The Treacherous Last Mile of Inflation | Vincent Deluard on France, 2025 U.S. Fiscal Drag, COLA Pain, and the U.S. Healthcare Price Spiral
Monetary Matters with Jack Farley
Deep Dive
Why does Vincent Deluard think a perfect storm of macro headwinds could lead to a bear market for U.S. stocks in April to May 2025?
Vincent Deluard believes that lower inflation in 2024 will result in smaller cost-of-living adjustments for 2025, which will hurt consumer spending. He also predicts that a strong U.S. dollar will dent corporate profits and that state and local government spending will shrink, leading to fiscal tightening. These factors, combined with higher interest expenses and potential political chaos from Donald Trump, could create a perfect storm that slows growth and dampens stock market performance.
Why did the recession warnings about the U.S. economy not materialize in the past two to three years?
The warnings were early rather than wrong. Inflation, while high, was offset by immigration, which replaced the labor force lost during COVID. The inverted yield curve and high corporate profits from low interest rates also contributed to economic resilience. The labor market was strong, and the Fed's rate hikes effectively provided a stimulus through higher interest income for savers.
Why is Vincent Deluard concerned about the U.S. healthcare sector contributing to stagflation in 2025?
The healthcare sector, which is about 20% of the economy, has been experiencing cost increases of close to 10%. These costs are poorly captured in the CPI, leading to underreported inflation. Despite this, the healthcare sector continues to add jobs, which could keep the unemployment rate low while inflation remains high, creating conditions for stagflation.
Why does Vincent Deluard think the U.S. dollar will strengthen in the short term, leading to lower U.S. corporate profits?
The dollar is expected to strengthen due to political instability in Europe, particularly in France and Germany. A stronger dollar makes U.S. exports more expensive and reduces the competitiveness of U.S. companies in global markets, which could lead to lower earnings and profits for U.S. firms with significant international revenues.
Why is Vincent Deluard pessimistic about the French government's ability to handle its fiscal crisis?
The French parliament is hung, with no stable majority. The government has hidden deficits and lied about its fiscal situation, similar to Greece during the euro crisis. Without a broad mandate for reforms and with the ECB holding significant French debt that will roll off, the French government faces challenges in addressing its fiscal issues.
Why does Vincent Deluard recommend the Swiss franc as a safe haven in a potential U.S. bear market?
Switzerland has no public debt, a strong current account surplus, and a central bank that has never done quantitative easing. The Swiss franc has low inflation, low unemployment, and a robust industrial sector, making it a high-quality asset. Given the fragility of the U.S. market and the potential for both stocks and bonds to decline, the Swiss franc offers a reliable safe haven.
Why does Vincent Deluard think a bear market in 2025 could be different from previous recessions?
In this scenario, both stocks and bonds could decline simultaneously, unlike traditional recessions where bonds act as a hedge. The U.S. economy is overvalued, and inflation is sticky, which could lead to a correction where the stock market drops 20% and bond yields rise. This would be a significant shift from the current rebalancing flows that have limited stock market corrections.
- Strong economy with momentum in consumption
- Inflation expected to remain sticky, potentially slowing at the end of Q1 2025
- Concerns about economic slowdown in 2025
- Commercial real estate issues, inverted yield curve, and the SOM rule are discussed as potential factors
- Immigration's positive impact on the labor market and its effect on unemployment rate
Shownotes Transcript