2024 will go down as another good year for investors
With equity markets in Australia and the US making new all-time highs. The question we always ask ourselves, will these good times continue? Let’s look at what happened during 2024 and determine what may lay ahead for next year. We also look at 3 trade ideas for 2025.
There is an old adage “During a gold rush, sell picks and shovels”. This year’s gold rush has been the AI revolution, and the winners were the chipmakers who sell the chips that train the models. With companies across the globe competing to build superintelligence, there has been a dramatic increase in demand for advanced computing chips. Nvidia has become a household name. Notably, Elon’s xAI which only started 20 months ago, now holds title to the world’s largest supercomputer with plans to make it 10 times as big. When Elon purchased Twitter (now X) in the name of freedom of speech, he also secured arguable the most up-to-date interactive AI training data set. Hundreds of millions of humans interacting on X in real time about real-world events, and currently becoming the most used app in over 180 countries and climbing. Elon’s quest to build superintelligence is also personal, since after founding OpenAi (‘Open-source non-profit AI foundation) and providing $50 million dollars startup capital, to see it transform into a closed source for profit company and no equity for Elon. Sam Altman, once stating he was not interested in money and famously claiming he had no equity in OpenAI, has now become one of the richest individuals in the tech world with an estimated $10 billion. Elon now seems intent on crushing OpenAi and Sam.
The momentum to build out more AI compute looks to continue. The problem for the companies building these AI systems is that much of the costs, the chips, the datacentres and infrastructure is paid up front, and they are working on the assumption they can grow the revenues to support their lofty valuations. Like all early ventures, the road is likely to be littered with carcasses of failed companies that were too aggressive or were unable to grow their cash flows fast enough.
The energy demand for upcoming AI datacentres is projected to be enormous, with estimates suggesting that by 2028, AI could add over 200 terawatt-hours of yearly consumption. Facing these energy challenges, several high-profile tech companies are going with nuclear power as a solution. Google, Amazon and Microsoft are adding nuclear energy solutions, including small modular reactors (SMRs), for their ability to provide consistent, carbon-free power. Clearly these companies are looking for the most reliable cost effect solutions and believe nuclear power is the answer. It is ironic that in Australia, our CSIRO has just released a report saying that any nuclear solution for Australia would be twice as expensive as a renewable alternative. This is at the same time, China is buying our cheap coal, rapidly expanding their nuclear generation, while selling Australia renewables technology. Something smells off. The CSIRO report has some very dubious assumptions, which greatly overstate the cost of nuclear, at the same time understating the cost of a renewable solution. The problem for Australia is the high energy costs are kryptonite for productivity, and we have seen Australia productivity flatline compared to the US and Europe.
Source: Lieran Davies Coolabah Capital.
It’s no surprise that another theme of 2024 has been the erosion of public trust in both the government and mainstream media, reaching levels of distrust not seen in decades. This decline is attributed to various factors, including perceived biases in media reporting, especially prevalent during the U.S. presidential election, and a series of government decisions and policies that have left many feeling disconnected or misled. The Covid 19 ‘safe and effective’ message comes to mind. The proliferation of misinformation, coupled with high-profile cases of media outlets aligning closely with corporate or political interests, has intensified scepticism. Transparency issues, undisclosed conflicts of interest, and the overt politicization of news have further fuelled public disillusionment, creating a landscape where trust in traditional sources of information and governance has been deeply compromised. Australian just tried to introduce a ‘MAD’ bill (Misinformation and Disinformation bill), aimed to address the spread of misinformation and disinformation online, which would put Australia on a path to censorship and the stifling of free speech. Everyone can agree that misinformation and disinformation is bad, but no government can be trusted to be the arbiter of truth. It is a truism that all new information first starts out as misinformation. The solution to misinformation is therefore not restriction, but freedom of speech, to let falsehoods be exposed and corrected by the community or experts.
Trump
2024 will go down as the year Donald Trump made his comeback, winning the 2024 election in a landslide after surviving two assassination attempts. While a free speech champion, his most notable election promise is to usher in a new era of government efficiency. Central to his administration’s policy was the establishment of the “Department of Government Efficiency,” or DOGE, led by Elon Musk and Vivek Ramaswamy, with Robert F. Kennedy Jr. for Health and Human Services. Their stated aims are slashing regulations, massively reducing the federal workforce, and cutting what they described as wasteful government spending. They’re overarching goal is to foster a business-friendly environment by reducing bureaucratic red tape. When Elon cut twitter’s staff by 80%, many claimed it will lead to chaos and failure, but even after such massive staff cuts, the platform has managed to persist and now thrive. Elon is currently proposed cutting at least $2 trillion annually from U.S. government spending, and again many are warning of chaos and failure. However, one can look at Argentina as a recent example of how a country can benefit when big government is made small, which then catalysed economic growth and bringing inflation under control. The Argentina stock market is up over 100% since the changes started, suggesting that a similar approach in the U.S. might unlock substantial entrepreneurial activity and market expansion.
A clear task for these US big government reforms will be to tackle the unsustainable US debt situation, which has come into focus in 2024. With the rebound in interest rates, the US net interest payments on national debt hit a $1.12 Trillian per year, a new record and now outpacing the entire US military budget. As a result, the interest payments as a percent of government revenue hit 18%, the highest in 30+ years. This will be made worse as the rest of the world finds alternatives to the US dollar and rates stay non-zero. Unless the US can get their debt under control, a major crisis will eventually occur.
