The Treacherous Last Mile of Inflation | Vincent Deluard on France, 2025 U.S. Fiscal Drag, COLA Pain, and the U.S. Healthcare Price Spiral
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close the door. I'm very pleased to be speaking today to Vincent Deloitte, director of global macro at Stonex. Vincent, great to see you. How are you doing? I am good. I'm really happy to be on your show. I've watched the first few episodes of your

new podcast and it's as good, if not better than the previous one. So very honored to be one of your first guests. Thank you, Vincent. How are you thinking about the market right now? You've been outspoken that you've been had an inflationary view and a view that the economy would not enter a recession. That view has definitely played out. Inflation has gone down, definitely a lot lower than the 9%. I think today we got a 2.7% reading, but how are you thinking about the economy and markets?

The moment on the economy, I am pretty much thinking the same, that we have a very strong economy, that we'll have very strong fourth quarter Christmas. There's a lot of momentum to consumption. I also think inflation is going to stay sticky, but it's more a kind of a nagging worry that this kind of gold-deducting environment will end, starting perhaps at the end of Q1.

And it's all the more worrisome that I must confess that now, I mean, I'm no longer the crazy guy. Like the consensus has moved so much towards my views in the past six or nine months that it makes me nervous.

It was a lot easier to be, yeah, long growth, long inflation. When everybody was forecasting imaginary recessions, which we had so many of them, while the commercial restate, we had the inverted yield curve, we had the most ridiculous of all, the Sam Wool imaginary recession. And that kind of created really a baseline for growth to outperform. And now that we see the consensus view that, yeah, we've nailed the no lending, the US will grow on forever, we

We have this super high productivity ahead of us from growth shock. That makes it a lot lightlier that a slowdown is actually going to happen in 2025. So you said the imaginary recession, recession fantasies, and there are many things that were supposed to cause a recession, commercial real estate,

inverted yield curve, basically short-term money cost of borrowing exceeding long-term borrowing. And then the SOM rule. Okay. So just a few things. So that commercial real estate, I had people, not people who are writing the commercial real estate doom newsletter, but people who worked at like the biggest insurance companies that managed trillions of dollars, they were openly saying that they expected carnage. And you

Yeah, I mean, so far it hasn't really happened. And then on the inverted yield curve, that's too, we're not going to, no one's going to solve that. The SOM rule, the labor market, why do you think that didn't trigger? And the SOM rule is basically that the unemployment rate, if it goes up sufficiently quickly, it is a harbinger of recession. Yeah, primarily because of immigration. And this is something that Claudia Sam herself acknowledged. I think she's quite sorry that her employees

Otherwise, very interesting indicator created such confusion in markets. It was never intended to work in a open economy. I actually had run a SAMRU in Australia to show that predicted nine of the past one recession, because famously Australia never has recessions, right? So when you have an economy that experiences an immigration shock, especially when that economy has an overheating labor market, which was the case in the US, it's actually very positive for growth.

So we took, who knows what the actual numbers there, let me go to the official 300,000 a month crossing at the southern border. So by that annualized to three, 4 million immigrants that basically replaced the people that had dropped from labor force in COVID. And yeah, in the short term, maybe that pushing unemployment rate a bit higher. I also suspect that maybe we had some reporting issues. I mean, it's been a lot harder to compute statistics. I know that no one picks up the phone.

Also, when you have a high share of the population that's perhaps not well documented, if you hear a man from the government asking you if you have a job, you may not tell the truth. So yes, that increase in employment rate was a bit, and then the Sam rule untriggered, and the recession never happened. Now, coming back to the other topic you mentioned, commercial real estate and the maturity war.

I think some of these worries were not so much long as they were early. And that's why I get a bit more worried when it comes to 2025. So for commercial research, your average commercial lease is five to six years. So the stuff that was a problematic valuation and that needs to be written down is going to start hitting.

in 2025, 2026. The same goes for the inverted yield curve. And this, this one reason why the recession never happened is that when the yield curve was inverted is that when the Fed started to hike, people had already refinanced and they had a ton of cash. So all that the Fed did with these rate hikes is effectively handed a universal basic income to people who had money market funds or short-term treasury. So it was actually similar to the interest rate channel

was kind of stronger than the boring channel. Now, the more the time passes, the more these starts to shift. We had a complete orgy of issuance in 2020, 2021, when the 10-year yield was around like 1%.

And the average corporate bond is a maturity of five to six years again. So everything that we sold in 2020, 2021, and that probably priced at around 2% is going to have to be refinanced. Looking at corporate bond yields now, it's probably around 6%. So it's about a 4% difference. Again, I don't think it's going to break the economy. I think the economy is quite strong. I think monetary policy is still a commodity. I think rates should be higher than they are today. When it comes to margins, corporate margins,

That interest expense is going to increase, that's going to reduce profit, and that's going to potentially slow the level of investment and the level of growth. So again, the people who were worrying about recessions in the past two to three years were not necessarily wrong. They were just very early, and I could see a lot of these forces coming together in 2025-2026.

And so there's the corporate maturity wall, but that was looming in 2023. But so a lot of it just has been refinanced, right? In the high yield market. No, I mean, if you look at the debt that was issued in 2020, 2021, the maturity wall always was 2035, 2026. I mean, there might be some smaller issuers that, you know, had shorter term debt, but

A lot of the debt was also issued at very long maturities. I remember the big tech firms, for example, issued some 50-year bonds. That's not going to price for a long time. But I see kind of your average kind of triple B rated company, that was 2025, 2046.

Yeah, I mean, the one thing that stands out is that the cost of credit is just so low. Risk-free interest rates are high, but the cost of credit, the credit spread is just so narrow. I mean, investment grade spreads 80 basis points. The market is less than 1% differential between the U.S. government and the high-quality corporate sector in America. So that is stimulative, right? I mean, you could say the stocks are overvalued, and they're probably overvalued relative to the cash rate of 4.75%.

But are they overvalued relative to 80 basis points investment grade spread? I don't know. I agree. I mean, if you put a gun to my head at this very moment and my decision is between corporate bonds and stocks, I'll still take stocks for the reasons you outlined. Certainly in the short term, like I said, in the short term, I think stocks are fine. I mean, we have this massive wealth effect. We have this still like animal spirit shock of the Trump election. And now is the easy time, right? I mean, Trump is not in power.

So you can project whatever you want on Trump and you're not disappointed. So yeah, I don't think the market breaks. You also have a tremendous amount of performance chasing. The market is up so much this year that I think most active managers were caught off guard and are probably kind of scrambling to get back on. But again, all these forces will fit coming January and February.

Okay, so you remain somewhat unconcerned about the U.S. economy, but you have a report out saying the bearish case for U.S. stocks. So what is the bearish case? Just how bearish are you? Does that mean that the stock market only ceases to go up or a mild 5%, 10% correction? Or are we talking some real bearish, some real, a true bear market here? Well, in the short term, I'm bullish, but I feel bear markets in April, May of 2025 are

The bear market typically is something like 20% or more. Just looking at straight math, we March, on March 9, March 3, sorry, we're going to celebrate the 16th year of the secular bull market that started with this ominous print of 666 on March 3, 2009. So yeah, 16 year bull market, and then basically the price

10X, right? 666 to maybe more strategies now expect we're going to see 7,000 any day. That would be the greatest bull market in history. If you look at that history of secular bull markets, basically they correspond to major US victories. You have one after World War I during the Roaring Twenties, you have one coming out of the Great Depression, you have one after the Korean War.

