Happy New Year, everyone! I hope you all had a great holiday season and that the year is off to a strong start for you.

This month, I had an interesting realization: I actually have a clearer picture of the economy and markets when I don’t follow them too closely. As some of you know, last year I shifted my focus to more “exotic” markets—like physical sulfuric acid trading—and at this point, that activity alone takes up most of my day. The rest of my time is split between CFA studies, sleep, the gym, and the occasional attempt at a social life. Naturally, I don’t track the markets as obsessively as I did a year ago. I thought this would be a problem, that I’d lose my informational edge—but I didn’t. In fact, my analysis actually improved. Fewer, but higher-quality inputs have led to better insights, even if I’ve lost some short-term actionability. But since I’m not actively trading, I don’t need it anymore. It was interesting to see this play out, especially since reducing my information intake was something I’d wanted to do for a while, and it ended up happening organically.

Another important thing that happened in January is that Trump has been inaugurated as President, and everything seems to be happening at once. We’ve really hit the accelerator. More on that later.

And then there’s the market. It started declining, and naturally, people are asking: Is this the end? I don’t think so. Consider this: you often hear that “cash is king”, but lately, that hasn’t been the case. Despite US money market funds offering close to 5% interest for much of 2024—and with economic and policy uncertainty still elevated—investors have been willing to run down their cash allocations to historically low levels. No one wants to miss out on the upside. On top of that, expectations that central banks will eventually cut rates to neutral or below-neutral levels have fueled stronger-than-usual demand for duration, which has provided yet another tailwind for equity prices.

And despite all the doom on Twitter, earnings have been solid so far. I don’t see a compelling reason for a significant equity market decline—yet.

Crypto

Contrary to my usual approach, we’re starting with crypto this time—because this month, the space went absolutely wild.

Just a few days before the inauguration, a TRUMP coin was launched in the middle of the night (for us Europeans). At first, we all assumed it was a scam, or that Donald Trump’s Twitter account had been hacked. But soon, it became clear that the coin was real—and that he was behind it. The price skyrocketed so much that, within 72 hours, TRUMP had outperformed the S&P 500 since its inception. Fine, he got richer—maybe it was a way to stealth-finance some operations or funnel money into a government fund. But ownership was heavily concentrated in just a few wallets, and we all expected a rug-pull.

Then came the next twist: another coin was born—MELANIA, issued, as you may have guessed, by Melania Trump (link). The newly minted coin immediately drained liquidity from TRUMP and, really, the entire crypto market, causing a crash. It was obvious this would be another rug-pull. Again, people speculated that her Twitter account had been hacked, but then Trump himself retweeted the coin’s contract address—effectively confirming its legitimacy.

Needless to say, both TRUMP and MELANIA turned out to be pump-and-dumps, massively enriching insiders and leaving the average “investor” holding the bag.

But if the United States can pull off a stunt like this, why wouldn’t others follow? That’s probably what the Cuban government thought when they launched CUBA coin, which briefly reached a $30 million market cap before collapsing. Naturally, this sparked a flood of “unofficial” follow-ups—Cuba Coin 2.0, Justice for Cuba, and so on.

Now, you all know I’m not a big fan of crypto. With a few exceptions like Monero, most coins are either worthless (in the sense that it has no productive value) or outright scams. But these events warrant a broader discussion.

In any country, government officials must at least appear professional—whether it’s just a facade or not is irrelevant. The government should always conduct itself in a way that is superior to the common man because it was elected to manage the country, to lead, and, yes, to set an example. Just as a company’s culture is shaped by how the CEO behaves, a country’s culture is shaped by the actions of its highest-ranking officials.

So what message does it send when a President rug-pulls a memecoin on the eve of his inauguration? That theft is acceptable, that scams are normal, and that white-collar crime doesn’t exist. Of course, that last part has already been true for the past 17 years—but you get the point. When those at the highest levels of power openly engage in such behavior, it corrodes trust in institutions and accelerates a shift toward a society where fraud is not just tolerated, but expected.

At some point, the line between governance and grift disappears entirely. And once that happens, there’s no going back.

United States

In my previous update, I said I expected no rate cuts this year—a contrarian view at the time, given that every major bank was forecasting two or more cuts. But with higher inflation readings and a still-hot labor market, I’ve been vindicated: more and more people are starting to believe there will be no cut.

And you know what that means?

