Zerohedge

Even though US cash markets are closed today for the President’s Day holiday, US equity futures are open and are trading about 0.2% higher amid muted volumes. 

The action, as noted earlier, is in Europe where bonds fell and shares of defense companies rallied on the likelihood of greater military spending, which could force governments to step up borrowing in the coming years. 

Bloomberg reported that European officials are working on a major new package to ramp up defense spending and some EU leaders are planning to meet on Monday in Paris to start drawing up their response. The moves come as the US pushes for a quick end to the war in Ukraine and after Vice President JD Vance attacked longstanding European allies at a security conference Friday.

“The goalposts are shifting, and the EU is realizing they can rely less and less on the US for protecting their borders. In lockstep, we’re going to have to see European countries spend more on defense,” said Aneeka Gupta, head of macro research at Wisdomtree UK Ltd. “That does warrant a bit more caution on bonds.”

The developments have cemented the view that debt sales will need to increase as European nations shoulder the cost of a lasting peace deal between Ukraine and Russia. Upgrading defense and protecting Ukraine may cost Europe’s major powers an additional $3.1 trillion over 10 years, according to Bloomberg Economics estimates.

In response to what some view as a massive new debt burden, which of course to others is just fiscal stimulus, Europe’s Stoxx 600 index rose 0.4%…

… led by strong gains in defense names with Rheinmetall hitting a fresh record high, as officials in the region work on a major new package to ramp up defense spending and support Ukraine, pushing Goldman’s index of European defense shares topped a record high (Saab +11%, Hensoldt +13%, RENK +13%, Leonardo +5.7%, BAE Systems +7%).

European stocks were also lifted by improved sentiment over China, a key export market, where a meeting between President Xi Jinping and business figures including e-commerce icon Jack Ma raised hopes that authorities’ years-long crackdown on the private sector is ending.

Here are some of the biggest movers on Monday:

• Assura shares soar as much as 18% on Monday, the most since January 2010, after the UK primary health-care property group’s board rejected a £1.56 billion ($2 billion) takeover bid by funds managed by KKR & Co. and the Universities Superannuation Scheme Ltd.
• Ferrexpo shares rally 18% in London after Peel Hunt raised the recommendation on the miner to buy from hold, citing chances of the company that operates mines and plants in Ukraine returning to full capacity.
• Bavarian Nordic shares rise as much as 6.1%, the most since Jan. 9, after the Danish vaccines maker said the US Food and Drug Administration approved its chikungunya shot called Vimkunya.
• CCC shares drop as much 8.9% after announcing plans to issue as many as 10 million new shares to buy out minority investors in its e-commerce arm Modivo.
• Formycon shares fall as much as 45%, their steepest drop on record, as RBC (outperform) sees a balance sheet impairment due to pricing for biologically similar medicines in the US.
• Bakkafrost falls as much as 8.8%, the most since August 2023, after the Oslo-listed salmon farmer’s 4Q operating Ebit came in below consensus expectations.
• Galp shares fall as much as 3.2% after Portuguese oil co. reported adjusted net income for the fourth quarter that missed the average analyst estimate.
• IP Group shares drop as much as 8.2%, the most in almost three months, after the investor in science and technology firms said its portfolio company Istesso’s mid-stage study of leramistat in rheumatoid arthritis didn’t meet the primary endpoint of improvements in ACR20 versus the placebo.
• Tomra falls as much as 5.4%, the most since November, after Kepler Cheuvreux cut its recommendation of the Norwegian recycling-technology firm to reduce from hold following last Friday’s estimate-beating 4Q.

Earlier in the session, Asian stocks rose, supported by gains in Taiwanese and Japanese heavyweights, even as a rally in China cooled. The MSCI Asia Pacific Index advanced 0.5%, on track for a fourth day of gains. TSMC offered the biggest boost to the benchmark, while Sony led an advance in Japanese shares after raising its guidance. Chinese stocks gave up some of their earlier gains as investors took profit following a recent rally. Optimism remains strong, with a meeting between President Xi Jinping and prominent entrepreneurs including Alibaba co-founder Jack Ma signaling endorsement for the private sector. Tencent stood out, climbing to the highest since 2021 after incorporating DeepSeek to its WeChat social media platform. Chinese tech companies including Alibaba, Baidu and NetEase are due to report earnings this week. Other upcoming events investors will be monitoring include rate decisions in Australia and Indonesia, as well as results from BHP and Rio Tinto.

In rates, German, French and Italian bonds all slipped, with 10-year bund yields — the benchmark borrowing rate for the euro area — reaching the highest in more than two weeks. US bond yields are closed,

In FX markets, Japan’s yen strengthened against all its Group-of-10 peers after the economy grew faster than expected, bolstering expectations of interest-rate hikes from the Bank of Japan. Bloomberg’s dollar index traded steady after two days of losses.

DB’s Jim Reid concludes the overnight wrap

As weekends go this year, this one seemed a fairly quiet one, especially after the last three where a combination of Deep Seek and tariffs have kept us on our toes ahead of the Monday open. However, there were still some fascinating European political developments after JD Vance’s confrontational speech towards Europe on Friday at the annual Munich Security Conference, and news the day before that the Trump administration would start bilateral talks with Russia, as soon as this week, aimed at ending the war in Ukraine. The responses ranged from bemusement to anger but it seems to have had an impact. European leaders will convene for an emergency meeting today in Paris to discuss the latest Ukraine developments and the future of European defence in light of recent fast moving developments, especially those emanating from the Trump administration. So in terms of European geopolitics it’s been a huge last few days with potentially large ramifications ahead, and maybe we’ll look back on them as a big catalyst to higher European defence spending.

Indeed our German chief Economist Robin Winkler wrote a blog on Friday suggesting that these very recent developments could potentially transform Europe’s security architecture and could prove to be an important catalyst for German defence and fiscal policy after the election on Sunday. It has led his team to adjust their base case for what is likely to be agreed in the coming weeks by the three centrist parties, regardless of which of them end up in government. There is seemingly more urgency now to increase defence spending and this is something European leaders seem to be coalescing around to some degree. Mark Wall has followed up his recent defence series with “Defending Europe: 10 key points” earlier this morning.

