Stocks dropped almost 700 points on Friday (Jan 10, 2025) – effectively pushing all major benchmarks into the red for the New Year 2025. The Dow Jones Industrial Average (DJIA) lost 696.75 points or 1.63% to close at 41,938.45, whilst S&P 500 and NASDAQ lost 1.54% and 1.63% respectively. What caused the bloodbath? The short answer – unexpected jobs report.

 

U.S. payrolls grew by a whopping 256,000 in December 2024, while economists were expecting an increase of 155,000 only. That’s a huge difference of mis-predicting. As a result, the yield on the 10-year Treasury note spiked to its highest level since late 2023 as investors dumped stocks. Was the U.S. government cheating on the jobs data? After all, they had cheated before.

 

Last August, the Bureau of Labour Statistics “revised down” its total tally of jobs created in the year (2024) through March by 818,000 – the largest downward revision since 2009. That revision means the U.S. economy added an average of 174,000 jobs per month during that time period – below the previous 242,000 estimate. Trump mocked Biden’s economy and called it a “fraud”.

Trump said – “The numbers are horrible. The economy’s bad. Inflation is killing our country. They don’t talk about the million people that they falsely reported had jobs, and they don’t have jobs. They don’t exist. It was a total fraud. They thought they were going to keep those numbers until right after the election, when they could announce a revision. They were fraudulent job numbers.”

 

Essentially, the hot jobs report diminished Wall Street’s expectations for more interest rate cuts from the Federal Reserve this year. That would make borrowing remains expensive. Rubbing salt in the wound, the stock market also took a beating after the University of Michigan’s consumer sentiment index signaled concern on the inflation front. 

 

The long answer to the sea of red in Wall Street was due to the prospect of a recession this year. Sure, the recession, long predicted by business executives, economists, analysts, investors and whatnot, refuses to show up, despite years of forecast and warning. Why? That’s because of years of steady hiring continue to fuel consumer spending and, in turn, an economic expansion.

However, just because everyone who predicted a recession has been wrong doesn’t mean they won’t eventually be right. The U.S. economy has been growing largely due to low unemployment rate. But what if the jobs report does not reflect the actual employment, meaning the government cheats with creative number massaging? If you keep cheating, eventually the bubble will burst.

 

About 3 years ago, the U.S. Federal Reserve jacked up interest rates at the fastest pace in decades to combat inflation that it initially misdiagnosed as likely to be short-lived. As Biden administration conveniently blamed Russian Vladimir Putin for the financial problems in the U.S. and the world, in reality, it was the U.S. that screwed up its own economy. And the person who had admitted that was none other than Janet Yellen.

 

In an interview with CNN, U.S. Treasury Secretary Janet Yellen said she was “wrong” about how severe inflation would be. She admitted her screw-up – “I think I was wrong then about the path that inflation would take”. She was referring to her remarks where she indicated there would only be a “small risk” of inflation, and that it would be “manageable”.

Till today, the Fed is still trying to balance the risk of cutting too soon (or too much) and controlling inflation from skyrockets again. Already, the annual inflation rate in the U.S. rose for a second consecutive month to 2.7% in November 2024 from 2.6% in October. The stock market’s response to the latest payrolls data could mean zero rate cuts in 2025. That’s how fragile the economy is.

 

But the gloomy story does not end there. Unlike previous years, the traditional Santa Claus Rally did not materialize in 2024, which was a surprise for many investors. In fact, since the beginning of December, stocks of all sizes and styles have struggled. This could indicate serious trouble, or at least challenging times, ahead in 2025 as markets retreat from the strongest run of back-to-back gains since the late 1990s.

 

Even with Donald Trump (who is the most pro-stock market president we have had in our history) set to take office on January 20, a meltdown could still happen. Unlike his first term, the pressure for a correction could not be higher today. Markets are at or near all-time highs based on every available measurement – P/E ratios, CAPE ratio, market cap/GDP ratio, concentration risk.

If past market crashes are any indicators – Dow Jones (1929), Nikkei (1989), NASDAQ (2000), and S&P 500 (2008) – we are now positioned for an historic crash, which is not a bad thing considering how it has been long overdue. What we need is a trigger or triggers, such as a war, a natural disaster, a pandemic, a banking collapse, a tech bust, or anything that could be used as an excuse.

