Three months ago, to the day, we wrote our first post-election commentary entitled “The Markets Are The Guardrails,” the idea being that whatever craziness might be going on elsewhere in the new administration, on the economic front at least their wildest ideas would likely be tempered by the reaction of stock and bond markets, about which these people, to a person, care deeply. So far, we would say that our prognostication back in November has been validated. There is plenty of crazy stuff going on elsewhere, and because our weekly commentary is about economics, not politics, we will leave it to others to delve into that side of things. Where the economy is concerned, though, the guardrails seem to be holding. By the numbers, neither equity nor fixed income investors should have much to complain about for the year so far – the S&P 500 is up and the 10-year Treasury yield is down for this time. Over the past three months, though, the main discernable direction is sideways, a whole lot of nowhere.

Tariff Kabuki

This past week has been an excellent illustration of the guardrails mindset, and the extent to which Wall Street appears to believe the supports will continue to hold. News hit the airwaves last weekend that those 25 percent tariffs against Canada and Mexico that had been floated earlier were, indeed, going to come into effect this week. “On Tuesday” was the promise. Equity futures markets plunged while financial opinion columnists provided a refresher course for investors on how far stocks have to fall before the market’s circuit breakers come into effect to temporarily halt trading (at three escalating levels of 7, 13 and 20 percent down from the open). Markets don’t like tariffs for all the reasons we have discussed many times in these pages, mainly because they are likely to put upward pressure on inflation and downward pressure on growth, otherwise known as stagflation.

On Monday the Wall Street Journal, not exactly a mouthpiece for the anti-capitalist left, featured an article the headline of which read “The Dumbest Trade War In History.” Something else the Trump administration cares about, alongside the performance of financial markets, is critical press coverage (much as they may be loath to admit it). Now, there is no obvious causal link between the WSJ headline and the announcement, about an hour into trading on Monday, of a “pause” in the tariffs with Mexico (and then, shortly afterwards, likewise for Canada, in both cases on fairly flimsy pretenses). No matter – the market quickly formed the consensus opinion that the guardrails had held again and prices never came near those circuit breaker levels. This is not to say that we have heard the last of the tariff threats – far from it. We expect this will continue to play out like a Japanese Kabuki drama for months to come – lots of histrionic shouting and dramatic movements, but in the end more performative than real. We may be wrong about that, and so might the market. But for now, the “guardrails will hold” mindset is the common wisdom.

Waiting For Tax Cuts

If the perceived guardrails against punitive tariffs form a kind of downside support level for stocks, then the upside formula largely concerns tax cuts. Lots of things that governments do have no bearing whatsoever on the market, but the one thing that always draws the spotlight is a new round of tax cuts. These are currently percolating as congressional Republicans try to put together a budget reflecting the administration’s economic priorities, and being Republicans, tax cuts are front and center (though, interestingly, the carried interest loophole so beloved of hedge fund and private equity titans is rumored to be on the chopping block – we’ll believe that when we see it). Extension of the 2017 corporate and individual tax cuts with perhaps some new ones as well may give stocks enough upside to push through the sideways corridor that has persisted for the past three months.

That upside may be short-lived, though, come March 14, which is the latest deadline for government funding approval. Noises are starting to emerge from the hitherto-quiescent Democratic side of the aisle that approval may not be forthcoming given what has been going on elsewhere in the federal government over the past two weeks (i.e., that “crazy stuff” we noted above that markets normally ignore). It’s too early to tell how serious these threats might be, but bear in mind that the very slim margin of Republican control in the House means that Democratic votes will ultimately be necessary to avoid a shutdown. Stay tuned, for there is never a dull moment.

Over the past two years, as advances in artificial intelligence turned into a massive tailwind for the US stock market – carried aloft by a relatively small number of companies with a credible claim to be at the center of the AI story – skeptical observers compared the phenomenon to the Internet boom of the late 1990s. That boom, as anyone around at the time will no doubt recall, ended with a spectacular crash at the turn of the millennium. So long to Pets.com and its ilk, popped into weightless effervescence as the dot-com bubble burst. So too, the AI doubters have insisted, will be the fate of those enterprises today with their promises of world-changing feats of economic productivity brought about by their high-octane large language modules (LLMs).