The great expansion of the 50s, the 60s, and you are in the 80s as the solar system collapses and you have the boom of the 90s. And yeah, it's like, I say like bull markets are like lobsters. Lobsters are theoretically, they're one of the few creatures that doesn't experience death. There is no...

It could live on forever, but in practice, most lobsters get eaten or slaughtered before they get 12 or 13. And again, we had 15 years, we had a massive bull market. So if you just take a very naive look at a short table view, you think, okay, now would be time to expect for something to turn. And yeah, I know we have all these stories about the melt up, right? Oh, like this is the melt up phase.

Maybe let's look backwards. In the Sharpe ratio of the S&P 500, at the end of October, it was 3.6, one-year Sharpe ratio. So you take the return divided by the standard deviation of return, away about 30 plus percent gain, 10 percent volatility,

3.5, we've done more than 3.5 on a year-over-year basis for Sharpe ratio. We've gone to 4, 4.5. But typically that happens after a recession or after a bear market. Here, we have a melt-up on top of a melt-up because 2023 was also a great year for stock. So the people who are arguing for that kind of Trumpian melt-up are suggesting that we're going to put three melt-ups, stacking three of them on top of each other,

Again, just looking at shorts, that is somewhat unlikely. And then I have some worries about the economy. We talked about the maturity wall. We talked about, well, we haven't talked about inflation, but I think we will. One thing that worries me is a slow-term government spending. And not so much because of Doge and Elon Musk, where my... Department of Government Efficiency, Doge. Yes. I love the memes. I love the memes.

But I think in the U.S., we spend far too much time worrying about Washington, D.C. and the federal government, which is the least interesting part of the U.S. government because 85% of what D.C. does is just sending checks to people, entitlements, Medicare, Pentagon spending that you cannot touch.

What we think of as government, which is who pays the teachers, who pays the cops, who maintains the role, who maintains the grid, who builds the bridges, is typically states and local government. And there we had this bonanza that was a bit delayed from COVID because it took some time for the money to be appropriated and spent. And then we had the big infrastructure acts, the CHIPS Act, the IRA. And then we had a booming tax receipt, which was

which basically allowed the state and local government spending to grow by 10%, 15% a year for three, four years now. This is about to end. If you look at the NERF Bill, the National Association of Budget State Treasurers, the expected change in state spending for next year is a drop of 6%, coming off something like 8% or 9% last year. So we will see fiscal tightening and growth.

I mean, you can argue maybe that's a good thing. Maybe we've seen from states and local government and that over time that will

It helps productivity in the economy, but in the short term, GDP is equal consumption plus investment plus net government spending plus net export. And I can think of two things here. The two nets are going to be negative next year. Net government spending is going to be less and then net export is going to be less because of the stronger dollars. So we're really putting all the onus to maintain these very elevated levels of growth on consumption and investment.

So Felix, sorry, I just interviewed Felix Ulof, so sorry. I'm not that bearish. So Vincent, when you talk about the flows to state and local governments and the mechanical impact of government and how that's going to impact the economy, I pay attention because I remember in 2022, everyone was bearish out of their mind. So many, not everyone, I should say. And you said, actually, because inflation was so high in 2022, that is going to be added to social security to the

senior citizen, and they're going to get a huge raise in social security, so to speak. And they did, and the economy held up. So I definitely pay attention to you. I'm sorry, Vincent, what was the thing you said after that? We're talking about state and local government spending. State and local government.

Switching from 10% growth to 6% decline. 6% growth. Oh, yeah, yeah, yeah. But I'm happy to take on the point on the inflation adjustment because that's quite important. Please, you want to take it right now? Yeah. Yeah. So, yeah. So one reason that I was so bullish on growth in 2022 and 2023 had to do with the lagged inflation adjustment in social security payments and

through income tax brackets. So typically, social security payments and the general schedule, which is the pay for the government employees, and then tax brackets are adjusted on the basis of training inflation. So the best outcome is when you have very high training inflation that is falling because you get a huge bump to your cost of living. The tax brackets go up by a lot.

on the basis of that past inflation. And effectively, the following year, you get much lower inflation. So you have a huge, real boost to your income. This was part of what I call the shadow stimulus of 2023 and 2024, which, quite correctly, more than offset whatever contractual forces were going on in the rest of the economy. So that works in reverse when you have relatively low inflation that is reaccelerating. Now, today, we just had a CPI print.

We're looking at, depending on the measure, 2.7% or 3.3% and actual increase on a year-over-year basis of inflation. And basically, inflation has been flat to up in recent months. Now, the cost of living adjustment, which was passed in November, I don't have the exact number, but I think it's around 2.5%.

And the general schedule increase, which goes to government employee, is around 1.8%. So it's all filling off this kind of low point of inflation at the end of Q3. If I'm right that inflation is not going to slow and possibly even accelerate next year, instead of having a real pay increase, what 70 million retirees will get plus X million government employees, plus everybody who pays income taxes is going to be a real pay decrease.

Which again, going back to this idea of GDP equals C plus I plus X minus M plus net government spending, the C part will get hurt a little bit. Now, there will be other things that will help it. The wealth effect, for example, will certainly help consumption. But on the margin, you could see how we had real pay increase for inflation adjustment that are going to turn into real pay decreases.

So in 2023, inflation was actually a lot lower than in 2022, but the adjustment to Social Security was from 2022. Now you're saying if inflation in 2025 is higher, let's say it's 4%, even 5%. Inflation in 2024 was, let's say, 3%. So in real terms, it will contract by 2%. Yeah, I just want to talk about that state and local government. So in terms of the actual size of the government in employment,

The federal government, quote unquote, only employs 3 million people. Local governments employ 15 million people. Interestingly, local governments actually peaked in about 2009. And I think there was austerity. So there's a shrinking of local governments. They have now been growing since the summer of, say, 2020. Why do you think that state... I said something about a certain percentage of decline in either state and local employment or state and local expenditure.

Tell us about that. Is that coming from Congress or is that coming from governors? Where is that coming? No, no. Congress has nothing to do with it. Only to the extent that sometimes it can allocate funds to state and local governments. Some of the stimulus funds were effectively spent by local governments, state and local governments. Part of it is the winding down of

of some of these big programs, the big infrastructure bill that the Biden administration passed, which are unlikely to be renewed. And they were also built to be somewhat franclody, right? I mean, this is politics. So if you're going to spend a lot of money, you typically want to spend it on the election year so that it benefits you rather than your successor. So it's going to be a little bit of a side effect there. But part of it is just the mechanics of states and local government. So we had these boom years and they generated boom in tax receipts. Now,

Different states have done different things with that. California spent it, as you would expect. Now, we were supposed to have some trouble closing the budget, but thanks to the bubble in basically the big tech stocks, we're going to be able to close the budget. But for California to run, we basically need the NASDAQ to double every year. So I doubt that this is... It's a long-term model.

Some states have put it in rainy day funds. States like Alaska that have a lot of typically commodities revenue had that. And then a lot of states, the vast majority of them, the Republican states, have kept taxes quite aggressively because they had more money than they thought. So they're like, okay, let's give it back to the people. So states and local government cannot run deficits. So if you get taxes, you're going to have to get spending. And we are the killing spending point.

So again, the number I quoted was state expenditure from general funds are going to drop by 6.2% in fiscal 2025, down from 13% last year. So it's a big gap. And also, if we think in terms of jobs, I mean, remember... In terms of what, sorry? Jobs. Remember like eight months ago when we had these good job reports and you had all the recessionists on Twitter, the jobs are real. It's all government.

