Geopolitical

The First Surprise said that there would be no negotiated peace between Russia and Ukraine. Unfortunately, that turned out to be true. (More on this in my forthcoming “Ten Surprises for 2025.”)

My Second Surprise declared that the American people should prepare for its military to, once again, be involved in the Middel East. It was clear to me that our forces were going to soon strike the Houthi rebels in Yemen. And they did so, on January 12th. Since then, it has been an ongoing operation. Even last month, on December 30 and 31, we attacked them again. Of course, you know that our actions last year in support of Israel went well beyond what was happening at the southern tip of the Arabian Peninsula. They included both offensive and defensive capabilities and operations, especially during the two times Iran directly attacked Israel with massive missile strikes.

I erred in my Third Surprise. China did not fall into a recession. That said, their economy is definitely slowing, and the Chinese Communist Party (CCP) is certainly trying to prevent one. In fact, they are using the western playbook to stimulate their economy. They just announced their second round of “money printing” and government spending to prop things up. Sounds familiar, doesn’t it? The first program announced in September helped their stock market a bit, but if one studies their last decade, it still doesn’t look good for the Chinese economy or their markets—still in a downtrend.

I wrote that more countries would doubt China’s motives concerning their “Belt and Road Initiative,” in my Fourth Surprise. This initiative is more about Chinese control of ports and other supply routes, rather than friendly trade relations. Sure enough. China will fix up a given country’s port system, as long as that country borrows Chinese money to conduct the retrofit. The United States and members of the European Union have dubbed China’s actions as “debt-trap diplomacy.” You see, if that country defaults on its debt to China, the CCP takes ownership of that port. Brazil, India, and Mozambique, just to name a few, are also criticizing the whole program as fraught with corruption and transparency issues. Imagine that.

Influences and Elections

The Fifth Surprise focused on the nascent change in political tastes in Latin America. They are moving rightward. Entire societies there are realizing that there must be a better way to live than under the constant thumb of their government. Argentina’s election of a libertarian capitalist as president was cited as proof of this trend. Leftist (read socialist) governments in other parts of South America are startled by this development, even to the point of jailing political opposition or using the courts to ban opponents from running for office. Despite these obstacles during their 2024 elections, Brazil, Columbia, and Chile all gained seats on the right-hand side of the aisle. People want freedom, and things are changing in this region of the world. Of course, it won’t be overnight. I must mention, though, that a significant exception to this trend occurred in Mexico. They elected a hard-left socialist for president.

The Sixth Surprise was about the US election for president, and frankly, my conclusion wasn’t even in the ballpark. I said that neither party’s frontrunner would get the majority of the popular vote. That was wrong. I was also wrong about Donald Trump not being able to secure the nomination. Of course, I did not foresee Joe Biden dropping out of the race either. I added further that a third-party candidate would siphon off votes from the major parties. But alas, the whole country was surprised by the election results and the command of the whole government won by the Republicans. There may have been a few who expected a clean sweep, but I couldn’t name them.

In my Seventh Surprise, the thought was that European elections would presage a success in the US electoral college for a candidate who walked a tightrope of issues well. This was both right and wrong. What was the “tightrope?” The issues in part were open borders, non-assimilated immigration, and the significant rise in antisemitism. President-elect Trump walked this rope well, but his victory had nothing to do with European elections. (In fact, leaders in Europe better get ready for their own comeuppance—a rebuke from their own electorates. Just watch Canada’s Justin Trudeau for a sneak peek. More on that later.)

Markets and Economics

The premise of the Eighth Surprise was that technology innovation and artificial intelligence would help the American economy continue to benefit from productivity gains brought by these breakthroughs. This was true insofar as the expectation of these benefits will accrue. The advantage is that productivity growth tends to help bring inflation down. This coupled with China’s deflation, which is being exported into the global economy by their willingness to cut prices and flood the world with cheaper goods, are really helping the Federal Reserve reach their inflation target. (Not that they met their absolute goal, yet. See the next paragraph.) These explain the reasons why the Fed started reducing rates in September. In addition, I also mentioned that political pressure would build for the government to reduce the federal deficit. I may have been a little early on that call, but the newly elected president did create DOGE (Department of Government Efficiency) for that very purpose. The last item I addressed was a “Roaring 2020’s” scenario for the stock market. Gains for the market have been extraordinarily strong the last two years, so that’s a good start for this scenario to come to fruition. We still have six years left of this decade to watch this unfold, despite what may be more moderate growth—but growth nonetheless—in the coming year (more on that soon).

The Ninth Surprise anticipated that the Fed would reach their inflation rate goal of two percent. When speaking of the headline number, they did not reach their target. But they made great progress, lowering the inflation growth rate from 9% down to about 3%. At the least, it’s heading in the right direction. Some of the other preferred gauges they use to measure inflation, like the PCED (Personal Consumption Expenditure Deflator), reached 2.4% in November. That’s close enough for government work, which the Fed used to justify easing their foot off the brake. (I am not agreeing with their reasoning, just explaining it. More on that later as well.) Last January, Wall Street wanted the Fed to start cutting rates at the beginning of the year. They all but demanded an unrealistic four to six cuts by summer. I wrote that the Fed would not start lowering rates until the second half of the year. I suspected the Fed would cut twice and quit. (Was I “close enough?”) Starting in September, their first cut was a surprisingly large half of a percent. They did two more quarter-point cuts before the year was out. They may regret the third cut they made last month, but we’ll see. I know one thing, though. The bond market sold off after the first half-point cut in September, and they still have not stopped selling. (Hint: the bond market is not happy with these cuts and signal that they don’t like the massive federal deficits. By their actions, they are saying that rate cuts are not going to help the situation. At least, that’s the message from the so-called “Bond Vigilantes” anyway.)

I ended last year’s article on a strong note in terms of my Tenth Surprise. Although many prognosticators predicted otherwise, I suspected that the big surprise would be that the much-anticipated recession in the United States would be avoided, followed by higher stock and bond prices by Christmas. The “no recession” call was right. So was the call about a higher stock market. But bond prices fell for the year, as measured by an aggregate bond market index. That sell-off was not only astounding, it was also downright baffling. One would have thought that longer-term rates would have followed the Fed’s lead. But the explanation goes back to the “Vigilante’s” concern about federal spending. Bond prices were positive for the year, until the Fed started lowering rates in September. After that, there was significant selling. If the interest income from the bonds is included, then their total return was a bit up for the year, but that is hardly a consolation.

Well, that wraps up my assessment of last year’s potential surprises. I hope you enjoyed this look back on 2024. Be watchful for the “Ten Surprises for 2025.”

Until then, “Happy New Year!”