The vibe of Schadenfreude was no doubt making its rounds among the critics of AI share prices this week, watching as the likes of Nvidia and Microsoft tumbled on Monday when a barely-known Chinese operation called DeepSeek burst onto the scene and, well, deep-sixed just about everything that had hitherto been conventional wisdom about generative AI – especially the billions and billions of expenditure dollars thought to be needed to make bigger and better LLMs, and the many megawatts of energy needed to power the data centers that bring them to life. DeepSeek appears to have capabilities more or less on par with those of ChatGPT, the iconic platform introduced by OpenAI in late 2022. But – to explain why all those AI-related stocks sank on Monday – DeepSeek can do all that at a fraction of the cost. Nor does this appear to be some kind of elaborate Chinese ruse. The company behind DeepSeek, a hedge fund called High-Flyer that specializes in AI applications for trading in financial markets, has made its training results public and its systems available on an open-source license. Anyone who wants to build their own programming on top of these systems can do so without permission. Scant wonder, then, that DeepSeek shot to the top of app store downloads in the US this week.

Getting back to those share prices for Mag Seven names (the Wall Street shorthand for those hitherto high-flying AI stocks). Is DeepSeek the catalyst for the bursting of the bubble – if indeed that is the right term to use? We imagine there will be plenty of short-term volatility in these shares as bargain-hunters do their thing, skeptics do theirs, and asset allocators interpreting all of this as a signal for repositioning between value and growth stocks do theirs. For our part, we think this is a new chapter in what we expect to be a very long story, with an ending that is nowhere near in sight. The capabilities of AI LLMs has grown significantly since the release of that first ChatGPT app. Now we have evidence that further growth is achievable with potentially greater cost and energy efficiencies – which is likely to spark more interest and produce new entrants whose names we don’t yet know. In turn, the overall potential market size is likely to grow. The established players will have a role to play here. At a recent tech conference, Nvidia CEO Jensen Huang pointed to robotics as the next major use case, with AI-empowered robots taking over a large swath of agent functions throughout the massive (and often unproductive) services economy.
“Agentics”—the techy buzzword for this – could be a word you hear circulating around a great many cocktail parties this year.

There will be winners and losers, in other words, as there always are with radical breakthroughs. Think back to Internet 1.0 in the late 1990s. Lots of those names went out of business, while others (such as Amazon) went on to be the behemoths of successive chapters in that story. There will be risks and there will be opportunities. But for better or for worse, artificial intelligence is very likely going to be an increasingly influential component of the global economy. The newest chapter of the story just got under way.

The 1980s was a colorful decade for many reasons, and not just limited to the cultural icons of the day like Boy George or Max Headroom. The economic arena had its own personalities. There was Michael Milken, the swaggering Drexel Burnham Lambert bond trader perched at his X-shaped desk in Beverly Hills, king of the junk bond market. And Ivan Boesky, merger arbitrageur extraordinaire and coiner of the “greed is good” mantra later immortalized by his fictitious avatar Gordon Gekko in the 1987 movie “Wall Street” (by which time Boesky himself was cooling his heels in the Lompoc Federal Correction Institution for a three-year term after being convicted of insider trading).

The Original Dr. Doom

The name Henry Kaufman may not ring a bell among many folks today, but back in the Roaring Eighties he was up there in the Valhalla of financial markets personages (and, unlike Milken, Boesky et al, never to be found on the wrong side of the law). Kaufman, a managing director at erstwhile bond market behemoth Salomon Brothers, was the original Dr. Doom – a nom de guerre now generally associated with the often dour economist Nouriel Roubini – and the de facto leader of a posse known as the “bond vigilantes.” Kaufman and his fellow vigilantes had a dour view of US fiscal policy, which they saw as beset by out of control spending and a bond market irresponsibly awash in public debt.

The bond vigilantes could move both stock and bond markets merely by pronouncing a view on where interest rates were headed. In perhaps the most famous of these pronouncements, Kaufman’s observation in August 1982 that interest rates were headed down for the foreseeable future sparked a stock market rally that lasted until the early 2000s. The influence of the vigilantes continued into the next decade, enough so to cause Democratic strategist James Carville to remark, early in Bill Clinton’s presidency, that he would like to be “reborn as the bond market” given how much sway it had over the economy and life in general.

