Here's the Deal - January 26, 2025

Economy: In Slowdown

Market Cycle: Bullish

_{Week 4 of 52 for 2024: 7.69% of the way through 2025}

Table of Contents

• Weekly Note:

• Inflationary Policies

• D.O.G.E. gets an early shake-up.

• Existing Home Sales continue to improve.

• Fed Week

• A Win for Freedom and Free Markets

• Significant Economic Data from the week:

• The Week Ahead

• WTF of the Week

  • Quote of the Week

Weekly Note:

It was an eventful first week for the Trump administration on the economic front. Much of the market’s optimism this week stemmed from a softer tone on tariffs, particularly regarding China, which reassured investors.

This led to the dollar testing a critical support level around $107, while the U.S. 10-year Treasury yield hovered near its key 4.5% level.

However, the tariff situation wasn’t entirely positive. President Trump continued to issue warnings to Europe, Canada, and Mexico.

It appears the administration is focusing on strengthening trade policies with allies first before turning their attention to major economic rivals like China. If that’s the plan, it’s a solid strategic approach. While tariffs are a negative for the economy, at least they appear to be rolling them out in a somewhat calculated and deliberate manner.

Inflationary Policies

Meanwhile, economists continue to warn Trump about the inflationary affects of the new administration’s policies. Like how their immigration plans will upend US agriculture, driving up the price of food.

This is another one of those industries I worked with and experienced first hand in my former career. “Labor intensive” is not nearly a strong enough term for crop picking, while industrial meat packing plants are no easy job either, are additionally downright depressing to experience daily. Truth is, the vast majority of people born in the US are just not equipped to handle working in those conditions. And that’s not necessarily a bad thing, as it shows progress and the upward mobility attainable in the US while also highlighting that it comes with trade-offs.

A trade war with Canada will also help drive the price of gasoline up. Trump and his administration can claim that we don’t need anything from Canada and that we in the US can simply “Drill, baby. Drill.” However, that excludes the fact that there are multiple types of oil for different uses. And the oil imported from Canada helps keep our gasoline prices lower in the US as ~24% of crude refined in the US comes from Canada. Not to mention home building materials imported from Canada would also be affected, sending housing costs even higher.

While there might seem to be valid reasons to support these policies, it’s important to accept the consequences when the negative impacts emerge if you are for them. Every decision comes with a cost, so it’s crucial to ensure that the benefits outweigh the downsides. In this case, the “juice” of protectionist policies comes at the price of years of higher inflation. A tradeoff that needs careful consideration.

D.O.G.E. gets an early shake-up.

It didn’t take long for a major shake-up in D.O.G.E. leadership. What began as a partnership between Elon Musk and Vivek Ramaswamy has quickly turned into a solo act for Elon, with Vivek essentially being told, “You’re fired,” last week.

The apparent tipping point behind the scenes was Vivek’s controversial thread last month discussing the need for immigrants. The post argued that recent American culture prioritizes “mediocrity over excellence,” sparking a significant debate.

Vivek’s observations, while outlandish and the musings of a nerd without athletic ability, does raise an important point: the benefits of striving for excellence while balancing intellectual pursuits with those of athletics and fun.

It also highlights how the work ethic and priorities of immigrant families often shift over generations. Historically, the pattern is as follows:

1. First Generation: Focused on basic needs, taking on low-skilled, labor-intensive jobs to build a foundation.

2. Second and Third Generations: Pursue higher education and careers that demand more intellectual skills, aiming for upward mobility and greater career advancement.

3. Later Generations: Over time, as families move further from the original immigrant experience, the hard work and sacrifices of earlier generations can fade while the privileges the latter generations continues. This often results in a less motivated mindset, leading to dissatisfaction and frustration.

Vivek was initially tasked with removing outdated and burdensome regulations, while Elon was focused on identifying and cutting federal government expenditures. Vivek’s departure seemingly leaves antiquated regulations as is for now.

In my view, this is a mistake as over regulation leads to higher cost burdens on all, while drastically cutting spending will have severe negative short and medium term impacts on the economy as opposed to a more measured and progressive approach. (Progressive like a slot machine, not like a political leaning.)

Time will tell if Vivek’s spot gets filled by someone else, or if D.O.G.E is now simply “The Elon Show.”

Existing Home Sales continue to improve.

Existing Home Sales continued to improve in December, albeit it slowly. But hey, gotta start somewhere. This makes three straight months of growing sales, making it a new trend as we approach the seasonally strongest months for residential real estate.