So its a big week for Europe and we’ll preview the German election in a bit more detail below. Before that, today should be quiet as the US is off for Presidents’ Day. It’s not a huge week for data but there’s plenty of Fed speak to go alongside the FOMC minutes on Wednesday. In US data terms, the highlights are housing starts and permits (Wednesday), the Phili Fed (tomorrow), jobless claims (Thursday) – which corresponds to payrolls survey week, and existing home sales and the final University of Michigan consumer sentiment reading on Friday. On this last one, the long-term inflation expectation series printed at the second highest level since 1996 in the preliminary release. So one to watch. However, the survey is extraordinarily partisan at the moment so the market is struggling to work out whether it should ignore the wild disparity between Democrat and Republican voters’ views on prices.

Elsewhere, Friday brings the global flash PMIs and before that we’ll get rate decisions from Australia (tomorrow) and NZ (Wednesday). Our economists expect a 25bps and 50bps cut respectively. We also see inflation from Canada (tomorrow), UK (Wednesday), and Tokyo (Friday), with UK labour market data (tomorrow).

With regards to earnings, 384 of the S&P and 201 of the Stoxx 600 have now reported with 41 and 124 reporting this week. So US earnings season is slowing down with one final macro hoorah next week (26th) with Nvidia. See the full day-by-day week ahead guide at the end as usual.

With regards to the German election on Sunday, the fiscal policy of Europe going forward is potentially at stake here. In terms of the current polls, the Conservatives (led by Friedrich Merz) are still leading by a wide margin at around 30%. The far-right AfD is polling at 21%, and the SPD are third with 15% of total votes, followed by the Greens with 14%. Given its successful social media campaign, the Left is currently enjoying the strongest polling momentum, currently in fifth with 6%. Both the newly founded hard-left party BSW and the FDP are currently polling between 4 and 4.5% and would thus not reach the 5% hurdle for entering parliament but it’s clearly all very finely balanced. At the moment we think a two-party coalition is the most likely scenario but the probability of a tripartite coalition has been rising, especially if two of the three smaller parties hit the 5% threshold required to join parliament. The key for markets is whether the three centrist parties attain the required two-thirds majority for amending the constitutional debt brake at some point if agreement can be made to do so. This likely depends on the three smaller parties’ ability to cross the 5% threshold to parliament. If none or one does then the majority will likely be secured. If two do, then it most likely won’t be. So a big moment ahead.
Asian equity markets are mostly quiet to start the week with the KOSPI (+0.62%) leading the gains with the Nikkei (+0.12%) slightly higher. Chinese risk is slipping after a stronger start with the Hang Seng (-0.91%), and the Shanghai Composite (-0.20%) lower. S&P 500 (+0.20%) and NASDAQ 100 (+0.35%) futures are edging higher with the cash equivalents closer later due to the holiday.

Early morning data showed that Japan’s Q4 GDP expanded at an annualised rate of +2.8%, significantly exceeding Bloomberg estimates of +1.1% while marking the third straight quarter of expansion on improved business spending. On a q/q basis, it grew +0.7%, more than the +0.3% rise expected. Following the data, the Japanese yen (+0.41%) is strengthening for the third straight session, trading at 151.70 against the dollar. Meanwhile, yields on 10yr JGBs (+2.1bps) have hit their highest since April 2010 trading at 1.37%. 5yr JGB yields have risen to 1.04%, the highest since October 2008. So some big landmarks crossed.

Looking back at last week now, risk assets managed to post a fresh advance, despite having to navigate an array of different events. That included the news of reciprocal tariffs from the US, an upside surprise in the January CPI print, potential negotiations over Ukraine, and then a weak retail sales release on the Friday. The latter saw a headline decline of -0.9% in January (vs. -0.2% expected). But amidst all that, the S&P 500 moved up +1.47% last week (-0.01% Friday) to within 0.1% of its all-time high. And over in Europe, the STOXX 600 advanced for an 8th consecutive week, posting a +1.78% advance despite a -0.24% retreat on Friday from Thursday’s record high.

The equity rally extended to other risk assets, with US IG and HY credit spreads down -4bps on the week, while European HY spreads tightened to the narrowest level since September 2021 (-12bps to 283bps). Meanwhile, most commodities moved higher over the week, with Bloomberg’s Commodity Spot Index up by +2.14% (+0.09% Friday) to a two-year high. So that exacerbated some of the concern about inflation, leaving the 2yr US inflation swap up +3.8bps last week to 2.77%, though they retreated -4.4bps on Friday after the weak US retail sales print. This also led gold (-1.56% Friday but +0.75% on the week) to post its biggest daily decline of the year so far.

This backdrop saw sovereign bonds put in a divergent performance on either side of the Atlantic. In the US, the balance of weaker data helped push the 10yr Treasury yield down -1.9bps (-5.3bps Friday) to 4.48%. That came as investors dialled up their expectations for Fed rate cuts, as the upside in the CPI was outweighed by the softer activity data and the weakness in the PPI components that feed into the Fed’s preferred measure of PCE. So investors are now pricing in 40bps of cuts by the December meeting, up from 36bps the previous week. By contrast, yields on 10yr bunds were up +6.1bps (+1.4bps Friday) to 2.43%. And over in Japan, the 10yr yield was up +6.0bps (+0.9bps Friday) to 1.36%, its highest level since 2011.

Authored by Mike Shedlock via MishTalk.com,

The Fed makes horrendous policy decisions because it does not understand inflation.

CPI and wage data from the BLS, chart by Mish

Percentage Increases Since 2022

• CPI: 13.0 Percent

• Rent: +20.1 percent

• Owners’ Equivalent Rent (OER): +19.7 Percent

• Index of Hourly Wages: +14.1 Percent

Hooray! Wages Are Up More than the CPI

Q: Really?
A: Yes but Hell No

Q: Yes for Who?
A: People who own their own home.

Q: Hell No for Who?
A: People who rent.

OER vs Rent

• OER is the price one would pay to rent their own house from themselves, unfurnished without utilities. It is a whopping 26.38 percent of the CPI.
• Rent is just what one would think, but always unfurnished without utilities to make the same comparisons. Rent is 7.50 percent of the CPI.

Q: Does anyone pay OER?
A: No silly. No one rents their own house from themselves.

People who own they own home either own it free and clear or have a mortgage. If the former, they pay property taxes, insurance, and utilities. If the latter, also add in a mortgage payment.

But mortgages, for those who have them, are fixed. They do not go up like rent. On those grounds, people who do not understand inflation, especially asset inflation including houses, believe the CPI is overstated.