They had a point. But it was all state and local government. State and local government were adding about 40,000, 50,000 jobs every month. So let's say that that drops to 10. The delta is minus 40,000 jobs. At the same time, we will have construction sector, which will shift from creating 16 to destroying about 15,000 jobs a month.

That's just based on the pace of new sale, construction, residential finally turning over. So you could see that right now we're printing about $150,000 on the non-farm payroll. We could be falling well below $100,000 starting. That's why I keep going with this idea of March, April of 2025. And I don't think the market is going to like that.

So, Vincent Delaward, card-carrying inflationista, card-carrying, soft landing, but no landingista, inflation will be hot, no recession, no recession, no recession. The recessionistas are having visions in their own head. Vincent Delaward is now saying that he might be concerned about the job market in 2025. Yeah, not falling. And that's the problem, right? Because if we had a

a full blown recession, then you could go back to other Fed is going to cut and nothing matters. There is no alternative and blah, blah, blah. Just slowing enough to give the creeps, but not to trigger reaction from the Fed because at the same time, the US labor force is no longer growing ex-immigration. And the peak in the immigration wave was about six months ago. Even before Trump, because the border was such a hot issue,

If you look at border crossing, they've dropped from about $300,000 a month to $70,000 now. And probably I will go to zero. So even if we have this kind of softish print, a non-farm payroll print at about $70,000, $80,000, your unemployment rate is not really going to go up. Average hourly earning is going to stay at around 4%. So the threat will be caught between the proverbial stone and the hard place where

They're looking at the inflation data that's not helping them. And they're looking at the labor market data and they see some weakening, but they don't see it in wage gains and they don't see it in the employment rate. So they turn to the dual mandate and they basically have no excuse to justify keeping propping up the stock market, which is what they've effectively done for the past two years.

Vincent, I calculate roughly local and federal governments over the past three years have added 1.3, 1.4 million jobs. The healthcare sector has added nearly 2 million jobs. So that one sector of the private job market, diagram of a job market, those gains have been bigger than the entire gains of the entire state, local, and federal government. So what is going on in healthcare? And I want to

attached of three or four different things. Number one is healthcare costs have been going up. Number two is stated consumer price inflation and PCE measures of inflation, in some cases were very low inflation or in some cases deflation. And in a way that everyone recognizes that the data does not accurately capture reality. It doesn't capture for a reason and it's not because of some corrupt reasoning, but it's just the way it's measured.

And number three is based on recent events, the conversation about the American healthcare system and how expensive it is.

And number four is something I noticed of UnitedHealthcare. I was like, their profits are actually down. So I'm, Vincent, I'm unable to connect all of these four issues, but perhaps you might be able to in terms of what's going on exactly with healthcare costs and with healthcare employment, because healthcare costs seem to be skyrocketing and healthcare employment based on actual data is skyrocketing. Yeah.

And I think it's part for the case of secular inflation and the reality that the 2% target is no longer viable. When you have a sector that's, what's almost 20% of the economy, healthcare now, and you see costs going up by close to 10%. So the one I like to look at

Rather than CPI, it's just I look at Medicare spending or VA spending as a proxy. Because I also don't really understand how you measure inflation in the healthcare sector. Like, okay, well, I get a new surgery that costs more money but buys me two years of extra life. How is that? Or a new drug that costs 10 times as much but has marginally better outcomes. What's inflation? What's productivity? I don't really know. Because the drug doesn't exist before.

Right, right, right. So exactly. So it's very hard to measure health care inflation, which I think is, when you were talking about some of the issues, I think we can talk about health insurance, for example, as one area where inflation is very poorly captured. And I think it's also part of the

a discrepancy between inflation as experienced by the population and as reported statistics, a lot of that has to do with healthcare. But let me go back to my idea that the healthcare sector is about 20% of the economy and spending is growing by close to 10%. Like if you look at the Medicare and the VA, that's what it's at. If you have 20% economy that's going to hit that, that's your 2% target.

right there, just from healthcare. So unless you have, and part of it is the inefficiencies of the system, which are horrendous. Part of it is also just demography and shifting preferences, right? As you reach a certain level of prosperity, you spend less on food, less on goods and more on healthcare. And if healthcare is an area where productivity gains are structurally lower, yeah, because life expectancy is kind of stuck, right? I mean, you're

I don't think we have 2% trend productivity growth in healthcare. At some point, we hit biological limits, even though some Twitter billionaires are trying and mostly failing, as far as I can see, to enter. The creator of Braintree, which got bought by Venmo, was his own by PayPal. Yeah, he's trying to live forever. I mean, credit to him. He's making everything public. But anyway. Yeah, yeah, yeah. So the more we spend on the healthcare, the more the 2% target walks away from us.

Even if we had an officially run system, which we don't, and which we're unlikely to have one because there's absolutely no plan. I think Trump said he has the concept of a plan, but we know that touching healthcare is political suicide. I mean, cost Obama his majority and it kept haunting the Democrats for a long time. And we've been talking about entitlement reform for four years and it is very likely to happen.

So we have this sector, it's like an ogre that keeps giving everything around it. And yeah, you certainly see that in employment statistics. I think the data point is the reason why I don't expect jobs, negative job growth, even though we see contraction in construction and contraction in local and state, because the healthcare juggernaut is going to keep adding jobs. A lot of these jobs are

A healthcare benefit administrator, because navigating the system, it's the, I'm sure you've seen the South Park video about navigating the US healthcare system where you keep bouncing from one person to the next and your claim keeps getting denied and the price is just made up at every step of the way.

So to me, that is the definition of stagflation. And this is what I see as the biggest risk for 2025. This is not a recession. I think we effectively made recessions impossible because of the size of the deficit, because of the reactiveness of the Fed, because of demography. But if you think in a full two-by-two matrix, growth and inflation, we can exclude the deflationary bust with kind of all nine scenario.

But the one next to it, where you have slowing growth and uncomfortably high inflation, is still there. And again, it's too early to tell if we're going to fall in that scenario. But it seems to me that we were in the disinflationary boom. Inflation was high and falling rapidly. And growth was very strong, 3% real GDP for eight quarters now.

So if you ask me where are we going to go next, well, it's got to be either the inflationary boom, and I think there's a chance of that if we see a big dollar devaluation, or

If we do nothing, it makes sense for us to go in that stagflation reverse. And so, Vincent, the two ways I think economists think that higher interest rates or interest rates raises from the Federal Reserve would slow growth or cause a recession is, number one, it just eats away at profitability or cash for companies and individuals. But also, it particularly discourages

borrowing and spending on items for which borrowing is frequently employed, namely automobiles and housing. And therefore it could cause a contraction in the employment for automobile manufacturing and home manufacturer. It's a bit visit. I mean, that is a traditional way, but I just looking at the weights of how many people work in automotive plants as well as home building to the healthcare sector, it's, it's like,

a few drops in a bucket, or I should maybe say a few drops in a water bottle. And the healthcare sector is just so, so massive and it just does not care about interest rates. Yeah, it's bomb. And I think you can see that in Europe where we've had pretty horrible economic conditions for several years now. I mean, basically German GDP has been flat to down.

Since COVID, industrial production is probably 30% pre-COVID peak. And you have an employment rate that's barely budged. I mean, I think it's 5.2 to 6.1%, given the amount of economic stagnation and the job losses that we've seen is exactly what you described.