Warning Shots and Dry Powder

It should not come as a surprise to anyone looking at charts of US public debt today to learn that the bond vigilantes are back. Total public debt is currently around 121 percent of US Gross Domestic Product, more than twice the level it was during the early 1990s when the bond vigilantes were terrorizing poor James Carville. Last September, when the Fed commenced its monetary easing program with a 0.5 percent cut in the Fed funds rate, Treasury bond yields rose, a counterintuitive movement reflecting, among other things, concern about debt, the deficit and whether inflation was really under enough control to continue cutting rates. That concern continued through the fall as inflation stubbornly moved sideways rather than down, eventually causing the Fed itself to revise its earlier thinking and signal a likely pause in the easing program. The vigilantes had spoken.

Yields continued to rise through the first couple weeks of January as additional concerns percolated about the inflationary potential of tariffs and sharp immigration restrictions with the arrival of the new government. Since then, though, the upward trend has tapered off. The 10-year yield today is around 0.2 percent lower than where it was on January 15. But that doesn’t mean the bond vigilantes have gone away. They are holding fire, keeping their powder dry but watching what will, and will not, happen with regard to campaign rhetoric becoming actual policy. A sustained upward trend in interest rates would create a world of economic problems for households, where credit card delinquencies are at their highest level since 2010, or among smaller businesses that rely on variable-rate credit instruments for much of their external financing needs. Government policymakers would be wise to channel their inner Carvilles and respect the sway of the vigilantes.

It is never easy to predict what is going to happen in the next twelve months, and very rarely do the best efforts of economists, sociologists and market pundits of all stripes get it all right (you can generally toss away all those specific numbers the big banks and securities firms come up with about where the S&P 500 or Nikkei 225 will be come New Year’s Eve 2025, and they will all be revised multiple times anyway between now and then).

It is especially hard this year, because the world is in a profound state of transition. What we have more or less accepted as the norms of what is still quaintly called the “postwar order” – the war in question having ended eighty years ago in 1945 – no longer seem to be the permanent backdrop for the shorter-term cycles of economic, social and political ebbs and flows. Nor is there anything like a clear-cut “new order” in anyone’s line of sight; what we are going through instead is a transition on many levels.

There is a lot going on in China right now. Talk of punitive tariffs against the Middle Kingdom swirled through the halls of Congress during a week of hearings for cabinet nominees. China’s trade surplus with the rest of the world hit an all-time high of $992 billion, probably giving even more grist to the tough-tariff mill. Its population fell by 1.4 million souls, declining for a third year in a row. Though China did, apparently, manage to gain several hundred thousand-odd virtual humans as TikTok aficionados the world over, in a fit of pique over the potential loss of their beloved app from which all mercies flow, signed up for Chinese social media start-up Xiaohongshu, which means “Little Red Book” and no doubt fewer than one percent of all those newbies signing up for the service will have a sense of the dark historical context of the Little Red Book. Let a thousand flowers bloom, in online spaces the world over.

Despite all the actual and potential headwinds, though, China has had a spate of good economic data to start off the year. Fourth quarter GDP growth came in at 5.4 percent year-on-year, higher than the 4.9 percent economists had expected. December industrial output rose 6.2 percent, and retail sales were up by 3.7 percent, both numbers beating consensus estimates. The National Bureau of Statistics (not known for being one of the more straight-up statistical agencies in the world) attributed the strong performance to the bevy of stimulus measures implemented last September to jump-start the economy.

Stimulus, Or Front-Loading?

Another, possibly more likely explanation for the strong showing is that Chinese companies have been front-loading exports, ahead of fears that those tariffs will come into effect sooner rather than later. That could imply a reversal that slows growth later in the year. Plus, of course, the actual impact of tariffs and other sanctions won’t be known until the rhetoric turns into actual policy. Which may be as soon as next week, or not until the second half of the year.

But even before the new administration takes office, the first two weeks of the year have seen a handful of other measures taken against China by the outgoing Biden administration. A start-up for developing large language modules for artificial intelligence called Zhipu was blacklisted by Washington, citing national security grounds. The administration is also imposing a wide range of export controls on US-made chips used for artificial intelligence. The EU is also getting in on the act, threatening Chinese medical device makers with curbs on access to European markets.