Q: What about renters?
A: The BLS says rent is 7.50 percent of the CPI. But also add in OER to arrive at 33.78 percent that the BLS applies to everyone.

The problem with a 33.78 percent is many people pay far more than 33.78 percent of their income on rent.

Those who do have been clobbered by inflation. The home ownership rate is 65.7 percent making the renter share 34.3 percent.

Those who rent are also more likely to have credit card debt and student loans. Interest on credit cards is not part of the CPI. Nor are housing prices.

Is the CPI Understated?

That is what the proponents of Truflation tout. They believe inflation is only up 2.06 percent from a year ago.

Truflation does not count home prices as part of inflation, it downplays OER, and it uses measures of rent based on new leases only (about 10 percent of he market).

It’s a horribly flawed measure.

CPI Year-Over-Year Percent Change

CPI year-over-year data from the BLS, chart by Mish

On February 12, I noted CPI Much Hotter than Expected, Core CPI Hotter than Expected

Year-over-year the CPI is up 3.0 percent with rent up 4.6 percent.

Those who spend a huge portion of their income on rent, their own medical insurance, or student loans will scoff at the notion of 2.1 percent truflation or even 3.0 percent CPI inflation.

So will anyone looking to buy a house, many of whom have given up on the idea they will ever be able to afford one.

The Fed’s Role

Like the CPI and the ridiculous Truflation model, the Fed also ignores home prices. And when the Fed slashed interest rates to zero in the pandemic, mortgage rates fell to 3.0 percent or less.

Anyone with a mortgage refinanced putting extra money in their pocket every month to spend.

Those hoping to buy, watched home prices soar out of sight only to watch the Fed and other clueless economists say home prices don’t constitute inflation.

Two Economies

We have two economies, one for asset holders and another for non-asset holders.

It was the non-asset holders (young voters and Blacks) who switched to Trump and swung the election.

I posted that view many times in 2024, well in advance of the election.

Asset bubbles also contribute to strong spending for roughly 2/3 of the nation while the other third is in misery.

Economists like Krugman still praise the Biden economy.

Looking Ahead

I see budget deficits as far as the eye can see, and Trump will increase them.

Those budget deficits will increase inflation.

On January 23, I noted Trump “Will Demand Interest Rates Drop Immediately”

Trump repeated that call after the disastrous CPI report.

Instead, he should have blamed the Fed for cutting rates before the election.

Europe is growing more hawkish in its rhetoric, seeing the need for a counterbalance against Trump efforts to secure lasting peace in Ukraine, which recently included Defense Secretary Pete Hegseth announcing that the US does not see future NATO membership for Ukraine as a realistic possibility.

The latest shot across the bow is British Prime Minister Keir Starmer announcing that the UK is “ready and willing” to put British peacekeeping troops on the ground in Ukraine, and stressing it’s essential that the West backs Kyiv toward “securing a lasting peace in Ukraine that safeguards its sovereignty for the long term” which essential” to deter Putin from “further aggression.” There is as yet no framework for negotiated peace in place, and yet Starmer is talking boots on the ground.

This was laid out in an op-ed the Telegraph newspaper published Sunday night. He sounded a similar note to other European leaders who have warned that Trump’s peace plan could cede all the immense sacrifices made defending Ukraine thus far.

“We must be clear that peace cannot come at any cost,” Starmer said. “Ukraine must be at the table in these negotiations, because anything less would accept Putin’s position that Ukraine is not a real nation.” He stressed: “The end of this war, when it comes, cannot merely become a temporary pause before Putin attacks again.”

This echoes current concerns out of Europe that Zelensky and the Ukrainians and European allies are being cut out of negotiations between Putin and Trump. For example, Finland’s President Alexander Stubb told reporters in Munich this weekend, “There’s no way in which we can have discussions or negotiations about Ukraine, Ukraine’s future or European security structure, without Europeans.”

“But this means that Europe needs to get its act together. Europe needs to talk less and do more.” he added. Macron, as well as German leadership have said similar things. But as Politico reports, there’s yet been little to indicate that Ukraine is directly involved in talk preparations: 

The Trump administration has since sent mixed messages about Ukraine’s role in the peace talks. Over the weekend, POLITICO reported that senior Trump administration officials were heading to Saudi Arabia to begin negotiations with Russians and Ukrainians — surprising Kyiv.

Starmer further wrote in his his op-ed: “While European nations must step up in this moment — and we will — U.S. support will remain critical and a U.S. security guarantee is essential for a lasting peace, because only the U.S. can deter Putin from attacking again.”

And he announced, “So I will be meeting President Trump in the coming days and working with him and all our G7 partners to help secure the strong deal we need.”

He acknowledged that more needs to be spent on defense, consistent with Trump admin pleas, and said he’d be telling colleagues at an emergency France-hosted summit of European leaders on Monday that “we have got to show we are truly serious about our own defence and bearing our own burden. We have talked about it for too long — and President Trump is right to demand that we get on with it.”

Not one British boot should march into Ukraine, Keir Starmer.

The public won’t stand for another reckless escalation—we want peace, not more bloodshed.

How about sending our troops where they’re actually needed—onto our borders to stop the illegal migration crisis?! pic.twitter.com/uShTC7p8xH

— Nicholas Lissack (@NicholasLissack) February 16, 2025

Trump might welcome Europeans’ willingness to send peacekeeping forces in the wake of a potential agreement with Moscow, given he has stressed that no US troops will ever be sent, and that it is Europe’s responsibility to shoulder the burden of its own security.

Meanwhile, one X user sounded off in response to the latest media headlines, saying, “People are angrier at Donald Trump for attempting to stop the war in Ukraine than at Keir Starmer for wanting to send British troops there to die. These people need a mental asylum.”

Meanwhile…

The pro-Ukraine war crowd has a new solution: global nuclear holocaust.https://t.co/yMWuTOoDbB

— Mark Ames (@MarkAmesExiled) February 13, 2025

European defense stocks surged on Monday following last week’s Munich Security Conference, where global leaders, ministers, and top policymakers discussed the urgent need to increase defense spending across the continent as a deterrent against an increasingly emboldened Russia. 

On Friday, European Commission President Ursula von der Leyen told the audience at the annual three-day meeting, “I can announce that I will propose to activate the escape clause for defense investments. This will allow member states to substantially increase their defense expenditure.” 

