Political upheavals in South Korea and France

On December 3, South Korean President Yoon Suk Yeol declared martial law, accusing the opposition-controlled National Assembly of "anti-state activities" and alleged collaboration with North Korea. This unprecedented move led to military deployment around the parliament and widespread public protests. In a dramatic turn, the National Assembly convened and voted unanimously (190-0) to rescind the martial law declaration. Subsequently, President Yoon lifted the martial law order. Following the martial law incident, opposition parties initiated impeachment proceedings against President Yoon, citing abuse of power and unconstitutional actions. The following day, France Prime Minister Michel Barnier's government was toppled after losing a no-confidence vote in the National Assembly. This marked the first successful no-confidence motion in France since 1962. The motion was propelled by opposition to Barnier's proposed austerity budget, which included significant spending cuts and tax increases aimed at reducing the deficit. Barnier has only served as Prime Minister for two months. President Macron now needs to appoint a new Prime Minister, prioritizing approving a 2025 budget.

• While both events have not been witnessed for over fifty years, they are consistent with the view that incumbent governments who were in power during the last inflationary period would come under pressure
• Over the last year, we have written about inflation being a source of volatility not only for markets but also for governments
• In South Korea, President Yoon Suk-Yeol’s party (the PPP) lost its majority in the National Assembly in April, which weakened its ability to be effective, including passing a 2025 budget
• The PPP has also been mired in corruption scandals, which has hurt its public perception
• Support in South Korea had shifted to the progressive Democratic Party
• In France, Macron’s party suffered a similar defeat in June of this year, with support going to Marie Le Pen’s far-right party
• Both events create uncertainty, which is unhealthy for markets and creates a new source of potential volatility
• Another common theme is that France and South Korea have run significant fiscal deficits, which are unsustainable on a long-term basis
• This will serve to fuel the debate around the sustainability of long-term fiscal deficits, whether or not they are a cause of inflation, and what can be done to address them
• The United States is not immune to this same dynamic

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China’s response to tariffs

This week, China implemented key trade measures in response to U.S. export controls targeting its semiconductor industry. It banned the export of critical materials such as gallium, germanium, antimony, and graphite, which are essential for industries including smartphones, electric vehicles, and radar systems. These restrictions are expected to disrupt global supply chains, prompting Western companies to seek alternative sources for these materials. Additionally, China extended tariff exemptions on certain U.S. products, such as rare earth metal ore and medical disinfectants, until February 2025, highlighting the escalating trade tensions between the two nations and their competing strategic priorities.

• China’s relationship with the United States has been in a state of change going back to the first Trump administration
• Biden’s administration did not significantly change its stance, enacting several new tariffs and export controls
• With the incoming Trump administration vowing to launch additional tariffs on China, it should be no surprise China is acting pre-emptively
• China’s new trade measures could serve as an inflationary force as supply chains are disrupted

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Bitcoin surpasses $100K (as stock markets rally to all-time-highs)

This week, Bitcoin achieved a historic milestone by surpassing the $100,000 mark for the first time, peaking at $103,713 before settling slightly below the threshold. This surge is attributed to increased institutional adoption, regulatory clarity, and a favorable political climate, notably President-elect Donald Trump's pro-cryptocurrency stance and his nomination of blockchain advocate Paul Atkins as the SEC Chair. Concurrently, U.S. stock markets have reached unprecedented levels, with major indices such as the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite closing at record highs. Investors have funneled nearly $140 billion into U.S. equity funds since Trump's election victory, driven by expectations of significant tax cuts and regulatory reforms to boost corporate profits.

• Trump’s election and subsequent appointment of pro-cryptocurrency candidates for key positions (Treasury and SEC) has been a major source of excitement for the industry
• While Bitcoin received lots of attention this week, it is notable that broad stock market indices also hit all-time-highs this week
• In general, investor enthusiasm is surging, and risk assets are rallying commensurately
• Combined with healthy economic data (GDP, Unemployment, etc), this will create headwinds for the Fed to continue to lower interest rates this month
• Some argue that monetary conditions are very loose already, and cutting interest rates further could exacerbate bubble-like conditions
• If interest rates were to remain at higher than previously expected levels for longer, it could put pressure on interest rate-sensitive assets, notably real estate

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