And that is my expectation for what recessions will be in the future. There will be periods of very tough growth with still uncomfortably high inflation and an unemployment rate that refuses to go up, partly because of demography and partly because the healthcare sector keeps gobbling more the labor force.

in ways that are active. I mean, there is something to be said for, I mean, it's a noblest thing, right? Providing care for another person, helping a senior person stay at home. I don't want to say it's in productivity in a spiritual sense, but in an economic sense, it doesn't have the same productivity gains as you would have in a car plant. Right. And I guess because if

Disproportionately, medical care is spent on the elderly. They work at a far lower employment rate. I guess that would be the argument. So Vincent, how can personal consumption expenditure for healthcare is up about a little over 30%, 32% since the fourth quarter of 2019, which is a lot. But yet the consumer price index for healthcare is not up by nearly as much. So I

If I was a spokesperson for the government or the healthcare industry, I might say, according to the Consumer Price Index, what are you talking about? It's only up at $10. Why are people angry? Why are people angry, Vincent? Tell us why that's wrong. The way that the Consumer Price Index is measured might indicate something. And I know UnitedHealthcare's profits are still massive, but they actually are down. They were really high in 2021, 2022, and they actually are down some.

somewhat in terms of stated net income. And I'm just wondering if you could connect these two ideas. Yeah. So let's, let's go with the CPI and let's focus on the C part of the CPI. The CPI is the consumer price index. So what they're interested in is the net consumption of good. So when you, when you buy insurance, the service you buy is the difference between the premiums that you pay and the benefits that you receive. That's how the BLS statisticians see it. So.

I'm going to take a home insurance example here. I live in California, big fire risk where I am. My insurance premium rose by 30% this year, something that's quite normal in my neighborhood. A lot of my colleagues are in Florida. They tell me it's even worse there because of the hurricane risk. A lot of insurers have actually left the state. But from the perspective of the BLS, I'm also going to get 30% more when my house burned down. So I'm good.

Right? Basically, I have not experienced inflation. The value of what I received is the same as the value as I paid. So I'm good. So what the- Sorry, sorry, sorry, Vincent. I'm not arguing with you. I'm arguing with the reasoning of the BLS. But if the price of a banana goes up 20% and you pay 20% more for banana, but what you get is a banana, which is worth 20% more, then there's no inflation either, right?

Right, right, right. But what I view that is basically the cost of the service, it's kind of like in banking, right? They look at the earning, the cost of providing the insurance, which is what you buy, is the difference between the premium that the insurer receives and the benefits that it pays out. That's the cost of the service. Everything else will be measured in the CPI when it gets purchased, if you include it in the

When you buy the insurance, you'd be double counting it. Is the way I understand it. So effectively that for good insurance, it's called the efficiency ratio. It's around 90%, right? You pay about 90 cents for every dollar you receive in benefits. So the way- On average, which means there are a lot of people who pay way more than they receive. And there are a smaller percentage of people who receive way more than they pay because they get sick and they need help. Yes, yes, yes, yes, yes.

But when it comes to the weight in the BLS and in the CPI, that effectively wipes out 90% of that expense. So that's why the weight of health insurance, I think, is on 0.6% in the CPI. And then there's another 0.4% for household and dental insurance. Now, I'm sure you pay health insurance and house insurance. I paid for my kids. I mean, it's my largest expense. And I think it's the biggest.

The norm for most American families, I mean, it's your biggest part of your paycheck. After the mortgage or sometime even before, it's interest if you have a big family and you're not subject to that. Or if you include the part of it that's covered by your employer, there's a tremendous amount of money that goes towards paying insurance.

But just a 1% weight in the CPI. And if I think about inflation, since COVID, I think that there has been these four waves. On re-opening economy, it was commodities, right? We couldn't get lumber. Oil prices went from negative to positive. That was the first wave of inflation. Then it got solved because commodity markets are global and effectively, they were quite well.

Second was core goods. It was a supply chain issue. China was closed. Couldn't get used cars. Eventually that was solved by reopening China. Third, it was in the labor market. The Great Resignation, lazy girl job, accent your wage, all that stuff. That was solved by bringing 6 million migrants to replace the workers we lost during COVID. The fourth wave of inflation is in insurance.

But contrary to the other three, it does not get measured in the CPI properly because the weight is very low. And then we can, I don't want to spend too much time on it, but also the, if you look at the price index, if you look at the health insurance price index, it's about the same level now as it is of 2017. And that has to do with the, the points you were making about UnitedHealthcare profits being low, because basically the

The health insurance price index is derived from the profits of insurers. So when profits go down, it's perceived to be deflationary, which is absurd. So for all these reasons, that fourth wave of inflation has not gotten captured in the data, which has allowed us to go from 9% to about 2.7% of the CPI, even though my experience, and I think most Americans' experience of inflation is that it's still way higher than it was before COVID, and it's probably even

probably around 3%, around 4%. Again, I think we are touching on the good hearts law. When a measure becomes an objective, it ceases to be a good measure. And you start to see that in all these discussions about the CPI and then breaking it down. It's like, okay, what is the goal? Is the goal to get the CPI or is it the goal to get inflation? And I would argue that the CPI is not inflation and we overly focus on the CPI, breaking down so many pieces that we forget that

the underlying reality is for you to measure. Yes. So medical care is only 8% of the CPI, but then health insurance is 60 basis points of the CPI. So less than 10% of the medical care. Or for medical care, a lot of it doesn't go into it because it's paid for by the government, right? So that's why it doesn't show up in the CPI. Got it. Sorry to belabor this point, but what did you say?

It shows up in PC, but not CPI because a lot of these are reimbursed, right, for seniors and people in Medicare. So it doesn't come out of your conceptual basket. Right. But just in terms of what people are paying, I guess, well, a lot of people get their, as I used to get their health care from an employer. And once you make that switch of paying for it yourself, you really realize, wow, what's going on here? Yes. And someone is bearing these costs. That's the problem, right? I mean, you can hide it.

It's like you press on a balloon, right? I mean, you can put it down, but that pressure is going to show up somewhere else. And that's one reason why I believe if you look at this core service, X housing, part of the CPI, why I focus so much on the cost of a haircut is because it will show up there. Your employer is

paying for your insurance or you are paying for your insurance or you are paying taxes that will go towards paying for your insurance. So if you take it out of one basket, then it shows up and it will typically show up in the cost of services that employer of labor because yeah, humans need health care. So let's tie this back to your bearish case for stocks. Not that there's going to be a recession, but that inflation will go up, but

The GP and spending and all the nominal stuff won't go up by as much. So in real terms, things will go down. Yeah, that's absolutely right. You'll get your smaller cost of living adjustment. Wage growth has been quite good, but inflation has been quite high. So on balance, you're not making much progress. And then the natural pace for the economy is to slope again.

In a weird way, partly because I was so bullish on the economy for so long, makes me paradoxically more... For me, the good times are now. We've come, we've experienced the growth boom, the productivity boom. I mean, with Q3, if you look at GDP now, it's probably at 3.5 right now. That would be the eighth quarter of 3% plus growth in the U.S. And pretty much all of that is productivity growth.

So the good times are now. The most likely place, the path for the economy is to slow, not accelerate. Yeah. And if the good times are now, that doesn't mean it's necessarily time to be bullish stocks because the best is already priced in. So you said you think there will be a bear market in late Q1, early Q2 of 2025. I know you're a strategist and you're not focusing on

specific trades as much. But if I knew that in one month, in April, from April 1st to April 30th or 31st, that the S&P was going to decline 20%, which is a bear market, you can make a lot of money by buying one month puts, especially because short-term volatility, implied volatility is so low because things have been so non-volatile.