The North Atlantic Treaty Organization (NATO) mandates that European countries allocate about 2% of their GDP to defense spending. However, many member states have failed to meet this target. New commitments over the weekend signaled that military expenditures will rise, fueling EU defense stocks on Monday. 

Goldman’s Lindsay Matcham told clients earlier that the GS EU Defense basket was the “chart of the day” after surging nearly 8% to a record high, driven by the notion that defense spending will rise and continued support for Ukraine. 

In a separate note, Goldman’s Matt Atherton explained to clients that bullish comments from the Munich Security Conference about defense spending would act as a “tailwind” for defense stocks: 

Additional Defence Spending an Extra Potential Tailwind: Despite little change regarding a Ukraine/Russia peace deal over the weekend amid growing positioning for such an event, the market has not retraced much of last week’s price action this morning. We think there was just enough positive soundbites, especially with regards to increased defence spending, to keep the market trading this theme. Notably, EU Commission President von der Leyen stated in a speech at the Munich Security Conference that she “will propose to activate the escape clause for defence investments [similar to a measure used during COVID]. This will allow member states to substantially increase their defence expenditure”. While GS Economics have highlighted that wider fiscal deficits across Europe via national debt are not sustainable over the long-term, they are certainly possible for a few years and would be much easier to pass than additional defence spending funded via European issued debt.

Individual names rocketed higher, including Rheinmetall +7.2%, Saab +7.7%, Hensoldt +7.7%, RENK +10%, Leonardo +4.5%, BAE Systems +4.7%. 

Bloomberg noted, “Shares of steel and engineering conglomerate Thyssenkrupp soar as much as 11%, hitting the highest level since April 2024; the group is pursuing an IPO of its naval unit, a maker of military ships and submarines.” 

European leaders have been deeply concerned that President Trump could retreat from NATO, leaving much of the continent unable to defend itself because of its deindustrialized state. The latest data from Goldman’s Sven Jari Stehn, Filippo Taddei, and others show that most of the bloc does not meet the NATO defense spending target. 

The move towards higher defense spending will occur over several years...

The Goldman analyst outlined three funding options for the bloc to increase defense spending:

• national debts,
• EU debt through existing institutions/programs,
• and a borrowing facility established through a new European program.

They noted, “All these options are unlikely to become operational before 25H2 at the earliest, so we turn to them now.” 

Authored by Lance Roberts via RealInvestmentAdvice.com,

Market Shakes Off Inflation Data

I am back from traveling, and we have a good bit to catch up on since our last report. If you missed it, I provided an update on Tuesday, updating all the weekly technical and statistical data we produce. Most noteworthy in that report was the sharp increase in money flows into the market despite the tariff announcement by the Trump administration and the latest inflation reports.

On Thursday, the market broke out of the bullish consolidation over the last few weeks, successfully retesting and holding support at the 50-DMA. Notably, the bullish trend remains intact, and retail investors continue to pour money into the market, with money flows reaching typical peak levels. With the market elevated, downside risk over the next few weeks will likely be contained to recent January lows. What would cause such a correction is unknown, but if money flows begin to reverse, such will likely provide the evidence needed to rebalance risks accordingly.

The bullish bias is evident, as witnessed by the recent surge in retail money flows into leveraged ETFs and speculative options trading. However, as is always the case, whenever investors are crowded on “one side of the boat,” it is often a decent contrarian signal to be a bit more cautious. Furthermore, while there is currently no evidence of a catalyst for a correction, it is worth noting that we are entering into the seasonally weak part of February.

While this is the average of daily market returns, it does not guarantee that market weakness will present itself. But it is worth being aware of the potential possibility of such a development.

Speaking of excess, Sentiment Trader recently did a great piece on the market’s Sharpe ratio. The conclusion of their report is worth considering.

“When the going gets easy for investors, it’s natural to let one’s guard down and become complacent. That’s a dangerous condition for all but the longest-term, long-term, unleveraged investors. Markets can be their most dangerous when they look the safest.

Using the Sharpe ratio as a proxy for how good it’s been for U.S. investors, we see above that there aren’t many times in history when it’s been better than the past six months, and there are signs that it’s ending. That can mean more volatility, but it doesn’t necessarily mean negative returns. The biggest takeaway has been moderate returns, with much more of a two-way market than investors had gotten used to in the months prior.”

An extended period of speculative complacency in the markets has markedly increased the Sharpe ratio. The problem is that long periods of complacency, a function of price stability, are often followed by periods of instability.

Such is the core of our discussion this week.

Stability Leads To Complacency

“Only those that risk going too far can possibly find out how far one can go.” – T.S. Eliot

As discussed on Tuesday, retail investors are currently “all-in” in the market. Such is not surprising given the long period of stability in the markets with continually rising prices.

“The market defies more negative news because retail investors continue to step in and “buy the dip.” In our recent Bull Bear reports, we discussed the push by retail investors, but looking at retail sentiment is quite remarkable. Since the pandemic, retail investors have never been this bullish on the stock market. Such is amazing, given that their mailboxes are not being stuffed with government stimulus checks”

“At the same time, their optimism about stock market returns is supported by putting their money where their mouth is.”

These periods of stability have always led to high levels of investor complacency concerning risk. However, historically speaking, such periods of complacency are often built on rationalizations with weak underpinnings. Investors are confident that the Fed will continue cutting interest rates, easing monetary policy, and supporting higher future stock valuations. However, that expectation may be misguided as the Fed remains unconcerned about any near-term recessionary impact. However, policy actions by the current Administration to reduce the deficit, cut Government employment, and impose tariffs are factors that could slow economic growth rates more than anticipated. Such is particularly the case now as evidence of weakening employment and consumers is emerging.

As Michael Lebowitz commented recently:

” While labor market data is generally good, there are signs the labor market is at a standstill. Continuing jobless claims are steadily rising at their highest level in over three years. The JOLTS hires rate is at ten-year lows. While the number of layoffs remains low, employers aren’t hiring either. Accordingly, the broad labor market data may seem good, but the chart below and other data should give the Fed pause so that consumers may start to spend less and save more. As if the chart below wasn’t concerning. It shows employment expectations are also plummeting. Similar changes in expectations have led to a higher unemployment rate previously.”

Furthermore, expectations of real household incomes do not suggest a robust consumer backdrop.