 

Heck, Donald Trump and Joe Biden could trigger a market crash without them realizing it. There was a reason why Barack Obama once said – “Don’t underestimate Joe’s ability to fuck things up.” So, don’t underestimate the senile Sleepy Joe’s ability to crash the economy just because he wanted to sabotage Trump, or unexpectedly do a lot of damage while trying to reward Democrat’s favourite contractors.

 

From scrambling to send military aid to Ukraine for a meaningless war with Russia to a scam programme called “Inflation Reduction Act”, Biden could still crash the economy after his exit from the White House. The Inflation Reduction Act has actually caused inflation and the cost of living to go up rather than reduce inflation and make life more affordable for Americans.   

The scam, worth a staggering US$850 billion, was designed for cronies involved in garbage business like windmills and solar modules. The Inflation Reduction Act has nothing to do with inflation and everything to do with enriching contractors involved in Green New Deal. Even Biden admitted it was a mistake to call the law as Inflation Reduction Act.

 

Trump, meanwhile, could similarly screw things up with his second version of trade war, tech war and currency war with China. He hadn’t a clue how contradictory he was when he vowed to “end inflation” in the U.S., but has also suggested new tariffs on imports from China, which will definitely increase inflation. He has vowed to impose a 60% tariff on Chinese goods and at least a 10% levy on all other imports.

 

American farmers are worried that it could be a much worse rerun of the Republican former president’s 2018-2019 trade war with China that hit U.S. farm goods with retaliatory tariffs and shifted Beijing’s purchases to Brazil and Argentina. Economists say that Trump’s tariff plans would push U.S. import duty rates back up to 1930s-era levels, fuel inflation, collapse U.S.-China trade, provoke retaliation and disrupt supply chains.

Even before Trump declares “Trade War 2.0” with China, the super-strong dollar today makes it difficult for other countries to buy U.S. goods. Both the strong dollar (due to high interest rate)and the coming U.S. tariffs invite retaliation by trading partners, including allies like Canada, Japan, South Korea and European Union, who will put up their own tariff walls.

 

Investors may cheer the Trump pro-business policies and his re-election, but the transition from Biden to Trump will bring economic pain as Trump inherits Joe Biden’s mess. Lower interest rates, flattening yield curves, negative swap spreads and declining oil prices are just some of the signs that indicate a U.S. recession is coming. That’s why Warren Buffett has built his cash pile to more than US$300 billion, waiting for a crash.

 

Crucially,  the world will not be able to bail-out the U.S. economy because China, Japan, Germany and the UK are all slowing economically at the same time or already in contraction. Chinese stock market started 2025 on a weak note as investors brace for higher tariffs that may prolong China’s economic slowdown, which is suffering from a housing crisis and deflationary pressures.

Besides China, the U.S. president-elect’s 10% across-the-board tariffs for all imports would have a huge impact on Asian exports and a global knock-on effect. Additionally, bearish bets on most Asian currencies climbed to multi-month highs as prospects of fewer U.S. interest rate cuts this year continued to boost dollar demand. Higher U.S. rates and the dollar’s yield advantage could spur capital outflows in emerging Asian markets.

 

The German economy has seen virtually no growth since late 2019. Growth projections for 2025 remain bleak for the Europe’s largest economy, with real GDP expected to expand by a mere 0.3%, according to Goldman Sachs. Germany’s economy, once considered the powerhouse of Europe, is now facing stagnation, fiscal uncertainties, high energy costs, geopolitical risks and a crisis in automotive sector.

 

While2024 was the year of a regime change in the Japanese economy, reflected in the Nikkei 225 Average Index registering its highest level in March after its last peak some 35 years ago, the end of an eight-year-long zero interest rate policy also means the biggest risk for Japan in 2025 following decades-long stagnation. Japan’s moderate economic recovery could face a slowdown, denting business and investor sentiment.

The Japanese economy is on a path of gradual recovery, but households are struggling with their budgets due to the rising prices of food and other daily necessities. In dollar terms, Japan has fallen from second to fourth place in the world, having been overtaken by China and Germany. Thanks to prolonged stagnation, Japan’s share of global GDP has fallen from about 18% in 1995 to about 4% today.

 

Tariffs proposed by Donald Trump would drag down U.S. gross domestic product (GDP) by 1.1% in 2027 due to their impact on prices and employment. At the same time, it could punish Japan’s economy, especially if they hit Japanese automobile imports. All hell will break loose if Trump tries to impose 100% tariffs on BRICS nations if they were to create a rival currency to the US dollar.

 

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January 12th, 2025 by financetwitter

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