Last Friday, several events helped push stocks (and gold) to all-time highs, but mostly because bad news is good for stocks (and gold), since bad economic news tends to make a key interest rate cut more likely.
One factor supporting gold is that government budget woes in Europe and America are weighing on bond yields, especially in Britain and France, which are currently led by parties likely to be ousted in the next election, by Nigel Farage’s Reform Party and Marine Le Pen’s National Rally party, respectively.
Many countries in Northern Europe have acute demographic problems, as they have failed to successfully assimilate immigrants. A “clash of civilizations” is underway, causing high welfare costs and exacerbating deficits. Another problem plaguing Europe is its erratic electricity grid. Due to negative electricity prices, green energy expansion is likely to slow dramatically, despite the European Union’s ‘Net Zero’ mandates.
Here are the most important developments recently and what they mean:
- This week will be all about inflation via the Producer Price Index (PPI) and Consumer Price Index (CPI). I am hoping that the deflation we are importing from China will show up in the wholesale goods prices and that shelter costs (owners’ equivalent rent) will help the CPI fall within the Fed’s inflation target. Lower crude oil prices should also help to lower both wholesale and consumer inflation. Interestingly, OPEC+ agreed to boost its crude oil production by 137,000 barrels per day in October, despite a growing supply glut.
- The Labor Department announced on Tuesday that it overstated 911,000 payroll jobs in the past year through March 2025. This whopping revision represents 0.6% of all payroll jobs and is literally triple the 0.2% average annual revision in the past 10 years. Interestingly, Bloomberg reported that a third of leadership jobs at the Labor Department are vacant, hinting that there may be a morale problem that the new commissioner needs to correct.
- The French government officially collapsed as members of Parliament ousted Prime Minister Francois Bayrou in a no-confidence vote. Bayrous was demanding $52 billion in annual spending cuts to get the budget deficit down to 4.6% of GDP. Furthermore, Bayrous was demanding that Parliament (1) cancel two public holidays, (2) freeze pension and welfare payments at 2025 levels, and (3) impose a new tax on high-income residents. French President Emmanuel Macron has appointed Sébastien Lecornu as the new Prime Minister, who previously served as the Minister of Defense..
- The French Parliament is controlled by Marine Le Pen’s National Party. President Macron does not have the authority to control Parliament’s budget resolutions and is effectively a lame duck with very little influence from his minority party. Complicating matters further, the French statistics agency Insee reported that industrial production declined 1.1% in July, due largely to a 16% drop in aircraft orders. France may be the first European country to implode from aging demographics, as well as a failure to assimilate its immigrants.
- Britain is the next European country to implode due to a debt crisis, caused by capital flight, aging demographics and being overrun by immigrants that largely fail to assimilate. The Wall Street Journal said “Britain and France aren’t illiquid. They’re insolvent. Their future spending commitments, primarily in the form of expected social-welfare and old-age benefit payouts, far exceed any realistic estimate of the economic growth that will be available to pay those bills. This is unlikely to induce a true default crisis in either country since a market will always exist for their debt.
- The easiest way to put a Band-Aid on the growing debt crisis that Britain, France, and other countries face is to dramatically lower interest rates to try to reduce the burden of existing debt service. Japan was the template of how a country has to lower interest rates as government debt becomes unsustainable. China now has lower interest rates than Japan and may have to devalue its currency as aging demographics take its toll. As a result, I am still expecting a global interest rate collapse, with rates in Europe being the next to fall.
- In the U.S., the Trump Administration’s recent ICE raid on LG Energy Solutions’ new battery plant in Georgia is sending some shockwaves, since apparently, many worker visas had expired. Before the ICE raid, South Korean companies had been struggling to get work visas. In battery plants, one official said that engineers who have expertise in production line design are “irreplaceable.” It will be interesting to see how this visa spat will be resolved. I suspect that the Trump Administration will demand that more U.S. workers be hired.
- When the $7,500 EV tax credits expire at the end of September, EV sales are expected to slow, so GM is already curtailing its EV production despite surprisingly strong EV sales. The Trump Administration’s EPA rollback of emission standards is also expected to provide GM, Ford, and Stellantis with a windfall, since they will no longer have to buy emission credits from Tesla and Rivian. GM has spent $3.5 billion on regulatory emission credits since 2022. Ford will now be able to cut almost $1.5 billion in regulatory emission credits this year.
- While the Big 3 are getting a windfall from the Trump Administration, they also have higher operating costs due largely to tariffs on Canadian auto parts. GM Chief Financial Officer Paul Jacobson said eliminating the fines “will save us money in 2026 and beyond for sure.” Ford Chief Executive Officer Jim Farley told analysts that the shift in policy “has the potential to unlock a multibillion-dollar opportunity over the next two years.” The bottom line is the Big 3 makes a lot of money on trucks, so now they will no longer have to buy regulatory emission credits to comply with the EPA.
In summary, bad economic news seems to be good for stocks, since the more bad news we see, the more likely the Fed is to cut key rates. At least that’s the way it looks when we see bad news deliver new record market highs.