The rise in part-time employment, slowing hiring rates, and increased continuing jobless claims indicate a weaker labor market. Historically, overestimating employment strength has led the Fed to delay necessary rate cuts. Once economic conditions deteriorate further, the Fed is forced to reverse course.

Unfortunately, the Fed is often “behind the curve” in anticipating such risk, leading to more aggressive monetary policy actions. In other words, market stability leads to policy complacency, which eventually evolves into instability.

The Stability-Instability Paradox

This is the problem facing the Fed.

Investors have been led to believe that no matter what happens, the Fed can bail out the markets and keep the bull market going for a while longer. Or rather, as Dr. Irving Fisher once uttered:

“Stocks have reached a permanently high plateau.”

Interestingly, the Fed depends on market participants and consumers believing this idea. With the entirety of the financial ecosystem now more heavily levered than ever due to the Fed’s profligate measures of suppressing interest rates and flooding the system with excessive liquidity over the last 15 years, the “instability of stability paradox” is now the most significant risk.

“The ‘stability/instability paradox’ assumes that all players are rational and such rationality implies an avoidance of complete destruction. In other words, all players will act rationally, and no one will push ‘the big red button.‘”

The Fed is highly dependent on this assumption as it provides the “room” needed to navigate the risks that have built up in the system. The risks of something breaking have increased substantially from elevated market valuations to exceptionally low credit spreads. As we saw in March 2023, the rise in interest rates nearly took down the regional banking sector until the Federal Reserve was forced to step in with the “Bank Term Funding Program.” Fortunately, that banking risk did not become a financial contagion, and the Federal Reserve maintained stability across the markets.

However, the key to that stability depends on “everyone acting rationally.”

Unfortunately, maintaining permanent stability has never been achieved over the long term.

The Fed’s Problem – Being Late

The most serious risk facing the Fed is individuals’ behavioral biases. Throughout history, the market has been plagued with unexpected, exogenous risks that fell outside the Federal Reserve’s regulatory abilities. Despite the best of intentions, changes to monetary policies, combined with investor complacency, preceded mild to disastrous outcomes.

• In the early 70’s, it was the “Nifty Fifty” stocks,
• Then, Mexican and Argentine bonds a few years after that
• “Portfolio Insurance” was the “thing” in the mid -80’s
• Fed rates led to the bond market crash in 1994.
• Dot.com anything was an excellent investment in 1999
• Real estate has been a boom/bust cycle roughly every other decade, but 2008 was a doozy
• Today, it’s leveraged ETFs, higher risk credit, and “Artificial Intelligence” everything.

The risk to this entire house of cards is a credit-related event. As Michael Lebowitz noted recently:

“Despite the tight corporate spreads, the difference between the S&P 500 earnings yield and corporate bonds is negative 2%. The Bloomberg graph on the right shows that the spread hasn’t been that tight since 2008. Stocks are riskier, yet corporate earnings yield less than corporate bonds. The graph further confirms very high equity valuations, suggesting investors’ earnings growth expectations are much loftier than historical earnings growth rates.”

“People are skewing toward assets that are giving you more and more upside. You’re really just trying to see people hit home runs here more and more.” – Bloomberg

What happens if, or should I say when, passive funds become large net sellers of credit risk? In that event, those indiscriminate sellers will have to find highly discriminating buyers who–you guessed it–will be asking lots of questions. Liquidity for the passive universe–and thus the credit markets generally–may become problematic. Furthermore, the significant decline in market liquidity indeed suggests rising risks.

If there is a liquidity issue, the risk to “uninformed investors” is substantially higher than most realize. 

Risk concentration always seems rational initially, and those early successes create a self-reinforcing behavioral sentiment.

As noted, stability is an illusion of everyone acting rationally. Unfortunately, when it all goes “pear-shaped,” rational calm quickly turns into irrational panic.

Investors Are Ignoring The Cracks In Stability

Stability is acceptable until something occurs that causes instability. Since October 2022, the market has steadily risen despite higher interest rates, inflation, and slowing economic growth. Changes to the Fed’s outlook, or as recently as tariffs and Deepseek, have caused market pullbacks. However, market stability has primarily been contained to a relatively narrow range of +/- 1% in daily price movements.

The chart below shows the importance of paying attention to volatility. As is always the case, periods of “low volatility” beget “high volatility.” For example, following the 2020 “Pandemic shutdown,” a period noted by increased ranges of daily price movements (high volatility), investors experienced an 18-month winning streak with low volatility. That period ended with the Russian invasion of Ukraine and the Federal Reserve embarking upon one of its most aggressive rate hiking campaigns since the late 70s.

However, alternating periods of low to high volatility and vice versa have been a hallmark of the financial markets since the turn of the century. What should be obvious is that these periods of low volatility are truncated by unexpected, exogenous events that cause market participants to reevaluate consensus expectations. For example, in 2000, the collapse of Enron called into question the entirety of the “Dot.com” thesis. 2008 Lehman’s failure ended the belief that “subprime was contained.” Today, the market is highly confident in superior economic growth and sustained and elevated levels of earnings growth due to “Artificial Intelligence.” What disrupts that thesis is unknown but is the most significant risk to investors today.

It is also worth noting that periods of stability have historically been truncated by the Federal Reserve and its rate-cutting cycle.

The reason, of course, is that by the time the Federal Reserve is cutting rates aggressively, something has broken in the financial system. While that has not happened yet, it does not mean it won’t.

The Single Biggest Risk To Your Money

In extremely long bull market cycles, investors become “willfully blind” to the underlying inherent risks. Or rather, it is the “hubris” of investors that they are now “smarter than the market.”

Yet, the list of concerns remains despite being completely ignored by investors and the mainstream media.

• Growing economic ambiguities in the U.S. and abroad.
• Political instability
• The failure of fiscal policy to ‘trickle down.’
• A pivot towards easing in global monetary policy (global economic weakness)
• Geopolitical risks from Trade Wars to Iran 
• Un-inversions of yield curves
• Potential deteriorating in earnings and corporate profit margins.
• Record levels of private and public debt.

None of that matters for now, as the markets hope for continued easing in monetary accommodation. The more the market rises, the more reinforced the belief that “this time is different” becomes.

Yes, our investment portfolios remain invested on the long side for now. (Although we continue to carry slightly higher levels of cash and hedges.)