Deflation Trap Still Looms

Arguably, though, the biggest economic problem China still faces is the threat of deflation. The Consumer Price Index for China is currently 0.1 percent year-on-year. To put that into context, consumer prices in the US rose 0.4 percent just in the month of December alone. Economists think it will take considerably more stimulus than the measures Beijing implemented last September to pull the consumer sector of the economy out of its prolonged funk.

All things considered, we would prefer to see an economically healthy China to a troubled one, as we believe that will be a better recipe for global stability (and this year, anything that can add to stability will be welcome in our book). This first batch of upbeat headline numbers represents a good start. But there is still a very long way to go.

What a difference a few months can make. Late last summer, markets were freaking out about what seemed to be a rapidly cooling labor market. Nonfarm payrolls for August increased by just 78,000, well below the 206,000 average for the twelve months prior to that. The Fed, too, was noticing the apparent tapering of conditions in the jobs environment. With inflation seemingly under control, the timing was right for an outsize interest rate cut, which duly arrived in September.

That was then. In November, nonfarm payrolls came in with a robust gain of 212,000. Today, we learned from the Bureau of Labor Statistics that the commensurate gains for December jumped to 256,000. Economists had been expecting to see just 136,500 additions to NFP, so financial markets were caught off guard by the BLS report (which also showed a slight decrease in the unemployment rate from 4.2 percent to 4.1 percent. The jobs market, it would appear, is sportingly healthy.

Too healthy, perhaps, for the Fed…and for the market. Following this morning’s jobs report, the yield on the 10-year Treasury jumped to 4.8 percent, its highest level since November 2023. Further cuts to the Fed funds target rate would appear to be off the table for now, pushed back into the increasingly dense fog of mid-late 2025. Current expectations in futures markets have the Fed holding at current levels until possibly as late as September. Pretty much nobody expects a rate cut when the Federal Open Market Committee meets next on January 29.

All of this is happening, of course, before anyone is in possession of reliable data about the extent to which the incoming administration is going to turn up the volume with tariffs, tax cuts and anti-immigration policies. We will have a new baseline for inflation next week, when the December Consumer Price Index report comes out, with current economists’ projections hovering around 3.3 percent year-on-year for core CPI. The problem being, of course, that 3.3 percent will likely be a baseline with considerable upside potential given the inflationary one-two punch of higher consumer prices (tariffs) and higher wages (immigration restrictions).

A worst-case scenario would have the combination of a hotter than expected jobs market and upward revisions to inflationary expectations forcing the Fed to return to raising rates. That, in turn, would likely exacerbate two other current areas of concern: a growing number of corporate bankruptcies and uncomfortably high delinquency levels in consumer credit. That would be a recipe for stagflation, the scourge of the late 1970s. To be clear, we do not believe this to be the likeliest outcome, but it is a scenario we have to bear in mind as we make portfolio decisions.

All things considered, more jobs is better than fewer jobs. Especially given our concerns about consumer spending in light of the credit card delinquency trend, the last thing we want to see any time soon is a spike in the number of people out of work. It may mean a few “good news is bad news” days like today in the market, but over time stocks and bonds will benefit from a healthy labor market. And perhaps this early January pullback will serve a purpose in nudging a few incoming policymakers away from some of the less desirable ideas being batted around. Guardrails, in other words.

Markets are trying to find their footing as the year gets underway, so far without much success. The S&P 500 is slightly lower in morning trading today after losing ground in each of the last five trading sessions, stretching back into the December holiday period. No Santa Claus rally this year, kids. But – so far, anyway – nothing too much out of the ordinary for a standard-issue pullback following a furious rally. Stocks rose more or less nonstop after the November election, reaching a peak in early December. Since its last record high on December 6, the S&P 500 has lost around 3.6 percent, well within the norm for these types of things. Markets don’t reach a technical “correction” until they have fallen at least ten percent from the previous high.

Nonetheless, we are always attentive to things that could go wrong. Here are four items to which we are paying particular attention in these early days of 2025.

The US Consumer

Our economy lives and breathes on the strength of the determined, doughty American consumer. Consumer spending makes up around 70 percent of our gross domestic product (GDP). The persistent strength of household spending over the past two years helped the US economy defy the predictions of most mainstream economists (ourselves included) who foresaw a recession two years ago. Back then, one piece of data that had us concerned was a sharp decline in household savings rates, as the cushion of income from the pandemic-era stimulus checks wore off. Our concern was arguably premature – households kept on spending throughout 2023 and 2024, but they did so increasingly thanks to credit card and other consumer debt. So we were not happy to see a recent report that credit card defaults among US individuals are at their highest level since 2010. We will be paying close attention to what banks and other financial institutions have to say about their credit card receivables and nonperforming loans when they start to report Q4 earnings in a few days.