But is that your base pace that in a month it goes down 20% or do you think it will be kind of a grind? Or do you think maybe just earnings will go up? Earnings go up 10%. If the stock market is, let's say, 20% overvalued, you tell me how much you think is overvalued. But if the stock market is 20% overvalued, then if the stock market goes down 10% and earnings go up 10%, that's how it returns to fair value. That would be a nice story, right? Yeah. Typically, bear markets are

are short and violent, right? Stocks take the stairs up and the elevator down. So I would be more looking for something like a 20% correction, which given the valuation that we're at, I mean, we're matching the high of 2021. We had 20, 24 times forward earning. So it wouldn't be that insane to have a 20% bear market.

In terms of Trigger, the reason why I have this timing for March or April is to give it time to filter through the data. First, to let go of this optimism boost that we're in. And that's how sentiment goes, right? I mean, there's one point when you run out of balls, right?

we're not yet there yet, right? We still have people chasing the rally. Uh, we still have the small cap trade might, might, might get some boosts, uh, small business optimism might keep going up. So I want to give it some time before to, to get everybody, everybody running in. I also think in terms of inflation. So my expectation is that inflation is, is not going down to 2%. It's, it's at best bouncing around where we are, if not reaccelerating, but

I think we're going to see that in January and February, but that the Fed is going to, and the market will have a credible reason to discard it, which is, oh, it's just a new price, right? It's, oh, companies will raise funding. That narrative is complete BS, by the way, because we have seasonal adjustment and the Fed has

The dual mandate of the Fed is not suspended because it's the first month of the year. Although we only have a price to be target for the last 11 months. That's crazy. But I've seen before, we'll have it. It'll be easier to discard a bad inflation print for January, possibly February because of that. But once we get to March, which will be released in April, and we still see inflation about 3%, I think that's when things get uglier.

This is when the spending cuts at the state level are going to start kicking in. This is when the boomers were used to getting these big increase, are going to get less money, the new call out. And also this is when companies will report Q1 earnings.

I think they're gonna take a hit because the dollar is very strong. And typically they, at the beginning of the year, they need to guide lower so they can beat later. Right. That's the game, right? Typically you lower, you lower your guidance in Q1 so that you can beat in Q2, Q3 and Q4. The expectations are still pretty high. So that's why I can think this is perfect storm. And then the last one I would add is the, the general chaos of, of Donald Trump. I, I think we forgot. It's kind of like babies.

I had, I got, oh, when you look, oh, you get the old pictures. Oh my God, they were so cute. I missed these years. And then it's, oh yeah. But also I was waking up like five times in the middle of the night and dealing with, with tantrums. We forgot how chaotic a Trump administration is. Remember back when you would create every day, the trade trade trade negotiations are going well.

I think I'm going to have to see a lot of that. I mean, he has a very disruptive agenda. Many, many things can go wrong with that agenda. And I think as after it gets inaugurated, we will get some of these policy uncertainty, volatility, threats of tariffs that will start piercing that big bubble that we have in the stock market. Earlier, Vincent, you've said that

Do you think net exports will go down because the dollar will strengthen? I assume the reason you thought the dollar would strengthen, perhaps at least one reason why, is because...

of the Trump tariffs that are going to strengthen the dollar. It's funny, everyone used to say tariffs are inflationary, but then if you would say, oh, actually inflation is just strengthening the dollar, then they negate the inflation because they increase spending power, which means the tariffs would have limited effects. So Vincent, connect a few things for me. What is the Trump's impossible strategy? What is your view on the dollar based off of tariffs?

And also, you've got a fascinating chart showing the real cost of U.S. manufacturing wages, which had gone up a little bit. But in particular, in yen terms, they have just skyrocketed. So connect all these ideas for us, please. Trump was elected to do three things. First and foremost, I think, was inflation.

People's perception of inflation were way higher than the States. And I think that's, they blame it on Biden and they think Trump can fix it. Two was immigration, biggest campaign program, not only ended, but possibly reverse it. And then the third one was, and what he called the American carnage. It is 20, 40, 60 now, acceptance speech. Reindustrialized the Midwest and then bring good medicine jobs to the US. My impression is that it cannot do all three at once. Something is going to have to give because now,

But my general impression of Trump is that he was the right man in 2016. In 2016, we had a very weak growth with a 10-year yield at 1.5%. Inflation was well below the 2% target. The deficit was actually quite small. China was rolling over into recession. Europe was still dealing with the consequences of the sovereign debt crisis. The Obama years were really austerity. The dollar was actually quite cheap back then. And there was a tremendous underutilization.

high unemployment rate, low inflation rate in the economy. So the way I think of Trump is kind of like a bull in a china shop, right? And that was, so a mix of like aggressive tax cuts, big spending increase, threats of tariffs, and strengthening the dollar was actually quite bullish for the U.S. economy. And indeed, my guess is Trump won, was 80% growth, 20% inflation.

And that 20% inflation was not a problem because we're below target. So that just got us back to target. And that gave this kind of golden moment, which still included a bear market in 2018, by the way, which even with the right environment, we still had a pretty nasty bear market. Move the clock forward to 2024, pretty much everything I described is reversed. We have a deficit of 6%, 7% of GDP. Current account deficit is massive. Ten-year yield at close to 4.5%.

We have inflation well above target, potentially stimulus in China. We have the unemployment rate at a 60-year low. So if you put the same policy, you'll get much more inflation and much less growth, which is part of my case for taxation. And then the last point you were making was about a chart where I was comparing inflation

Real wages, real manufacturing wages adjusting for an impersonating power term between the G7 economies and Mexico. And what we've seen is really a perfect storm for the U.S. One, the dollar's gone up a lot. Two, we had more inflation than other countries. And three,

Wages, manufacturing wages have grown faster than inflation in the U.S. while they've grown less than inflation in the rest of the world. So if you look at all three of them, we've seen basically a doubling of the cost of U.S. labor looked at from the perspective of a Japanese industrial conglomerate or a German automaker. So the Trump bargain, which is basically build a factory here or I slap a big tariff on you,

is unlikely to work unless that tariff is something crazy like 100%. Because, yeah, labor, the U.S. is now a high-cost economy. It kind of reminds me a bit of Brazil, where you have every 10 years or so, you have a boom because there's big people discover gold or the price of

coffee or I don't know what goes up. And then the economy runs pretty hard. The government keeps spending. The central bank is a bit behind the curve as the Fed keeps hitting the boom. And then that boom ends up just creating stagflation. Costs keep rising in the economy because you are dealing with a strikingly high-cost economy.

I would say the U.S. in 2024 is closer to that, which was not the case in 2016. So, Vincent, when you said in 2016 Trump was the right man for the job, I assume all of your analysis, 100% of your analysis was purely from an economic point of view, not political, of course, which is that in 2016, the Trump administration

The Trump bulldozer, let's call it, is a cocktail of inflation going up, the dollar strengthening and a boost to manufacturing. And that would have been extremely welcome in 2016. But now inflation is already above trend. The dollar is already strong. So economically, you don't think it would be as good of a thing or a bad thing.

that those types of policies. So you said, do you think tariffs will be inflationary in a way that will not be offset by a stronger dollar? Well, I mean, both things can be true at once, right? I mean, tariffs is various. The incident of tariffs, so it can be for profit margin. Some of it can be through relocation of supply chain. Some of it can be through currencies at the core.

Like, I mean, words have a meaning, right? If you're going to increase the price of something, that is inflationary in essence. It really is. I think the knee-jerk reaction of the market is going to think that the dollar is going to appreciate because of the areas. My concern is that if the dollar keeps appreciating, U.S. growth is going to slow because, again, inflation.