However, that will change rapidly at the first sign of the “instability of stability.” 

How We Are Trading It

Given the market uncertainty, the high levels of complacency, and the risks to stability, managing portfolio risks is worth considering. That is why we have started rebalancing portfolio risk accordingly. With both technical and sentiment readings suggesting the short-term market risks are elevated, it is wise to take some “small” actions now, which you will likely appreciate later.

1. Tighten up stop-loss levels to current support levels for each position.
2. Hedge portfolios against more significant market declines.
3. Take profits in positions that have been big winners.
4. Sell laggards and losers.
5. Raise cash and rebalance portfolios to target weightings.

Therefore, from a portfolio management perspective, we have to trade the market we have rather than the one we think should be. This can make battling emotions difficult from week to week. However, as noted, we expect a correction sooner rather than later, providing a better risk/reward opportunity to increase equity exposure if needed.

*  *  *

Feel free to reach out if you want to navigate these uncertain waters with expert guidance. Our team specializes in helping clients make informed decisions in today’s volatile markets.

Houston-based Waste Management will continue to shed jobs in 2025 by reducing dependency on roles that require physical labor and turning more to technology and automation for its services, Govt Tech Insider reported.

“There has been a long-term plan to not backfill specific vacated roles. By 2026, we’re anticipating that will lead to the reduction of about 5,000 positions,” said Kelly Caplan, senior director of external communications. ”At the same time, increased automation is reducing the demand for these types of labor-intensive roles.”

The waste-and-recycling business has its headquarters in Houston. According to Stock Analysis, the company had about 48,000 employees at the end of 2023.

The Wall Street Journal reported in January that about 1,000 positions will be impacted in 2025 eliminating about 650 trucking positions by modernizing its fleet. Upgrades to its recycling plant in 2025 will reduce that workforce by 350.

“WM is increasing the use of technology and automation which will reduce labor dependency for roles that are challenging to recruit and retain across North America,” according to a statement from the company. “Technology is helping us mitigate the business risk associated with high attrition rates for these roles — a challenge not only for WM but for the industry at large. We’ve had a long-term plan to implement technology solutions when available for hard-to-fill roles.”

On Jan. 30, Waste Management Chief Executive Jim Fish spoke to Jim Cramer about the future of the Waste Management workforce.

“Our average heavy equipment operator is approaching 53 years old. It becomes difficult to find folks to drive a truck or to work on a piece of heavy equipment,” Fish said on the show. “So this is almost by necessity that we’re using technology to replace difficult-to-hire roles. I think one thing that I wanted to make sure I was clear about on here, though, is we’re not laying folks off. All we’re doing is using attrition. Some of those jobs have very high turnover rates.”

He estimated the turnover for those working at the back of the truck was as high as 50%.

In 2024, Waste Management struck a deal to acquire medical waste services provider Stericycle. Based outside Chicago in Bannockburn, Ill., Stericycle provides medical waste collection, compliance and secure information destruction services, according to a Houston Chronicle report last year.

Authored by Yael Ossowski via RealClearPolitics,

With a big tech-powered magnifying glass on federal websites, spending contracts, and government payment systems, Elon Musk’s band of DOGE system admins have been turning Washington inside out in their hunt for waste, fraud, and abuse. One of the most prized agencies on the chopping block is the Consumer Financial Protection Bureau, heralded by progressives as an indispensable force for helping consumers wronged by financial institutions, but derided by fintech investors and conservatives as little more than a government “shakedown agency.” Consumers will be better off without the CFPB breathing down the neck of American companies. 

Since the inauguration of President Trump, the CFPB’s temporary leadership put an immediate halt on all work, also informing the Federal Reserve, which directly funds the agency, that it would no longer seek new funding. 

Sen. Elizabeth Warren, the intellectual force behind the agency’s founding, has been apoplectic. She’s argued that Trump is “firing the financial cop on the beat that makes sure your family doesn’t get scammed.”

The origin of the CFPB goes back to the rubble of the 2008 financial crisis when legislators saw this proposed agency as a viable response to the populist backlash engulfing Washington and Wall Street. Instead of penalizing wrongdoers, Congress funded bank bailouts and launched a “watchdog” group. The 2010 Dodd-Frank Financial Reform Act mandated new standards for lending, restricted capital that could be tapped for bank loans, and created the CFPB to police consumer finance. 

All functions performed by the five former federal banking supervisory agencies were rolled into the CFPB, granting it sole jurisdiction over non-depository firms and financial institutions with over $10 billion in assets. This empowered the agency to issue regulatory guidance, demand information from financial institutions, and launch civil actions in federal court.

Supporters of the CFPB point to an impressive record of close to $20 billion in consumer relief, as well as an additional $5 billion in civil penalties. Without the CFPB, fraudsters and scams would metastasize and consumer injustice would run wild, so they say. But this couldn’t be further from the truth.

As a regulatory agency with civil litigation authority, the CFPB is emboldened to file high-dollar lawsuits against financial firms. An estimate of the CFPB’s database of enforcement actions reveals that roughly 85% of all cases are settled out of court before a final ruling.

Companies often choose to settle, but this shouldn’t be mistaken for an admission of guilt. In a litigious society such as the United States where companies are routinely targeted in frivolous lawsuits, the court of public opinion matters just as much as the court of law. 

Firms prefer settling cases over having their name dragged through the mud for months on end in the media, something tort lawyers call a “nuisance settlement.” These expected costs are baked into large firms’ financial projections and are sometimes factored into pricing their goods and services for consumers. 

The CFPB is more akin to a state-backed tort law firm that can tap the nation’s central bank for resources while exploiting its do-gooder reputation for easy PR victories.

Rather than smart regulatory guidance to oversee a new generation of consumer finance firms, CFPB has relied on quick settlements out of court to squash innovative upstarts.

While CFPB enforcement has been successful in penalizing banks and lenders for how loans are structured or advertised, it does not take much imagination to see how this has impacted the investing climate for new competitors. Since CFPB’s founding, there are now 35% fewer financial institutions remaining for consumers to choose from, down from 15,000 to just roughly 9,000 today.

While there is high consumer demand for fintech, payment apps, and account offerings, including Bitcoin and cryptocurrency banks, CFPB’s chilling actions have slowed that innovation, leading to the recent calls for the agency to be gutted. And they’re right.

