by Jim Rickards, Daily Reckoning:
Earlier this week, Donald Trump’s victory in the 2024 presidential election was officially certified by lawmakers in a joint session of Congress.
Kamala Harris presided over the ceremony as president of the Senate and faced the awkward task as she formally certified Trump’s victory and her own loss.
Notably, the Democrats set aside some members’ views that Trump is ineligible to return to the presidency because of the Constitution’s bar on insurrectionist officeholders.
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Apparently, the voice of the American people resonated in Democrat lawmaker’s ears because of Trump’s Electoral College landslide, his victory in all seven swing states, and the fact that he won a majority of the popular vote — the first Republican to do so in twenty years and only the second to do so in thirty-six years. That gives Trump both a mandate for change and the goodwill to try.
However, this decision to not challenge the certification does not mean all is well for America and the financial markets. Wall Street has challenging times ahead as shown by a shaky end to 2024. The traditional Santa Claus Rally did not materialize, which was a surprise for many investors.
Since the beginning of December, stocks of all sizes and styles have struggled, apart from shares of a few mega-cap companies that have increasingly dominated the market.
With the 2024 election in the rearview mirror and Donald Trump set to take office on January 20, a meltdown is still a threat to markets.
Here are three threats to markets as we head into 2025.
- Market Melt-Up. Markets are at or near all-time highs based on every available metric: P/E ratios, CAPE ratio, market cap/GDP ratio, concentration risk, etc. This is accompanied by indexing, investor complacency and analyst euphoria. When such conditions have existed in the past, they have always been followed by market crashes of 50% to 90% unfolding over several years. Examples include Dow Jones (1929), Nikkei (1989), NASDAQ (2000), and S&P 500 (2008).
We are now positioned for an historic crash. The specific cause does not matter – it could be war, natural disaster, a bank or hedge fund collapse or another unexpected event. What matters is the super-fragility of the market when the trigger is pulled. This is why Warren Buffett has over $300 billion in cash and why central banks are buying gold. Prepare now. Don’t be the last one to know.
- A U.S. recession is coming. There are ample signs that the economy is headed for a recession (or may already be in one) including higher unemployment, lower interest rates, flattening yield curves, negative swap spreads, collateral shortages in Eurodollar markets, reductions in China’s reserve positions (not a sign of “dumping” Treasuries but a sign of a dollar shortage and a need to provide liquidity to banks), declining oil prices (despite output reductions), and others.
The emerging recession will cause a stock market drawdown as earnings are revised downward, consumer confidence crumbles, consumer discretionary spending hits a wall and precautionary savings rise. The world will not 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.
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