Valuations

Item number two on our list is the concern one always has when markets have been going gangbusters; namely, nosebleed valuations. The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 is currently around 22 times – not a record high by any means, but comfortably above the 10-year average of 18.5 times. Of course, some multiples are higher than others. The S&P 500 technology sector sits around 40 times, while that of AI chip leader Nvidia is at 54. Tesla, which appears to be losing ever more ground to Chinese rival BYD in the volume of electric vehicles produced, sits at a jaw-dropping 103 times earnings. Of course, the high-flying tech sector was also expensive a year ago, and a year before that, and those who dumped all their Magnificent Seven holdings back then are probably regretting having done so. There is no particular reason why 2025 should be the year when the tall poppies get lopped back to earth, but that doesn’t make the concern go away. Earnings and sales, earnings and sales. It will be a year for maintaining a hawklike eye on corporate earnings.

Rest of the World

We keep looking for reasons to be even slightly excited about investment opportunities outside the US,  and we keep coming up shorthanded. The year is just two trading days underway, and already the euro and the British pound are under water against the dollar. A euro buys a scant $1.02 today, while a pound sterling gets you just $1.24. Good times for American holidaymakers abroad, bad times for owning assets in non-dollar denominated currencies. High on our list of international problems are two very powerful economies: Germany and China. The Eurozone’s leading economy has been in, or close to, recession for the past two years and is also showing increasing signs of political instability. China is flirting with deflation, and its leaders know this but seem unable to do anything meaningful about it. Other problem spots include France and South Korea, also beset by myriad political and economic dislocations.

Inflation

We would have hoped to cross this one off our list of worries sometime last year, but if anything, our concerns about price levels are higher now than they were six months ago. There was a nice reprieve from recent bad news on the inflation front with the Personal Consumption Expenditures (PCE) index report late last week – finally, a month-over-month increase that was less than what economists had forecast. But Fed chair Powell himself was pretty blunt about the inflation problem during the post-FOMC press conference last month, and the guidance provided by his colleagues in their Summary Economic Projections reflected a belief that prices will take longer to come down than previously expected. So, therefore, will interest rates. And that closes the circle with Concern Number One expressed above. If interest rates stay higher for longer, then consumers’ credit problems are likelier to persist as well, and that in turn feeds back into growth prospects for the economy and for corporate earnings. Which, in turn, could make those valuations even more expensive. And that’s all just within the US, which is still supposed to be far outpacing the situation elsewhere in the world.

All of which may mean a great deal, or nothing at all, for equity markets. Even during the 30-odd minutes it has taken to write this commentary, stock prices have turned from negative to positive this morning. Yesterday they turned from positive to negative. As the old Wall Street saw goes, the market can stay irrational for longer than you can stay solvent. Neither too far one way, nor too far the other, but reasonably positioned for both growth and downside protection is, in our opinion, the right way to start off the New Year.

The next time we write our weekly column, it will be the third day of 2025 and the beginning of another year of both predictable and completely unfathomable twists and turns. As we prepare to navigate whatever lies around the next bend in the river, let’s look back at the events and forces that have brought us to where we are today.

For what feels like the eleventy-millionth time in a row, the market of US large cap stocks, led by growth-oriented sectors in information technology and communications, left just about every other asset class in the dust. The S&P 500 is set to finish out the year hovering somewhere close to a 30 percent return (there are still three days of trading to go, so there is still very much a plus-minus variable from that baseline at play), while the Russell 1000 Growth index is flirting with 40 percent. The more things change, the more they apparently don’t change. The “US exceptionalism” theme has cemented itself into the collective hive of the financial community. Of course, when something becomes the received wisdom handed down from on high, that is normally the time to think about getting out and moving on.

