2025: Year of Panic
2024 was the Year of Ponzi, therefore I predict that 2025 will be the year of panic.
First I will discuss Wall Street's predictions and then I will get to my predictions.
In 2024 stocks just gained 20%+ for two years in a row, something that hasn't happened since 1998. Therefore bullish pundits are data mining that period of time to ascertain what happens next:
"History says the S&P 500 could continue soaring in 2025"
Bulls are claiming that two massive up years usually leads to a third massive up year. However, when you read the article you quickly realize that the ONLY three times stocks gained 20%+ three years in a row during the past 70 years were all during the late 1990s Dotcom bubble. In other words, they are using a five year timeframe within an epic Tech bubble in order to declare that "history" is on their side.
Further down in the article, the editor warns that this level of valuation has only been seen 6% of the time in the past 68 years and every time that happened stocks declined. So on the longer timeline the odds of another up year are extremely low.
Therefore the consensus on Wall Street is for more gains in 2025, with 6% probability of being right:
"The S&P 500 will finish with gains north of 20% for consecutive years for the first time since 1998...For investors, that represents a rosy picture for the coming year."
Once again, Wall Street predicts a "broadening out" of the rally in 2025 which they predicted for 2024; however, yet again Tech dominance increased during the year and reached levels of relative dominance far beyond what prevailed in Y2K. More on that in my prediction below.
So that's the set-up from a Wall Street standpoint: big gains in 2023 and 2024 followed by more gains in 2025.
It therefore falls on us to figure out what could go wrong?
Hence my predictions.
I will start with the economy and end with stocks.
It's a fool's errand to predict the economy in a 6% budget deficit because on an annualized basis there have been no recessions worse than 6% of GDP since World War II so we could be in a recession now and not even know it. Needless to say that the current 2% GDP growth rate when the debt is growing at 6% of GDP is beyond frightening. The deficit is now growing far faster than the economy and any efforts to contain the deficit - not to say any are on the table - would push the economy into recession and thereby increase the deficit at an even faster pace. Which is another way of saying that the debt is now out of control.
On the political front, the GOP just took control of the Congressional House, Senate, and White House so we can expect a very business friendly agenda on the docket for 2025 which in normal times would lead to a booming economy. Unfortunately, the Fed turned hawkish late in 2024 so the Fed will use this opportunity to either hold rates steady or indeed begin increasing rates again in 2025 which is a scenario that no bull expects. Which would be deja vu of 2018 when the Trump tax cut was passed and the Fed kept raising rates until stocks imploded.
Taken together my economic prediction is that a consumer-led recession will begin early in 2025 caused by a "higher for longer" hawkish Fed imploding the working class that is ending 2024 leveraged to the maximum and will now be buried by higher interest rates to pay for tax cuts for the ultra-wealthy. A scenario that is obviously not foreseen by the ultra-wealthy.
Which gets us to markets.
All of the above economic scenario will be overshadowed by an imminent global markets crash led by Emerging Markets which have been imploding since the election.
The record buying that we saw at the end of 2024 will soon morph into record panic selling. The machines will not be able to handle the level of volume that is about to take place. Note in the chart below the distance back to the 200 day moving average (red line) is now equal to a bear market in Momentum Tech stocks.
There will be no "broadening out" of the rally in 2025 because there will be no rally to broaden out.
Here we see that breadth collapsed late in 2024 and is now deja vu of the 2022 bear market.
Today's bullish pundits are flying blind, straight into the ground.
The one thing I agree upon with bulls is that Tech dominance will end in 2025. Here we see that Tech dominance is greater than it was in the late 1990 period that bulls are using to data mine a third year of gains. And the ratio is well on the way to rolling over from a second lower high.
Which is when the recession began in early 2001.
In summary, sooner than later, all of 2024 Ponzi stock gains will evaporate as if they never occurred. The Fed will be caught off guard and therefore slow to cut rates and worse yet slower to reverse their bond policy from selling (QT) to buying (QE) which will cause a massive selloff in global risk assets and a global liquidity crisis.
Next, the GOP trifecta will take office and be too slow to enact fiscal stimulus since it's not their job to bail out the middle class. Therefore they will wait just long enough to turn "too big to fail" into "too big to bail" and then the house will be looking like a rummage sale.
All of which will be highly deflationary.
Therefore all of Wall Street's predictions for 2025 will be off by a minus sign, and the violent unwind of 2024 will make them look like highway bandits for having predicted yet more gains at the apex of history's largest super bubble.
Happy New Year!