GDP is from some time plus investment plus the government spending plus an export. And the stronger your currency, the harder it is to, and we still have a globally impoverished economy. 50% of S&P 500 revenues come from overseas. So we are not an island that can just set the value of the dollar, whether we want it. So that growth is going to slow. And then eventually, yes, I think probably that that will cause the dollar to go down. In terms of the impact, yes.

I'm not sure that the yuan is actually going to be devalued. I think that's one of these fairy tales that we think, oh, don't worry about the inflation because the Chinese are just going to take it all over gently. We're going to put big tariffs on them, but they're going to live in a tragic currency. So we'll just be able to buy more stuff from them and we get more money. So the whole idea of the tariff is going to pay for itself. I'm not sure that's how the Chinese see it.

US exports are a much smaller share of the GDP now than they were in 2016. They had eight years to think about it. It's not like the shock factor that it was in 2016. There are tentative signs that the Chinese economy is recovering. There is a stimulus in the background. There is a China-Current Account surplus. So I'm not sure that the Chinese yuan is actually going to dig it up.

The reason why I think the dollar is going to strengthen at least in short term is mostly because the euro, especially the European currency is narrow. I can see them going down partly because of the, mostly because of their own political issues. But over time, yes, tariffs are inflationary. I mean, it's, you add costs and then you also add inefficiency. I mean, if you remember your little diagram, some econ 101,

The tariffs, some of it gets to the government, some of it gets to the producers, some of it gets, but there's a little bit of efficiency that's being lost. Deadweight loss? Yes. So Vincent, the euro has weakened a lot to currently 1.05 to the dollar. You think it'll go to parity, one euro to one dollar, we could even further. Why? What is your bear case on the euro relative to the dollar?

It's really, it's really the politics. I think the economy, everybody now understands that the European economic model is deeply broken, right? You cannot get your, we used to get cheap gas from Russia, free protection from the US and the growth from the Chinese market and everything is upside down, right?

So we were basically at war with Russia. The US and Northern world wants to pay for our protection and the Chinese, instead of buying our cars, are flooding us with their cars, which tend to be better and cheaper. So everything that could go wrong is going wrong. I think the market understands that. The part that makes me think it's going to get worse is the political crisis that is festering.

So the French government just, just fell. Macron was supposed to announce a new government today, still hasn't done it. I doubt that he will. If he does, I think the same causes will be the same effect. It will last for a couple of months before it's taken down. And what makes it worse is that Germany is also having a body of crisis of its own at the same time. One thing that really helped Europe was the, the, the asynchronous nature of the crisis that we had for the past 15 years. One was the PICS crisis.

Germany was super strong, right? They were riding- The pigs, Portugal, Italy, Greece, Spain, the southern countries were having economic issues. Germany was fine. Germany was- Germany was going to bail out the pigs, yeah. Bowing ahead, right? They were getting the cheap gas from Russia. They were sending capital goods to China. The industrial sector was booming. Angela Merkel was widely seen as the most competent leader in the West. Now that has changed quite a bit, but at the time, we had Merkel basically-

the president of the EU for, and Draghi as the head of the ECB. So we had two very strong hands, at least that was the perception. Now we have Olaf Scholz, maybe for another couple of weeks, and Macron, which are completely spirited. And then at the ECB, we had Christine Lagarde, who was appointed there, let me just say, not because of her high competence as an economist, but that's to put it gently. So...

Everything is hitting at once. This is a time when you hit the panic button, right? We see Russia is winning in Ukraine. Trump was reelected.

German companies are starting to slash. I mean, Germany has this tradition of delaying the pain because typically, because Germany's industrial economy and typically the industrial cycle is violent, but short, right? You have big downturns, but then it comes back up. So it doesn't make sense to fire your workers. And the German system is made so that you can put them on partial unemployment and find all these ways to keep them going. But if the downturn lasts for more than three years, which is the case for Germany, basically, nonstop recession, COVID, at some point, you get it.

get it okay you gotta let go and we've seen basically every dax company firing tens and fifty thousand by the hundred sometimes a hundred thousand workers so yeah germany's slowing france is a major budget crisis and yeah i think the the ecb's only tool is rate cuts

And so far, the inflation in Europe has run quite a bit. We're closer to 2%, so they're not constrained by inflation yet. So I think we start to see perhaps a 50-bips emergency rate cut in Europe in the next two to four months. And at the same time, if I'm right about inflation being too sticky in the U.S., the Fed doesn't cut as much. So there you could see the euro just falling slightly.

below parity, especially if we have on top of it, in tariffs, Europe would be a case where, yes, the currency would absorb the tariffs because the European central bank would basically have the right and say, well,

The tariffs are going to contract our export sector, so it's a recessionary thing. So we need the euro to weaken. We would not fight a weakening of the euro the same way the Chinese would. So Germany is having an economic crisis because China is flooding the markets with capital goods that Germany used to produce. France is undergoing a political crisis.

You are from France, so I'm glad you have authority on this issue. And you had a recent piece about it for StoneX. Tell us what's going on. And for people who have not been following it, just start off really simply, as well as to you also explain just the parliament, people who might be familiar with the U.S., how the U.S. system works, but don't understand the parliamentary system. Okay. It's hard to explain it simply.

At the core, I think the problem is the Macron government was quite unpopular. We had the Yellow Vest protest in 2018. He won again, but mostly to prevent the other guys from winning. Never had a very strong majority. So what Macron did was spend his way out of the problem. When COVID hit, he had his co-occurrence, whatever the cost.

And then with the Russian invasion, that pushed the electricity prices higher. And then again, the French government just opened the checkbook, which in a way worked. Like the French economy has outperformed the German economy. We didn't have a recession technically. The environmental issue quite low. But the budget is busted. And on top of that, we lied. So every year, this is a daily thing.

embarrassing aspect of being a EU politician. It's like you have to present to the teacher, which is the European Commission you plan and promise you'll be a good student and, oh, this is my spending and this is my forecast. Well, we lied. In the same way the Greeks lied 15 years ago. We inflated the tax revenues, inflated the growth projection, underestimated spending. So there was about 100 billion euros of, everybody knew that in the French Ministry of Finance, of hidden deficits.

And the idea was we didn't want to spoil the Olympics. I mean, again, the Greeks and the Brazilians are the same thing. They own Olympics. So we did our Olympics. We got our ceremonies. We got our medals. And then all the rot has come to the surface. And Macron lost badly a local election, a European election, and decided he'd be good at killing his government so that someone else deals with the mess. What he may not have predicted is that the underlying parliament was

a hung parliament, a third, a third, a third. And basically they don't want these throws, there's no way to combine these throws in a way that's stable.

Because the middle third views the other two-thirds as not worthy of talking. They are dangerous populists. They're threats to democracy. We cannot deal with them. But the problem is, yeah, to govern in a democracy, you need 50% of the vote. So if you insist that 65 to 66% of the population is problematic, well, you can't govern. And that's where we are. So we tried all these different combinations. Or maybe we swing left. Maybe we swing right. Maybe we'll get this guy out of retirement.

But it still leaves the two extremes still have the power to bring it down. And it's caused some blackmail, it's instability. And what's worse is in France, usually the president can call new election, new parliamentary election. But if he does it, he doesn't, can't do it for another year. It's to prevent from basically calling election after election until you get the results you want, right? There's a penalty to it. So Macron used his power in June. So we stuck with his people.

until next June, and then we're stuck with Macron for another three years. So that's why it's not going to get better, even if we have a new government. And at the core, again, the problem is for both France and Germany, I think, is this refusal to engage with about half of the electorate by saying, oh, they don't belong in the republic. They are outside of democracy.