It means that regardless of whether my prediction turns out to be correct, the trade on this narrative shift is already gone. Take Goldman Sachs, for example. On January 11th, they wrote: “We pushed back the final three rate cuts in our Fed forecast on Friday morning in response to the strong December employment report, which alleviated some of the lingering concerns about recent labor market softening. We now expect two cuts this year, in June and December, and one more in 2026.”

In their case, they remain dovish because they’re confident inflation is still on track to hit the Fed’s target. I’m less convinced, hence the differing views.

As for the broader equity markets, no cuts don’t mean hikes. Even if the Fed pauses its expected rate cuts, we’re still in the easing phase of the monetary cycle. For us to shift back into a tightening phase, inflation concerns would have to outweigh labor market concerns. And over the past few months, it’s been clear that the Fed cares far more about the unemployment rate than the inflation rate—especially as long as the latter stays within the 2-3% range. Anything that pushes the Fed back toward prioritizing inflation over employment would be extremely bearish.

So, for my view on rates to be correct without triggering a market drop, we’d need to strike a delicate balance—between the idea that Trump will bring back inflation and the belief that inflation is still under control. Not exactly an easy task.

But even if markets do fall—say, the S&P 500 corrects 10% in the first half of the year—would that really be such a disaster after the massive gains of 2020, 2021, 2023, and 2024? Not at all. Especially when we all know that Trump cares about stock prices more than any other president. If markets start seriously dumping, a V-shaped recovery is almost inevitable. And if we have to drop 10% before closing the year up 15%, I’ll take it.

Now, let’s talk about tariffs.

First of all—are they even active yet? The President announced them, but as of this writing (February 1st, 2025), nothing official has been signed. We’re basically in that awkward phase where two teenagers are clearly into each other, have already kissed, but still haven’t defined the relationship. An interesting way to conduct international affairs.

Beyond that, the way most people are analyzing their market impact is like playing with fire—they assume everything will unfold just as it did in 2018. But this is a completely different cycle. Inflation, which is first and foremost a psychological phenomenon, has been running too high for—what—five years now? That means it hasn’t been stamped out and will inevitably be passed on to consumers simply because companies can do it. And just because economic textbooks claim that one-off price hikes aren’t inflationary doesn’t make it true. Remember: economics is, above all, mass psychology. And Americans are already scarred by inflation.

Then there’s the risk of collateral damage. The strength of the U.S. dollar has been a cornerstone of America’s power and wealth. So what happens when government policies actively disincentivize other nations from holding it? Or, put differently—what happens to asset prices when global demand for the dollar starts to decline?

As Rand Paul said, “Tariffs are simply taxes. Taxing trade will mean less trade and higher prices.“

Federal Reserve

Before diving into the FOMC meeting, it’s worth noting the recent headlines around Trump’s push for Powell to cut rates, driven by the obvious reason: lower rates typically push asset prices higher. But making such a move would be a serious misstep. Monetary policy is a delicate balance that relies heavily on the central bank’s credibility, much of which is built on its ability to operate independently from political pressure. If you undermine that independence, you risk opening the floodgates to uncontrolled economic chaos. Truly a bad idea.

There is actually a good book that has been written on the topic, “Unelected Power” by Tucker: highly suggested.

Anyway, at January’s meeting, Powell basically confirmed that the Fed’s policy has shifted from pre-emptive easing—cutting rates to head off potential bad outcomes—to reactive easing, meaning they’ll only cut rates in response to bad things actually happening. In other words, the Fed can no longer be counted on as a bullish driver for stocks. This is a big shift for the market, and the days of easy rate cuts as a reason to pile into equities are over.

This is something I explained in my December 2023 update, if you recall: “Nevertheless, it’s crucial to bear in mind that, contrary to the seemingly widespread belief, rate cuts aren’t inherently bearish. Given the limited instances of market reactions to rate cuts, we need to delve into the reasons behind the cuts to deduce the rational market response. For instance, if rate cuts occur due to an economic recession, then the outlook is likely bearish. On the other hand, if the cuts are a response to inflation returning to the target and there’s no longer a need for a tightening stance, then it would be considered bullish. The distinction between these scenarios lies not in the action itself (the cut) but rather in the narrative it conveys about the future: the first scenario leads traders to anticipate a decline in growth, resulting in lower earnings and consequently lower valuations; in contrast, the second scenario provides no insight into growth or earnings but does reduce the discount rate, leading to higher valuations.“

The subsequent Q&A session, however, felt more like a spectacle as the press seemed desperate to manufacture a Powell vs. Trump showdown for 2025, which, honestly, is probably going to happen on its own—no need for the media to stoke that fire.