Most of CFPB’s functions are mirrored at the FTC on everything but finance. Regional Federal Reserve banks are also responsible for bank oversight and regulation, not to mention state banking regulators. Existing regulators have the reach, experience, and know-how to police would-be fraudsters and outright deceptive practices among banks. Why not let them?

For consumers who want next-level services and financial products, there is no question that CFPB’s litigious approach has impacted their ability to access credit and financial services. There must be a better way to regulate our financial institutions and protect consumers than a tort law firm with government authority. Congress could fold elements of the CFPB into the FTC, OCC, or even FDIC, and bad actors will still be policed. 

Consumers deserve to be protected, and they will be, but they also deserve a regulatory structure that rewards innovation and brings financial products to market that they can choose between.

The CFPB is due for defanging.

Yaël Ossowski is deputy director of the Consumer Choice Center, a global consumer advocacy group.

The western public has been hearing a lot about “genocide” in recent years, from the genocide of indigenous peoples, to the genocide of Palestinians to the genocide of trans people.  The demand is that these concerns be taken seriously whether they are realistic or exaggerated, that reparations be distributed and that refugees be taken in by the millions.  The underlying narrative is always the same – “White colonialism” is the ultimate culprit behind every social injustice in the world and marginalized minorities are perpetual victims that require protection.

But what happens when white people are the minority under attack?

That’s a question that’s simply not acceptable according to the establishment media, and any suggestion that such a thing is possible is treated as an act of xenophobia.  White people can never be considered a “marginalized minority”.  This is the conundrum the western public often encounters when the issue of South Africa is broached.  

The country’s well known history of segregation and Apartheid, which was dismantled from 1990 to 1993, is publicized and dramatized constantly in the media and by Hollywood.  However, the aftermath is barely discussed. 

Nelson Mandela, a member of the South African Communist Party and a co-founder of the terrorist group “uMkhonto we Sizwe” in 1961, was elected the first black president of the nation in 1994 and rebranded as a civil rights hero akin to Martin Luther King.  After a honeymoon period of around ten years the country’s economy went into a steady spiral.  Unemployment has now exploded to over 30%.

           

South Africa’s economy is in dire straits, with many utilities in disarray and organized crime running the streets of primary metro areas.  The current government isn’t even able to properly maintain fresh water and waste systems.

One sector of the South African economy that has continued to grow despite the greater financial turmoil has been farming and agriculture, led primarily by the “Boers” (white farmers or Afrikaners).  They represent only 7% of the total population but make up 72% of the nation’s agricultural output.  This is about to change drastically, though, as white farmers and their communities are increasingly demonized by communist political groups vying for power and control of private property.

One such group is the Economic Freedom Fighters (EFF) led by Julius Malema.  Malema (and many other leaders) have consistently called for the murder of white farmers in South Africa.  He refers to this idea as a “revolutionary necessity” even though black South Africans are the majority population and dominate the government.  What power structure, exactly, would they be rebelling against?

Julius Malema has repeatedly called for the genocide of the 4 million Whites living in South Africa.

Malema could very possibly be elected as Prime Minister in a few months.

Zero international outrage.

pic.twitter.com/EcoMVILDk6

— End Wokeness (@EndWokeness) February 6, 2024

As with all countries under socialist/communist influence, the habit when faced with economic crisis is to divert blame to convenient scapegoats and steal resources wherever possible.  Often, farmers are the people most abused by leftist governments.  In the case of South Africa, such abuse is rationalized by social justice ideology and the fact that most of the farmers are white (therefore, they deserve to be robbed or killed).  

Despite media attempts to suppress news of white genocide there is an ongoing problem of violent attacks on whites in the region.  It has become commonplace for families to hide within gated homes with steel doors (inside and outside) due to persistent targeting for robbery, rape and murder.  Many are considering leaving the country entirely.

The calls for an exodus have increased after the current government under the African National Coalition (ANC) passed the Expropriation Act in 2024 allowing for the confiscation of private property based on “social equity” (race).  This law gives authorities the ability to take land from anyone for reasons of equity and reparations.  Though the law does not specifically name the Boers as a target, everyone in South Africa knows exactly what it means.     

With the Trump Administration being the first to confront the South African problem directly, US and European journalists are scrambling to dismiss the issue as a “fabrication of the right wing”.  Trump has cut off federal subsidies to the SA government in response to expropriation laws and has also offered possible refugee status to white South Africans.

The South African media and the western media have published stories telling farmers not to consider Trump’s offer, claiming that Americans are “hostile to refugees” and that the US would be a “dangerous place for them to live”.  The argument is absurd, obviously.  Americans have a problem with illegal immigrants and asylum seekers gaming the system, not legitimate refugees with their own wealth and valuable skill sets such as farming. 

The media has launched a flurry of stories claiming that South Africans are “mocking Trump’s offer” and have no interest in escaping to the US.  They say there is no threat to white people in the country and that the expropriation laws have nothing to do with the Boers.  This, of course, is a lie.  

Over 10,000 white farmers in SA have already expressed interest in relocating to the US, and the list is growing.  Speaking to SABC News, Neil Diamond, president of the South African Chamber of Commerce in the USA, warned of a potential mass exodus of skilled agricultural professionals. 

He noted that within just 18 hours of Trump’s executive order’s announcement, over 10,000 inquiries had been received from South Africans seeking information on refugee status and relocation to the US.  He emphasized that the departure of experienced farmers could have severe consequences for South Africa’s food security, agricultural value chain, and economic stability.  

In other words, South African race communists need the white farmers for food production, but they also want to use them as a scapegoat for political purposes, which could very well lead to genocide.  Though many white farmers will surely want to stay and defend their homes, there is now doubt that they are aware of the growing dangers presented by their increasingly hostile government.    

Authored by Steve Carmel via RealClearDefense,

Every day, we are reminded of the challenges the U.S. faces in maintaining global leadership in critical industries and technologies. The recent DeepSeek revelation, which shocked the tech world, exposed how aggressively China is advancing in the artificial intelligence sector.

With DeepSeek reportedly matching U.S. AI capabilities in effectiveness but costing less, it’s clear that China isn’t holding back in its bid for global dominance.

DeepSeek’s ramifications are unsettling, but it doesn’t necessarily pose the greatest risk to U.S. national security. A far more pressing threat to our strategic interests lies in China’s rapid and unchecked progress in securing primacy over the world’s oceans.