No, that's not democracy. I mean, democracy. They're the formals. Yeah. Democracy where only a minority plays is an aristocracy. So that's the problem. That's why we can't do reforms. And that's why I'm not optimistic that we'll do reforms. Because the only way to solve such a crisis as deep as the one that's faced by France and Germany is to really get everybody around the table and have a broad mandate to pursue democracy.

radical reforms. And you cannot do that when you have very weak coalitions that can be brought down any day. And so there's a missing $105 billion, 100 billion euros. If that was the United States, no problem. The Federal Reserve would just buy it. The banks would buy it. The U.S. is a monetary sovereign as the monetary theorists would say.

European countries in the EU do not, in the euro system, do not have that. The Bank of France cannot just print French francs. The currency is the euro, which is printed by the European Central Bank, which is for all countries. So what is the, tell us the French fiscal situation. They've got a hole, but the hole only has to be

finance if you have to issue debt because you have to refinance. What are the financing or refinancing needs of the French US government? How much does it have to... If all the money is due tomorrow, that would be a huge issue. If it's 30 years, okay, over the next 30 years, they could find some issue to issue debt. So tell us about the issuing needs of the French Republic, as well as the European Financial Bank, which owns a lot of French debt, as well as the holdings, which you've got some great chart on.

Yeah, so there's about $60 billion in new insurance for next year in the budget. That's probably going to be revised higher is my guess. Because again, we can't pass the budget at this point. So that figure I gave you, we increased some spending cuts, which may not happen. So quite $200 billion from the deficit. I think there's about $150 billion of maturing debt that needs to be rolled over. And then there's a question of the ECB's holdings. So just like the Fed,

The CDC engaging in QE after the great financial crisis and then PPP, pandemic emergency purchases during COVID. And a lot of these bonds are maturing.

The idea is that the ECB is not tightening as much as the Fed, but it's still letting a lot of these bonds roll off. Now, they've been reluctant to let the French bonds roll off because they want to help as much as they can. But at the end of the day, it's kind of a fairness argument, right? I mean, if you can't change the rules for the French, especially as the French are not doing any of the homework and they shut down the ATMs for the Greek,

10 years ago, they can't just basically tell the Greeks, well, thank you for your work. Now please buy some French debt so that the French can retire at age 60 to win the Greece to take the hit. So there's a fairness argument here. So there's about a hundred billion euro of French debt on the CV's book that's been showing next year. So all in, yeah, you're looking at 400 billion euros of French debt.

That's a big number to lend to a chronically insolvent sovereign country with no government, no plans for reform in a currency that rapidly loses value. I mean, it's not some pocket change that you can find, especially if your central bank can't buy it. And Vincent, so I'm looking at the French 10-year government bond yield.

which investors are being paid in euros, which whether it's a French or a German or a Greek bond, it's all the same thing. So the differences in that yield is purely a reflection of the credit risk. So I'm aware that the French tenure yield has widened relative to the German tenure yield. So there's an increasing investor concern about being paid back. However, just looking at the outright tenure yield, it hasn't gone up by that much. So it seems to me like

It's only we're dealing with a few basis points, 10 basis points, whatever. But basically, it could get a lot worse. Like looking at the chart of the Greek, which stiffed with the 50%, not that I'm projecting anything close to that or saying that's even possible. But could you see the 10-year yield going to 6% or a meaningful widening above all other European 10-year rates and yields? Wouldn't be my base case, but I would not exclude it.

I mean, if you, maybe Greece is not the right comparison, but let's look at Italy in 2007, where we had a similar situation with a government that was

very weak, that was butting heads with ECB and really, ECB wanted Berlusconi out and then really stop Rainbow and let L'Espred go up. I think Italian yields touched 7%. And that's when the pain got so hard that eventually Berlusconi had to go and they had to bring all these technical caretaker governments, implement some of the reform. And then now France is not there.

France has been quite, Macron has been very careful to bring Brussels compatible politician in power. So the policies are not good. The budget is horrible, but the French are well liked. I mean, the, the, Michel Barnier was former EU commissioner. He had negotiated the, the Brexit deal. He was widely seen as kind of competent, respectable man. And I think Macron is going to try to do that again with the next government.

So I think that that removes that tail risk of 1 to 60%. I think that tail risk happens if we have elections that bring probably the leftist coalition, which would do things like bring back the retirement age to 60 years old and openly try to challenge the European Commission. And then you would see the full fury of the European Central Bank unleashed. And they have the tools to bring the French government down, like I said, it's

You keep pushing that straight up. Eventually, when you have debt to GDP of more than 100, you get into that fiscal dominance where a higher rate increases the deficit. And then in Europe, we're borrowing currency that we can't print. So you have to start getting somewhere else. So the ECB can absolutely bring down a government if it wants to. I mean, it's done it with the Greeks before. It could do it with the French. We're just not there yet.

As you mentioned, that 3% is still quite moderate. But it's moderate because rates in Europe are much lower than in the U.S. If you look at that spread over Germany, it's probably a 10-year high at this point. And now France pays more in its debt than Spain, Portugal, even Greece. For a brief moment last week, the 10-year Greek yield fell below the French-Greek

the French bond, which was completely unexpected. My guess is that Italy is going to be next. That's the trade I recommended since last summer is to go wrong Italy, strong France, because your game has to spread, collapses, and you also get a positive carry. Yes. And that's the type of trade that very hard for a retail investor to put on. So you probably got an employer bank to put on some of that type of trade. Vincent, you said that the European Central Bank has the tools to put the

French government to heal. That sounds to me like economists and economic technocrats and central bankers who were not elected, but you're putting a democratically elected government to heal. And I actually think of, I forget exactly what year, but sometime in the 1920s, I remember the Banque de France was also accused of that by basically interfering. I mean, that can be a very volatile political situation. Yep. It's the way the

This is the way the European Union was set up. I think once you give up monetary sovereignty, you give up sovereignty altogether. And that's what the southern countries had to learn the hard way 10 years ago. And yeah, it's very possible that France has to go through the same amount of pain to force the reforms that would make that French accessible. And so Vincent, other than

shorting government-fresh debt and going along the European as a bit of time bond. What are the other trades you see for this? What are the opportunities? So I was selling the stocks and I think the knee-jerk reaction would be, oh, France is in a state of crisis. Let me sell some French stocks. May not be the most correct one.

Even though it's been good, the French index has underperformed the German index by some 20% in the past three, four months. I think most of that has to do with luxury. The French market is very exposed to luxury. And when China slows down, that really slows the sales of LVMH, Hermès, L'Oreal. So that's really the... It's kind of a sector trade, France versus Germany. France is more luxury, Germany is more industrial. So...

And again, the more the Euro weakens, the better it is for French exporters. You actually have some ETFs that will invest in European exporters while actively neutralizing the currency, which would do well in this scenario. If we see more Euro weakness and, well, you may get a hit on tariffs, but we'll see what happens there. So the large caps may not suffer that much, or they suffer for separate reasons.

The banks obviously have been a long favorite. Whenever you have a sovereign debt crisis, the banks usually get a hit. Now, the French banks are very cheap already, but they could still get cheaper. I would look at small caps. Small caps make a lot more money from the domestic market. They rely on banks for loans a lot more, and they're also more integrated with local supply chains. I mean, one trial that I look at in horror in France is new bankruptcy filing just recently.

skyrocketing. And I think at some point that's going to, I mean, it's already hit the small caps, obviously, but they would end up bearing the cost of higher credit, higher taxes, less demand. So yeah, now it's a rosy future for French small caps. And so luxury stocks actually have been underperforming industrial stocks for over a year now. I wasn't aware of that. Yeah. Partly, I mean, it's because I think they got really expensive. Yeah.