On the policy side, the FOMC kept rates unchanged between 4.25% and 4.50%, as expected, with a unanimous decision. However, the statement did reveal a hawkish shift—specifically, the removal of the reference to inflation making progress toward the 2% target. Powell defended this as nothing more than “language clean-up”, insisting it wasn’t a policy shift, but we know that everything is a signal when it comes to central banks. On the labor market, the Fed acknowledged that conditions had stabilized at a low unemployment rate, which contrasted with their December assessment that conditions were easing. Still, the Fed remained cautious, maintaining a balanced view on risks to both employment and inflation, sticking to its data-dependent approach for future adjustments.

Powell also emphasized that the Fed isn’t in a rush to adjust its stance, even when questioned about a potential rate cut in March. He did highlight recent inflation progress, particularly in shelter costs, but made it clear that this progress isn’t guaranteed. Given the uncertain forecasting environment, he reiterated that the Fed is in a good position to monitor the economy, with no immediate plans to end quantitative tightening just yet. Powell also confirmed that the Fed is currently above its long-run neutral rate estimate and is closely watching reserve levels.

Europe

It seems Europe is finally waking up to the fact that it has become little more than an open-air museum. If the continent doesn’t find a way to innovate—economically, technologically, and industrially—it risks fading into irrelevance, a mere shadow of what it once was.

As I mentioned in my September’s update, there has been a solid blueprint for restoring European competitiveness, but until recently, it seemed more like wishful thinking than an actionable plan. Now, however, real movement is taking place, and for the first time in years, there’s a sense of urgency.

This is the foundation of my bullish thesis on Europe. Admittedly, my perspective is highly qualitative—something that’s reflected in my portfolio weighting—but the core idea is simple: Europe has reached a now or never moment. Mario Draghi has accurately identified the key areas in need of reform, public support is growing, and with political backing and initiatives such as “Make Europe Great Again” (link) and EU-INC (link), the chances of meaningful change are higher than ever.

Given the developments in the U.S. and China, this is likely Europe’s last opportunity to reassert its relevance. If these reforms fail, there won’t be another chance—the continent will be permanently left behind.

But you may be wondering: what’s the trade? How do you capitalize on this thesis?

Ironically, the best way isn’t through the market—it’s by being European. If this thesis proves correct, the primary beneficiaries won’t necessarily be investors, but business owners, entrepreneurs, and citizens. A more competitive Europe means a stronger environment for innovation, better opportunities for wealth creation, and an economic climate that rewards those who actively participate in it.

That’s why, beyond any specific asset allocation, my biggest bet on Europe is simply living here.

We might laugh at Von Der Leyen’s speech about “Compass” (link), but in reality, this is the closest thing a bureaucratic system like the EU can say to: “We were wrong, and we’re going to change—quickly and across a broad range of issues.”

The “Competitiveness Compass” is essentially a roadmap for how the EU plans to stay relevant. It focuses on three key areas:

• Innovation – Europe can generate patents and start-ups, but turning them into actual businesses? That’s been the struggle. The plan aims to address this by pushing for more R&D, cutting red tape, and making it easier for companies to scale across the 27-member bloc.
• Green Transition & Industry – The EU is going full steam ahead on decarbonization, but the crucial difference here is that they want to do it without crippling their industries—a massive improvement, though it comes after nearly reducing Germany’s economy to rubble. The Clean Industrial Deal aims to strike a balance between sustainability and economic competitiveness, while also tackling Europe’s structural issue: sky-high energy costs.
• Economic Security – Europe has finally realized that depending too much on external suppliers (especially for critical materials) is a ticking time bomb. The plan proposes diversifying supply chains, securing trade agreements, and streamlining regulations to make the single market a real growth engine again.

Of course, all of this looks good on paper, but execution is where things could fall apart. The EU’s classic problem—getting 27 countries to agree on anything—still looms large. But at least they’re finally acknowledging that if they don’t change, they’ll be left behind.