In a report issued last month, the outgoing U.S. Trade Representative warned that China is aggressively targeting the maritime, logistics, and shipbuilding industries: “we build less than 5 ships each year, while the PRC is building more than 1,700[.]” If America is to regain its edge in these critical sectors, swift and bold action will be necessary.”

Unfortunately, the U.S. shipbuilding industry has atrophied under years of neglect. As a result, China vastly outpaces the U.S. in the production of commercial vessels. This threat to our nation doesn’t stop at ship production. The logistics infrastructure that supports both civilian and military transport is just as critical—and it is here where the new Administration must act.

Logistics is the backbone of military power projection; knowing the U.S. lacks the capability to sustain a long-term conflict, adversaries—including China—may feel emboldened to attack U.S. allies, drawing the U.S. into a conflict thousands of miles away.  This scenario undercuts a key assumption of our defense strategy: that prolonged conflicts favor American forces. If a long war does not play to our strengths, the risk calculus—including our entire deterrence posture—must be reevaluated.

Recent estimates suggest that China now boasts more than 5,000 commercial ships available for military sealift, while the United States has less than 200. This gap is mind-blowing. We cannot win a war with an anemic logistics capability. [OR “a logistics capability that is on life-support.”]

In a major conflict, nearly everything moves by sea—troops, supplies, weapons, fuel, and tanks. As the Wall Street Journal recently reported, “Within China’s centrally directed economy, the government controls commercial shippers, foreign port facilities, and a global cargo-data network that could be repurposed for military purposes or to undermine the U.S., including on home soil.”

Like China, the U.S. military’s sealift capacity relies heavily on commercial vessels. Another often overlooked logistics dynamic is that the personnel who carry out military sealifts are primarily civilian merchant marine officers. This reliance on civilian mariners underscores the importance of maintaining a strong and capable commercial maritime industry.

Key members of the Trump administration recognize these challenges and are well-positioned to reverse the tide, with Mike Waltz, a former Navy SEAL and expert in military logistics, serving as President Trump’s national security advisor. Before joining the administration, Mr. Waltz was an original cosponsor of the SHIPS for America Act, a comprehensive bipartisan bill designed to address the U.S.’s maritime vulnerabilities.

From my perspective in the commercial shipping industry and as a former member of the U.S. Merchant Marine Academy’s (USMMA) Congressional Board of Visitors, these grave issues will be taken seriously and addressed post haste. To strengthen our sealift capability, the U.S. must prioritize:

1. Investment in shipbuilding: Boosting the U.S. commercial and military shipbuilding industries are essential to reversing the growing gap with China.
2. Expansion of mariner training: We need to invest in a robust pipeline of qualified merchant mariners to ensure the U.S. can mobilize efficiently in times of crisis, especially those service obligated merchant marine officers in the U.S. Navy’s Strategic Sealift Officer program, primarily graduates of USMMA.
3. Revitalizing logistics infrastructure: Improving port facilities, enhancing supply chain resilience, and securing key international shipping routes must be a top priority.

The U.S. faces numerous challenges as China aggressively expands its naval and maritime capabilities, but it is not yet too late to act. By prioritizing investments in shipbuilding, mariner training, and logistics infrastructure, America can preserve its competitive edge and maintain the ability to project power and protect vital interests around the globe. I am hopeful President Trump will recognize that now is the time to act—before China’s maritime buildup permanently shifts the global balance of power.

Stephen M. Carmel, President at U.S. Marine Management oversees a diverse fleet supporting global commerce, the U.S. Military Sealift Command and Tanker Security Program. He is a former member of the U.S. Merchant Marine Academy Congressional Board of Visitors.

In an unexpected behind-the-scenes move, a US senior diplomat has held a meeting with Belarusian President Alexander Lukashenko, the New York Times reported on Saturday, describing it as very “below the radar” and as part of longshot efforts at wooing Belarus away from Moscow.

The meeting happened Wednesday, involving Deputy Assistant Secretary of State Christopher W. Smith meeting with President Lukashenko in the capital of Minsk, to jump-start potential improved bilateral relations, also in context of the Trump administration trying to rapidly pursue a Ukraine peace deal with President Putin.

It was the first such meeting with a top State Department official traveling to Minsk in a half-decade, the newspaper noted.

Smith has described efforts to strike a “grand bargain” in hopes of gaining the return of an imprisoned American citizen, and it has apparently begun with some success, per the NY Times report:

After talks with Mr. Lukashenko, Christopher W. Smith, a deputy assistant secretary of state, and two other American officials drove to a village near the border with Lithuania. There, courtesy of the Belarusian KGB, three people who had been jailed — an American and two Belarusian political prisoners — were waiting to be picked up.

As darkness fell, the Americans and the freed prisoners drove back across the border to Vilnius, the Lithuanian capital. Speaking outside the U.S. Embassy there on Wednesday evening, Mr. Smith hailed the successful completion of what he called “a special operation,” describing the prisoners’ release as a “huge win and a response to President Trump’s peace through strength agenda.”

Journalist Andrey Kuznechyk and activist Alena Maushuk were freed, with the US citizen not having been identified at this point.

The “grand bargain” would seek the return of more political prisoners, and in exchange Washington could ease longtime sanctions on Belarus, specifically on Belarusian banks and the country’s key export product – potash (used in fertilizer).

Washington first shuttered its embassy in response to Belarus’ role in hosting Russian troops and military assets during the Feb. 2022 invasion of neighboring Ukraine.

Belarus has been met with growing isolation from Washington and the West, particularly going back to the Bush administration when it was declared by the US to be the “last true remaining dictatorship in the heart of Europe.”

In January of this year Lukashenko extended his 31-year rule with another 5-year term win in a landslide election which the exiled opposition and its western backers called a ‘sham’ vote.

As the United States feuds with its ally Germany, relations are thawing between the Trump administration and … wait for it … Belarus. https://t.co/kBTBK34oLr

— Jonathan Weisman (@jonathanweisman) February 15, 2025

As for these new diplomatic effort by the US, it is likely the Kremlin had to give its blessing, since Russia and Belarus have long formed a ‘Union State’ based on tight economic, trade, and military ties. Putin and Lukashenko have visited each other several times throughout the Ukraine war, and Belarus even hosts Russian tactical nukes on its soil, overseen by Russian military officers.