It's the lack of technology stocks in Europe made investors kind of rush into luxury because luxury has some characteristics of tech, good balance sheet, very high margins, seen as quality. So because we didn't have FANG or MAGA, people were trying to replicate that with some of the fresh luxury companies. And a lot of it is China.

China's going down, China developing its own brands and buying fewer handbags and makeup products that are made in France. And then the industrials felt a bit better because of the increased defense spending. And then there was the hope of the Chinese stimulus that kind of gave a jolt to the industrial sector.

And so you like the Swiss franc. Why? I always do. I just, just always do. And it's just some of my favorite currencies. I mean, the Swiss franc has this beautiful asymmetry with European currencies, which is when, when the franc or the, now the Euro goes up, the Swiss franc follows because obviously Switzerland is very degraded with the European economy. So rising tide, it's all both. But then when you start to see crisis in, in France, Germany, or Italy,

The initial reaction is just to go buy, go put your money in Switzerland. So the Swiss franc does not fall as much or even sometimes appreciates as a result of that. To me, Switzerland is really the, it's the anomaly in the world. And in the Western world, with varying degrees, we just see the same pattern, right? Greater deficit, higher debt levels.

monetary accommodation of these deficits and financial repression. And then Switzerland here, we have a country that has basically no public debt, that has a care account that's in surplus, that has a central bank that's never done QE, that is still run the way you'd think about a central bank in the 70s with textbook, no inflation,

Very low unemployment, still a pretty big industrial sector, and then very high added value activities, mostly pharmaceutical, luxury, watches, finance.

that have proven to be more resilient. So Switzerland is a quintessential kind of quality asset. And I think, especially as I worry about possible bear markets in Q1, as I see US assets being extremely overvalued, as I see the US being the only game in town, I think Switzerland has a place in that portfolio. And it's on the road in many ways because it has no debt, right?

It's hard to buy an asset that doesn't exist. So most people are underweight Swiss assets, even though they are very in quality with the rest of the world. Yeah, of course, credit suites no longer exist. So Vincent, tell us the effect of the weak euro. Is that going to be stimulative for Europe? Can Europe get itself out of its financial and economic mess by having a weak currency and just export it to the rest of the world?

I think by default, that's what's happening. When you don't have an idea, you just end up debasing the currency and then hoping eventually someone pulls you out. I guess there's a level where that would work if we don't get tariffs. Maybe that works for tourism. I mean, that's basically why Spain really are now the economic engines of Europe. It's wealthy Brazilians buying homes in Lisbon. It's American tourists that are

moving to Barcelona because the food is great and life costs nothing. So I guess so. I guess that's a strategy, but that's one way you basically make your citizen core relative to the rest of the world. So that's not really a winning strategy in terms of politics.

Right. So your views on Europe, you think the euro and the dollar will go to parity. You think that the French prices will fester, be ignored by the EU and that the EU holdings, the ECB holdings of French debt are going to roll off.

and that your ECB will do a lot of rate cuts and therefore the euro is the new yen. Okay, Vincent, going back to that, you think the US stock market is kind of a bubble and you have made the bearish case. How can investors protect for this? Because in your piece, you say two specific things. Your piece, of course, about the bearishness. You say, number one, this is not a Trump fashion piece. I'm just tall like I see it. And number two, this is not a sell everything. So people should not, according to you, go and sell everything. What should they do?

Right. For now, nothing. That's often true. Yeah, just enjoy the good time. I mean, the good times are now. We have a bull market. We have a strong currency. We have a high growth, high productivity. Now is the time to pat yourself on the back and enjoy your good fortune. Then, yeah, start watching the things that I mentioned. None of them are certain.

There's a possibility for construction jobs. They've been defying expectation for a long time. Maybe there is a second, but the Fed just cut rates, right? So it will cut rate again. So maybe the construction sector start to pick up again. Maybe there is some more stimulus that goes in. I would not.

The US economy has surprisingly upside many, many times before. Maybe the consumer has more buying power that will more than offset everything that I described and the economic boom continues. So watch. My guess is that some of the things that I mentioned will flip. Also watch Trump.

There is a, the thing about Trump is that there is good and there is bad. And there is chaos. A lot of it has to do with the timing of the good and the bad, right? I mean, if we get the, if we get the tax cut, if we get the pragmatism with China, if we cut a deal with Mexico, there is a path where indeed the Scott Besson view of the world, the three threes, I think it's an error path. I think it's unlikely, but there is a path. So watch what he does.

If things pay out the way that I suggest, I think the first thing you want to do is to start hedging. As you mentioned, implied void has fallen quite a bit now that the election has passed. Start hedging these gains. I would not buy treasuries as a hedge. I think if we have a bear market, it will be a 2022 like bear market where stocks are down 20%, bonds are down. Maybe not 20 because we're starting from a lower level, but

If the case for the bear market is that inflation is not rolling over and that we have this massive insurance that pushes long-end higher and that we have a strong dollar that forces other currencies to sell treasury reserves, yields are not going to come down. And I think, by the way, the only way to have a proper bear market in the US is for stocks and bonds to go down together. It's something that Mike Green and I have been talking for a long time. You have this almost...

perpetual motion engine with target date funds that are rebalancing from one to the other uh so uh if if stocks go down and bonds go up in value then target date fund will will will buy stocks and sell bonds that will put a natural stop on how low stock market corrections can go and indeed this is what we've seen since we we've developed this target date of some good passive bubble

It's much harder to get a sustained bear market because at some point you get a rebalancing flow. The only way that we can have a bear market is if both go down at the same time. And again, because I believe that

I mean, over time, we cannot have stocks go up by 30% every year. I agree with you there. Otherwise, we will have revolutions. We will have the inequalities between those who are exposed to this perpetual motion engine and those who are not will grow. So we need to have a way for the system to correct. The way for the system to correct is for stocks and bonds to go there at the same time. So

In this scenario, cash is probably a good asset. Obviously, put options have long been a proper goal because of second inflation. Obviously, it's been a good trade. And yeah, I'll put maybe a little bit in the Swiss franc as well. What about Bitcoin? I will reserve my judgment on this. I don't think I know enough to make any judgment call as to how Bitcoin will perform

in a scenario where both stocks and bonds come down. But I will say that in 2022, it went down with it, if not worse. Yeah, I mean, Bitcoin is very correlated to the NASDAQ in the stock market. People often accuse it or equate it to being a triple levered ETF, which has been a good... You want to own the triple levered NASDAQ when the NASDAQ is up so much. Vincent, it's been so great getting you on here.

people to tell us where can people find your work and where can people find your reports, which I really value a lot. And I think you're not only are you very smart and have very compelling thoughts, which have been on display for these 90 minutes, but also you're an incredibly good writer, which is all too rare in the investment commentary in business. Thanks. Thank you very much. Bindeloth. Twitter at Vincent Deluard, D-E-L-U-A-R-D. And then under my

Profile, pin to get a free trial. If no one gets back to you, shoot me an email for my DMs. I look at them. I will respond. It will get you a free trial. And then if you're a customer of StoneX, just talk to your sales rep. Say, hey, I want to get Vincent's work and we'll make it happen. And again, thank you very much. Congrats on the new show. It's been a pleasure. My pleasure, Vincent. Thank you. Just close this door.