European Central Bank

As expected, the ECB cut rates by 25bps, lowering the Deposit Rate to 2.75%. In their policy statement, the Governing Council emphasized a data-dependent, meeting-by-meeting approach, avoiding any firm commitment to a specific policy path. Despite this easing, policymakers still view the current stance as “restrictive”. The statement noted the economy faces headwinds, but demand should pick up over time. Inflation is still considered “high” but is progressing in line with expectations, with the disinflation process on track.

At the press conference, Lagarde’s initial remarks weren’t overtly dovish, which briefly sparked a hawkish reaction in the market. However, as the Q&A progressed, that sentiment faded. She clarified the decision was unanimous and that there was no discussion on the terminal rate, even after Schnabel’s recent comments suggesting the ECB may be near the point of considering further rate cuts. Lagarde also stated the debate around neutral rates was “premature”, stressing it was too early to discuss if rates would go below neutral.

Looking ahead, the ECB will release a paper on revising the natural interest rate and debut its wage tracker on February 7th. However, as I mentioned in May’s update, much of the focus on R* seems irrelevant outside academic circles.

Overall, the ECB is dialing back restrictiveness but doing so cautiously due to the uncertainty created by the potential tariffs from the Trump administration, which continue to cloud the euro area’s growth outlook.

Japan

The BoJ delivered the widely anticipated 25bps rate hike, pushing the short-term interest rate up to 0.50%, signaling its continued focus on controlling inflation, even as it treads carefully around economic risks. Despite the hike, there was some internal dissent, with board member Nakamura voicing opposition. In its policy statement, the BoJ reiterated that further rate hikes will depend on whether the economy and inflation evolve as expected, with the ultimate goal of sustainably reaching the 2% inflation target. Inflation expectations have been rising moderately, and the bank highlighted an encouraging signal: more companies are indicating solid pay hikes in the upcoming spring wage talks, which could help support both inflation and consumer demand.

On the economic front, while inflation remains the BoJ’s main priority, the growth outlook seems to be facing some headwinds. In a move that surprised many, the BoJ raised its Core CPI projections across the board, undermining expectations for a dovish stance. At the same time, the central bank downgraded its Real GDP forecast for FY2024, suggesting that growth may struggle in the near term. However, it kept projections for subsequent years unchanged, indicating a longer-term optimism despite short-term challenges.

Governor Ueda’s press conference initially seemed hawkish, with his comments on strong wage talks and the stability of markets post-Trump signaling that the BoJ could continue tightening. But as the conference progressed, his tone shifted to a more dovish stance when he stressed that there was no pre-set path for future rate hikes. This created uncertainty in the market, leaving participants unsure about the pace of future tightening.

The BoJ now faces the delicate task of managing market expectations while staying committed to its inflation targets without pushing too hard on tightening, which could risk stalling economic recovery.

China

The China section will be entirely dedicated to the news of the month: DeepSeek.

Here’s the saga in a nutshell: OpenAI, led by Sam Altman, kicks things off by asking for billions in funding to build AI. People go, “Sure, take the cash”, and then Altman casually asks for trillions instead. Everyone’s on board, and AI is proclaimed the next industrial revolution. Nvidia skyrockets in value, and suddenly, every employee from the CEO to interns, is a millionaire. Meanwhile, OpenAI keeps raising prices, claiming they’re losing money due to insane compute costs.

So, some random Chinese quants, fed up with the escalating costs, throw together their own AI project—DeepSeek—with just $70 in funding, a bag of chips, and a sweatshop coworking space. They end up building an incredible model, releasing papers and benchmarks that prove it outperforms OpenAI’s.

And guess what? The bombshell drops—DeepSeek’s model, known as R1, isn’t just good, it’s better. Developed with only a modest budget of $5.58 million, R1 is challenging the likes of OpenAI’s GPT series, with results showing it outperforms in key benchmarks. It’s also open-sourced, further fueling the movement towards accessible, affordable AI. This sent shockwaves through the industry—Nvidia’s market cap took a $600 billion hit, and tech giants like Google and Apple were left scrambling. Chinese companies like ByteDance are also ramping up their own AI efforts, now claiming they’ve outpaced OpenAI’s models in certain tests.

The American AI companies are in total meltdown, calling DeepSeek a ploy by the Chinese government to disrupt the global market. In reality, though, this development highlights how quickly China is closing the gap in AI technology. The AI bubble in the U.S. may have popped, and it’s clear: if you’re still betting on the West’s AI dominance, it’s over.

And all that speculative capital? It’s shifting back to crypto, where the real risk-takers are headed.