The Treacherous Last Mile of Inflation | Vincent Deluard on France, 2025 U.S. Fiscal Drag, COLA Pain, and the U.S. Healthcare Price Spiral

Episode Summary

Executive Summary: Vincent Deluard argues the U.S. economy remains resilient in the near term, but several lagged forces—refinancing cliffs, state/local fiscal tightening, sticky inflation, and slowing labor growth—could create a growth scare in 2025. He also makes a bearish case for European assets and the euro, citing political dysfunction, weak growth, and ECB easing as reasons the currency could move toward parity.

Main Topics: U.S. economy: no recession now, but 2025 slowdown risk (Priority: 5/5): Deluard says the economy is still strong, with consumption and Q4 momentum holding up, but he expects the current goldilocks setup to deteriorate starting in early 2025 as delayed drags work through the system. Why prior recession signals failed (Priority: 5/5): He argues many recession indicators were valid but early: commercial real estate, the inverted yield curve, and the Sahm Rule all took longer to bite because of refinancing, stimulus, and immigration-driven labor force effects. Fiscal drag from state and local governments (Priority: 4/5): He expects state and local spending to shift from strong growth to contraction, removing an important source of job creation and GDP support just as federal politics become less relevant than subnational budgets. Inflation, healthcare, and the limits of the 2% target (Priority: 4/5): Deluard says healthcare inflation is structurally undercounted and economically large enough to keep overall inflation sticky, making the Fed’s 2% target increasingly unrealistic. Bearish case for U.S. stocks, but not yet a sell-off (Priority: 4/5): He is bullish short term, but thinks the secular bull market is aging and a 20%+ bear market could arrive around spring 2025 if inflation and growth dynamics turn less favorable. Europe, France, and the euro as the weak link (Priority: 5/5): He sees Europe’s model as broken by geopolitics and weak politics, with France’s fiscal and parliamentary crisis plus German industrial weakness pushing the ECB toward rate cuts and the euro toward parity. Portfolio positioning: hedge, don’t panic (Priority: 3/5): He advises investors to enjoy the current rally for now, then gradually hedge with cash, gold, Swiss franc exposure, and possibly selective European relative-value trades; he is less enthusiastic about Treasuries as a hedge.

Key Arguments: The U.S. economy is still robust now, but lagged effects from higher rates, refinancing, and fiscal tightening could weaken growth in 2025. Earlier recession calls were not wrong, just premature; many stress points were delayed by cash balances, refinancing, and immigration-led labor supply growth. Commercial real estate and corporate debt costs should begin to weigh more materially in 2025-2026 as old low-rate debt matures and gets refinanced at much higher yields. State and local governments have been a hidden source of stimulus; their spending is set to slow sharply, removing support for employment and GDP. Healthcare spending and employment are large, growing, and poorly captured in CPI, helping explain why official inflation may understate household pain and why 2% inflation is unrealistic. The U.S. stock market can keep rising near term, but the secular bull market is mature and vulnerable to a correction if inflation stays sticky and earnings/margins weaken. Europe is in worse shape than the U.S. because its energy, trade, and security assumptions have broken down, and political instability in France and Germany reduces policy credibility. The ECB has more room to cut than the Fed, so monetary divergence plus euro weakness could push EUR/USD toward parity. Cash, gold, and Swiss franc exposure are preferred defenses if stocks and bonds fall together in a future bear market.

Data Points: U.S. CPI reading: 2.7% - Latest inflation print mentioned early in the discussion, showing inflation down from prior highs. Former U.S. inflation peak: 9% - Referenced as the prior inflation level from which inflation has fallen substantially. Expected U.S. slowdown timing: Q1 2025 / March-April 2025 - Deluard repeatedly identifies early 2025 as the period when growth and labor-market weakness may emerge. Commercial lease duration: 5-6 years - Used to explain why commercial real estate stress may hit with a delay. Average corporate bond maturity: 5-6 years - Used to describe the refinancing wall from 2020-2021 issuance. Corporate bond spread: ~80 basis points - Investment-grade spreads were cited as unusually narrow and supportive of risk assets. Risk-free rate: 4.75% - Used as a comparison for equities versus cash and credit conditions. U.S. secular bull market start: March 3, 2009 - He framed the current equity run as the 16th year of the bull market that began at the crisis low. S&P 500 level at start of bull market: 666 - Symbolic reference to the 2009 low used to illustrate the scale of the rally. Expected S&P 500 level: 7,000 - Mentioned as a market forecast some strategists expect 'any day'. One-year Sharpe ratio of S&P 500: 3.6 to 4.5+ - Used to argue the market has experienced an unusually strong melt-up. State spending outlook: -6.2% in fiscal 2025 - Cited from budget data to support the fiscal tightening thesis. State spending growth last year: ~13% - Compared with next year’s expected decline. Local/state government hiring pace: 40,000-50,000 jobs per month - Used to show how much government hiring has supported payrolls. Nonfarm payroll growth now: ~150,000/month - Current pace he says could fall well below 100,000. Potential payroll growth later: <100,000/month - His projected weaker jobs data in early 2025. Healthcare share of economy: ~20% - Used to argue healthcare inflation matters enormously for overall inflation. Healthcare cost growth: close to 10% - He says spending growth in the sector is far above the inflation target. Social Security COLA: ~2.5% - Referenced as the adjustment based on prior inflation. Government employee pay increase: ~1.8% - Referenced as another lagged inflation-linked adjustment. Immigration flow at southern border: ~300,000/month - Used to explain why labor supply rose and the Sahm Rule did not trigger a recession. Current border crossings: ~70,000/month - Used to argue that labor supply growth is now slowing. French hidden deficit: ~100 billion euros - Cited as the scale of France’s fiscal hole. French new issuance need next year: ~60 billion euros - Budget financing need mentioned in the France segment. French maturing debt: ~150 billion euros - Debt that must be rolled over. ECB French debt holdings maturing: ~100 billion euros - He says these holdings will also roll off next year. Total French debt funding need cited: ~400 billion euros - Combined estimate of deficit financing, rollover needs, and ECB holdings. French market underperformance vs Germany: ~20% - He says French stocks have lagged German stocks over the prior three to four months. French bank/sovereign spread level: ~3% - He notes spreads are still moderate but could widen further.

Pivotal Quotes: "The moment on the economy, I am pretty much thinking the same. That we have a very strong economy... But it's more a kind of a nagging worry that this kind of goldilocks environment will end, starting perhaps at the end of Q1." — Vincent Deluard: Summarizes his base case: strong current growth, but a fading setup in 2025. "I feel bear market in April, May of 2025." — Vincent Deluard: His clearest timing call for when equities could turn decisively lower. "I think the European economic model is deeply broken." — Vincent Deluard: Core thesis behind his bearish view on Europe and the euro.

Implications: Investors should not panic now, but should prepare for a 2025 regime shift: weaker growth, higher-for-longer inflation, less fiscal support, and possible equity/bond drawdowns. Europe looks especially vulnerable, making cash, gold, Swiss francs, and selective hedges more attractive.