The year is ending with a significant level of optimism among investors, focusing on an expected string of rate cuts from the Fed and an estimated economic soft landing.

However, a soft landing is a very rare event. Since 1975, there have been nine rate hike cycles, and seven of them ended in a recession.

Why? We must understand that the concept of “landing” that the Federal Reserve repeats constantly is exactly that: a recession. A soft landing is a significant decline in the aggregate money supply, which entails lower credit and access to capital for families and businesses. There is no other way to lower inflation, which the extraordinary and unnecessary increase in the money supply in 2020 caused.

The world equity markets ended November with their biggest monthly rally in three years. Optimism comes from better-than-expected inflation figures, expectations of central bank rate cuts, and general acceptance that earnings and economic growth will be weak but acceptable in 2024.

The main challenge for investors in 2024 is to confirm these hopes as trends.

The first problem is believing that inflation will drop magically without any significant impact on growth and ignoring monetary aggregates.

Inflation is falling due to the significant decline in money growth, and this means an abrupt slump in liquidity, a weaker economy, and financial conditions worsening.

The monumental fiscal and monetary hole that Peronists Massa and Fernández have left for Javier Milei is difficult to replicate. Ex-president Mauricio Macri himself explained that the inheritance Milei receives is “worse” than the one he found from Cristina Fernández de Kirchner. Peronism leaves a country in ruins and with a massive time bomb for the next administration.

The enormous economic problems of Argentina start with a primary fiscal deficit of 3% of GDP and a total deficit (including interest expenses) exceeding 5% of GDP. Moreover, it is a structural deficit that cannot be reduced unless public spending is slashed. Public expenditure already accounts for 40% of GDP and has doubled in the era of Kirchnerism. If we analyze Argentina’s budget, up to 20% is purely political spending. The previous left-wing administration only cut spending on pensions, which were half of the adjustment in real terms, according to the Argentine Institute of Fiscal Analysis.

Market implied Fed Funds rate discount a string of cuts starting in January 2024 and culminating in a 4.492 percent in January 2025. These expectations are based on the perception that the Federal Reserve will achieve a soft landing and that inflation will drop rapidly. However, market participants who assume rate cuts will be bullish may be taking too much risk for the wrong reasons.

The messages from the Federal Reserve contradict the previously mentioned estimates. Powell continues to repeat that there is more likelihood of rate hikes than cuts and that the battle against inflation is not over.