage: United States (but only slightly)

A Tolerable Administration of Justice

Whenever even just two people live in close proximity, conflict will occur. This conflict need not necessarily be violent; it could be a simple disagreement between parties requiring outside adjudication. Customers and merchants can disagree on the terms of a warranty, companies can believe that they have complied with various laws and regulations where the public might disagree, or neighbors might disagree on noise levels that are permissible at certain hours of the night.

What is necessary, then, is some means of resolving conflicts in a way that is understood to be fair and impartial to both parties. This conflict resolution mechanism must also be easily accessible so that when disputes happen, a resolution can be reached quickly and at (relatively) low cost. In most countries, this service is performed by courts and other mediation services.

In the US, The National Center for State Courts provides analyses of public opinions of the court system. In their 2023 report, they find that, broadly speaking, the public trusts the court system, finds it to be generally accessible, but that there is growing concern that the court system has become politicized.

For the EU case, the European Commission publishes an EU Justice Scoreboard report, which analyzes the court system on the bases of “efficiency, quality, and independence.” While they find evidence of general improvements being made within the Union, they also acknowledge that much work remains and that there is tremendous cross-country variation in the quality of the judiciary.

We can also get a sense of the overall administration of justice by looking at The Fraser Institute’s Economic Freedom of the World Index, specifically the legal system score by country over the last twenty years. While both the US and the EU score highly in absolute terms, of the twenty-seven countries in the EU, only seven (Austria, Denmark, Finland, Germany, Netherlands, Luxemburg, and Sweden) score higher than the US and only just barely. The other twenty countries are all significantly lower than the US scores.

This matters because having reliable, affordable, and quick access to an impartial court system allows for conflicts to be resolved and for both parties to move forward with their lives — and businesses.

Advantage: United States

Conclusion

Overall, the United States has greater peace, both domestically and internationally, easier taxes, and a more tolerable administration of justice than the European Union. The disparate economic growth between the two is understandable in those terms.

What does remain a mystery, though, is the magnitude of the disparity. If we include the UK’s GDP into the EU’s GDP, there would still be a $7 trillion gap. And while some may point out that Brexit caused reduced economic growth for the entire European region, it is hard to imagine anyone seriously arguing that voting against Brexit would have nearly doubled every single EU member’s GDP. Much remains to be examined.

Still, Adam Smith remains correct: peace, easy taxes, and a tolerable administration of justice are vital for economic progress. With these securely in place, the rest, as he says, will follow and indeed it has.

Authored by Charles Kennedy via OilPrice.com,

Greece is urging the EU to move faster to address the high power and natural gas prices in the bloc that undermine its competitiveness alongside burdening households, Greek Prime Minister Kyriakos Mitsotakis wrote in a letter to European Commission President Ursula von der Leyen seen by Bloomberg News.

European wholesale electricity prices jumped in November to the highest level in 20 months, additionally burdening the key industries in major economies that had just started to recover from the 2022 energy crisis.

Major economies in Western Europe – Germany, France, the Netherlands, Spain, and Italy, have seen a surge in energy costs.

Economies in east and southeast Europe, including Greece, have been suffering even more as energy prices have been higher than in Western Europe in recent months.

Greece, Bulgaria, and Romania have already called on the EU to discuss measures to relieve the high prices.

The Greek PM also wrote to von der Leyen in May 2024 urging the European Commission President “to make the Single Market more competitive and transparent for consumers, for a Europe that improves the living standards of its citizens”

In another letter seen by Bloomberg News, Mitsotakis wrote more recently,

“Prices are telling us we need to move faster but also differently — to think about new ways to tackle the problems that confront us.”

Mitsotakis is calling for better integration of the national grids and for additional measures to protect southeast Europe’s and the EU’s natural gas security. The Greek PM also seeks limits to the costs of overregulating emissions.

“Shifts in the geopolitical landscape make this task even more urgent,” Mitsotakis wrote in the letter.

The European Union is getting ready to have natural gas hold a smaller share of the energy mix, but “we will depend on gas for at least two decades,” the Greek prime minister noted.