Which brings us onto another theme of 2024, the rapid appreciation in the gold price, which has rallied around 30% over the year. Gold is often referred to as the reciprocal of faith in the US dollar. When government debt levels rise to unsustainable levels, there’s often a fear of inflation or currency devaluation, and this year gold has been a major beneficiary.
Crypto
However, gold now has a digital rival called Bitcoin which has been taking some of its shine. Bitcoin and other cryptocurrencies have seen a significant surge this year. The rapid rise in 2024 has been fuelled by several factors, including the approval of spot Bitcoin ETFs, which opened the floodgates for institutional investment, and the Bitcoin halving event in April, which historically leads to price increases due to reduced supply growth. The extreme volatility of Bitcoin remains a hallmark of its nature, with the potential for 80% drawdowns that require investors to have a strong stomach for risk. The fear of missing out (FOMO) has been palpable, driving even the most sceptical to consider a stake in crypto. Not owning Bitcoin has started to feel costly as its value continues to climb, pushing more individuals to enter the market despite the known risks.
Interestingly, while the West has been increasingly embracing cryptocurrencies, the BRICs (Brazil, Russia, India, China) countries have shown a preference for traditional safe-haven assets like gold. This divergence in investment strategy highlights a geopolitical divide in asset preference; the West sees cryptocurrencies as a new frontier for finance and investment, possibly as a hedge against inflation or as a speculative asset, whereas BRIC nations are doubling down on physical assets, perhaps viewing them as a more reliable store of value amidst global economic uncertainties. This contrast could signal future trends in global finance, where cryptocurrencies might play a more significant role in Western economies, while gold continues to be a cornerstone for emerging markets.
Another major thematic of 2024 has been the slowdown in China, which has been a powerhouse of global growth and driver of commodity prices. As I write this, China is currently talking about doing various stimulus measures which hopefully reignite demand.
So what we can expect for 2025
Politically, Australia is heading towards an election where the current Labour government is facing significant unpopularity, primarily due to economic issues like inflation and the rising living costs, housing unaffordability, which has largely been driven an uncontrolled immigration program that brings in the population of Canberra and Hobart each year. However, the Liberal Coalition, as the main alternative, currently isn’t offering a markedly different policy direction, particularly on housing, and immigration which remains the two contentious issues. This situation presents a paradox for politicians: while everyone acknowledges the housing affordability crisis, proposing radical solutions to genuinely address it is electoral suicide due to the vested interests of homeowners who benefit from rising property values. The housing Ponzi must go on.
The good news for mortgage holders is that the RBA is likely to continue cutting interest rates next year, which should be some relief to those in mortgage stress. The RBA have been hampered in cutting rates by the excessive government spending. The RBA are the brake and the government is the accelerator and they have both been working against each other. The RBA cuts could provide some relief to mortgage holders, but the timing and scale of these reductions will be crucial in influencing consumer confidence and spending.
What about markets in 2025
The outlook for equities in 2025 presents a scenario with both enticing upside potential and notable risks. On the upside, there’s optimism for continued economic growth supported by potential rate cuts, which could fuel further market expansion, especially in the U.S. where large-cap stocks might benefit from political tailwinds like tax policies and deregulation. However, this optimism is tempered by growing risks, including high stock valuations which could lead to a market correction if earnings growth doesn’t meet expectations or if geopolitical tensions escalate. The market’s current high multiples, particularly in technology sectors, suggest that much of the future growth might already be priced in, making stocks vulnerable to any disappointments in earnings or economic indicators. Additionally, the exuberance around AI and other high-profile tech themes could face scrutiny regarding their long-term viability and monetization, potentially leading to volatility.
Coffee
Coffee prices have finished 2024 at all time highs, but we believe they are going much higher in the first half of 2025. Severe droughts (Brazil has had their driest year in 50 years), heatwaves and weather disruptions including a volcanic eruption in Tonga have devastated global crops, and we are going into the fifth year of deficits. Forget hording toilet paper, the time has come to start hoarding Arabica. The ride is likely to be bumpy though with increased volatility and range expansion, so positioning correctly will be important, but ultimately, we believe ending up much higher. The world is about to witness what happens when their morning heart starter with an inelastic demand curve meets a physical shortage in a marketplace used to 50 years of surpluses.
Asia is very cheap compared to the US
South Korea is currently very cheap, with main stock index Kospi is trading at a forward PE of around 8 compared to the S&P 500 at 23. South Korea is home to some well-known companies such as Samsung Electronics, LG, Hyundai and is a world leader is electronics and displays. South Korea’s workforce is highly educated and prepared to work long hours, with strong manufacturing base. There are several reasons that the market has been underperforming but we believe they are about to resolve and thus this market will outperform in 2025. These include political upheaval in recent months with Martial Law imposed by the South Korean President Yoon, who has been extremely unpopular leader, and thus will be replaced. We also believe that given South Korea’s friendly status with the US, they should be able to negotiate around Trump’s promised 25% tariff on all foreign companies. Another positive catalyst is that Korean market has been negatively affected by China’s slowdown, but as China repositions to start stimulating their economy, South Korea should also benefit.
Source: the Leuthold Group via X.com
Silver and high-grade silver mining companies
Silver is both an industrial metal and a traditional inflation hedge (poor man’s gold), but right now it’s also a bet on the continued rollout of renewable technology. Currently every solar panel uses about 20 grams of silver, due to its excellent electrical properties. While there are ongoing efforts to reduce the silver content or find alternatives due to cost and supply concerns, silver’s unique properties make it challenging to replace entirely in this application. Silver demand will likely continue to increase, and currently silver mining companies are cheap on many metrics.