But moving on to where? That is the confounding part of the question. Let’s consider what has happened in Europe this year. The continent’s two largest economies, and the founding pillars of the European Union, are both in advanced political dysfunction. France is barely governing itself after a no-confidence vote earlier this month ousted its prime minister. Germany will hold snap elections in February following the collapse of its current coalition in November, which will almost certainly be the end of the road for current chancellor Olaf Scholz.

Over in East Asia things aren’t much more stable. South Korea is in a prolonged political crisis following the ham-handed attempt by its president to impose martial law a few weeks ago. That president has since been impeached and now the acting president who replaced him is also being impeached. The South Korean won has plunged to its lowest level against the dollar since the global financial crisis. Over in Japan, voters tossed out the long-ruling Liberal Democratic Party in October parliamentary elections, setting up more uncertainty there. Stocks in Japan did fine this year – the Nikkei 225 finally clawed back its previous record high set way back in 1989 – but the 20-ish percent gain was offset by the twelve percent decline in the yen against the US dollar.

Then there is China, Asia’s behemoth and the world’s second-largest economy, stuck in an economic trap of its own making as Beijing’s policymakers vainly try to defy the basic rules of economics through a growth formula that more or less bypasses household consumption. China has a long-term strategy that makes sense, if it can somehow get from here to there without melting down in the meantime. The stimulus measures that created a brief frisson of excitement among investors back in September seem to have fallen far short of what most economists believe is necessary to pull the country out of the punishing slow-burn decline of its property and development sector.

The world’s most volatile region has widened its borders to encompass ongoing crises far from the epicenter of Middle East flashpoints in Israel, Gaza, Lebanon, Syria and Yemen. North and east of the Mediterranean, the war in Ukraine drags on. To the south, what is perhaps the most devastating humanitarian crisis, while also having broader international implications, shows no sign of ending in Sudan. Meanwhile, the sudden collapse of the Assad regime in Syria along with the decapitation of Hezbollah in Lebanon and Hamas in Gaza has scrambled the flinty balance of geopolitical considerations across the region.

Given all this, it is perhaps unsurprising that the conventional wisdom among the denizens of financial markets, as this year draws to a close, is for the continuation of “US exceptionalism.” Except that we here at home, while blessed with a resilient and innovative economy, are not isolated from the same forces of disruption that are happening elsewhere in the world. 2025 is going to bring with it some considerable challenges. We do not think it will be a year for the faint of heart, but will require extreme diligence and the ability to adapt as situations change. We are ready for the challenge. But before then, we wish all of you the best of health and happiness as you see out the holidays and ring in the New Year. See you on the other side!

The Fed cut interest rates again this week in a widely telegraphed and entirely unsurprising move (though not without one notable dissent from Cleveland Fed head Beth Hammack, who voted to keep the target Fed funds rate at its current level). Somewhat more surprising was the change in projections by members of the Federal Open Market Committee as to the likely cadence of rates in the year ahead. Back in September, the median estimate for 2025 rate cuts was four, which would give us a target Fed funds rate in the range of 3.25 – 3.50 a year from now. This week, though, the FOMC dialed back these expectations to just two cuts. Citing a stronger than expected economy, a well-behaved labor market and inflation proving to be somewhat stickier than desired, Fed chair Powell explained that current conditions give the central bank the ability to proceed cautiously. Left unsaid by Powell – but harped on by pretty much every journalist in the room at the post-meeting press conference – was uncertainty about potential risks to the present economic equilibrium once the new administration gets going with its plans come January.

The chart above encapsulates the rationale for putting on the monetary policy brakes. The Fed’s dual mandate calls for maintaining stable prices and maximal employment. Back in mid-late summer, inflation (the blue line in the chart) seemed to be on a reasonably steady trend towards the target two percent rate while unemployment (the green columns) was creeping higher. Concern about the jobs market was starting to overshadow what had been for the past three years a singular focus on inflation. The past several months, though, have given cause for pushback. Inflation seems to have leveled off and even ticked slightly higher on a year-over-year basis, as you can see in the chart. Core (ex-food and energy) Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, has been stuck between 2.7 – 2.8 percent since August (though core PCE for the month of November as reported this morning grew only 0.11 percent, which was lower than economists’ estimates). Meanwhile, the unemployment rate has steadied and backed off somewhat after reaching a three-year high of 4.3 percent in July. Earlier this week we also got word that third quarter real GDP grew at an upwardly-revised 3.1 percent. Put together, all these indicators suggest that the risk of a somewhat higher Fed funds rate choking off growth and bringing about a recession is fairly low. Tapping on the brakes, by this argument, is warranted.