As we also learned that 2024 was the slowest year in real estate in 30 years. Which is even more significant now than it was then as there are now 26.5% more people living in the US than there was 30 years ago.

Of course, interest and mortgage rates are going to have a lot to say about how this year turns out and if the bottom is truly in for the residential real estate market. But one things for sure, these are the types of headlines you see at bottoms.

How this plays out in the coming months will tell us much about what to expect out of the economy as residential real estate contributes 15-18% to US GDP.

Fed Week

It’s Fed week once again, with the Federal Reserve set to announce its latest interest rate decision on Wednesday afternoon. Unlike the last few announcements, this one is almost certain to result in no change to rates, regardless of whether President Trump demands cuts or not.

Trump’s insistence on lowering rates at this stage is particularly concerning. It reflects a fundamental misunderstanding of how the economic system operates. Pushing for policies that stimulate economic activity and growth while inflation rates remain high, and once again trending higher, is a significant unforced error.

This highlights why Presidents should not have direct control over interest rate decisions. Breaking from tradition of Presidents refraining from outright criticizing the Fed to apply political pressure is one thing and bad enough, granting any President formal authority over rate changes would set the stage for a major economic disaster as allowing rate adjustments for political gain undermines long-term economic stability.

Ironically, if Trump got his way and rates were cut now, it could lead to severe inflation and economic hardships, which could lead to widespread calls for his removal from office. Pair this with inflation-driving tariffs, and the situation could become far worse for the majority of Americans. Except for the ultra-wealthy who are better positioned to weather and ultimately benefit from such conditions.

A Win for Freedom and Free Markets

In a significant win for liberty and open markets, President Trump pardoned Ross Ulbricht this week, fulfilling a major commitment to libertarians, free-market advocates, and supporters of free speech.

If you’re unfamiliar with Ross Ulbricht’s case, it’s an infuriating example of government overreach and corruption within the Department of Justice. Ulbricht, the creator of the Silk Road website, received an exceptionally harsh sentence, while federal agents involved in bringing him down who were later convicted of more serious crimes, were granted much shorter prison terms and were released early.

Sending Ross to prison for building a website is like imprisoning the CEO of Ford or GM because criminals use cars to commit crimes. It’s also similar to labeling Bitcoin or cryptocurrencies as inherently bad because they can facilitate illegal transactions.

By that logic, the U.S. dollar would be far worse. While an estimated $21.4B/yr in cryptocurrency is used for illicit activity, fiat currencies like the dollar are used to transact and launder between $800 billion and $2 trillion annually. This perspective underscores the inconsistency and hypocrisy in how government officials judge different systems, technologies, and government employees as opposed to civilians.

The Past Weeks Market Performance

Markets consolidated at higher levels this week after last weeks surge higher. The consolidation at higher levels shows markets remain strong and warrants a move from “Bullish under Pressure” to flat-out Bullish.

Even bond prices look like they could be bottoming here as well. Something to keep an eye on in the coming weeks and months. Especially if they start to outperform the indices at some point, which would be a major red flag.

All the while, market breadth (New 52week High vs New 52week Lows) is now positive once again after spending much of December negative.

Meanwhile, credit spreads continue to move higher, showing the lack of concern of any sort of credit crisis on the horizon.

If there is a worry for markets at this moment, it’s not an imminent crash. It’s a potential melt-up, which is typically the last gasp of bull markets and credit cycles.

Increased volatility is also a concern as the VIX continues to hold higher lows. Meanwhile, the S&P 500 has already formed an "outside month" on the charts, a pattern that suggests significant price swings. This setup points to the possibility of an active few months ahead for the markets, with plenty of back-and-forth movement likely on the horizon.

Significant Economic Data from the week:

The Week Ahead

We’ll know the result of this year’s January Barometer and January Trifecta at the close of trade on Friday. At this point it looks good, as the S&P 500 is over 3% higher than where it began the month and new year.

We will also get our first glimpse of how the US economy performed in Q4 with the initial release of Q4 GDP on Thursday.

While we also will see how the Fed’s preferred inflation index fared in December with the release of PCE and Core PCE on Friday.

Economic Data to watch:

Earnings This Week

It’s a huge week for earnings as Apple, Amazon, and Microsoft are reporting along with many other market moving names. Marking the 2nd busiest week of earnings. (Next week is the busiest.)

Again, the key this earnings season is how well profits and profit margins held up last quarter. Should they begin to drop, it’s likely that layoffs will ensue as a result. That would be a major signal the we are entering or about to enter a recession.

WTF of the Week

Quote of the Week

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