Then there are all those questions about what lies in store when the new administration takes over in January. Judging from what has been going on in Congress this week, a decision to wait and see without leaping to hasty judgment would seem to make sense. A continuing resolution to keep the government open past a Friday night (tonight!) deadline, which had bipartisan support, was shot down. A Plan B funding bill whipped up yesterday also failed, with 38 Republicans joining almost all Democrats in voting against the bill (this despite its support from the president-elect). Plan C is apparently circulating out there somewhere, maybe? Anyone? In short, there appear to be enough fissures within the Republican Party itself, let alone opposition from across the aisle, to cause anyone to wonder how much new policy good or bad is ever going to make its way into law.

Fortunately, the Fed has time on its side given where the economy is today. Markets reacted negatively in the immediate wake of the FOMC decision on Wednesday, but today’s better than expected inflation numbers from the PCE report seem to have taken the edge off a bit. With plenty of potential for uncertainty ahead, it’s better to keep at least some powder dry while you can.

Back in September, the financial press called it a “blitz.” On September 24 the People’s Bank of China, the country’s central bank, announced a series of measures to stimulate the moribund Chinese economy. Among the few initiatives mentioned by the PBOC with any specificity was a planned $114 billion fund (a “war chest” in the patois of the military terminology-loving media talking heads on CNBC) to be lent to asset managers and the like to buy shares in domestic Chinese companies, presumably on the notion that animal spirits in equity markets should somehow spill over into feistier household spending on goods and services in the real economy. Sure, we’ll go with that. Domestic Chinese stock indexes, having been in the dumps for most of the year to date, skyrocketed on the news. The CSI 300, an index of companies listed on the principal Shanghai and Shenzhen stock exchanges, soared 15.7 percent that week for its best performance in more than 15 years. By October 8, the CSI 300 had gained 32.5 percent from that September 24 announcement. Without a single weapon being pulled out of that putative war chest!

Things haven’t been all that great for investors in Chinese equities since then, though, and pity the poor folks who followed the advice they were getting from the talking heads on October 8 to just buy anything in sight that had its home in Shanghai or Shenzhen.

To continue with the military arcana so beloved by the financial media, the “blitz” and the “war chest” are all well and good, but what the market really needed to see was a “bazooka.” A big armament chock-full of specific fiscal measures to get Chinese shoppers back in the habit of spending like crazy instead of setting records for high savings rates. Lack of adequate health insurance and insufficient pensions are among the reasons why Chinese households have some of the highest savings rates in the world, not to mention the housing and property crisis, three years old with nary a solution in sight, that has wreaked havoc on real asset values. Dealing with a consumption crisis this deep requires more than throwing a bunch of state-funded money at Chinese companies via equity share purchases; hence the need for the fiscal bazooka.

Investors thought they finally might be getting the goods this week, when Beijing’s monetary policy mandarins met at the Central Economic Work Conference, a two-day confab probably as sleep-inducing as the name suggests. Shares on the CSI 300 crept up during the week but dropped like a dead weight today when the stated pledge to “vigorously boost consumption” and expand demand in “all directions” was not backed by any specific fiscal policies to achieve that outcome. Vigorous words indeed – and actually saying that domestic consumption would be a top policy priority isn’t nothing, given its usual position way down the pecking order below manufacturing and exports. But no bazooka.

China’s economy really does need a major boost, and this is true even if the worst-case (and meaningfully possible) scenario of being on the losing end of a trade war with the US doesn’t come to pass. China’s inflation rate currently stands at 0.20 percent. That’s annual inflation – the change in consumer prices from twelve months ago to today. By comparison, consumer prices in the US currently rise by more than that every month. The headline US Consumer Price Index for November, as reported earlier this week, gained 0.30 percent from November 1 to November 30. China is flirting with deflation, the economic malady that knocked Japan for more than a decade in the early 2000s.

The bazooka may yet be hauled out, because the Chinese authorities may have no choice. But there is a reasonable chance we won’t get any meaningful details before the next plenary meetings, likely to be the Two Sessions conferences in March next year. Meanwhile, investing in China is likely to continue to be a bumpy ride with plenty of downside room.