2024 was supposed to be a return to some kind of normalcy, with inflation and yields coming down while real economies gradually would recover after previous shocks from pandemics and war. The outcome was more mixed. Inflation did come down in Europe, but a surprisingly strong American labour market made it more sticky in the US. As a result, the bond market has gyrated wildly in its view of the Fed's action – from pessimism to optimism and then another bout of pessimism.

The European economy has been sluggish. Germany is in recession, with manufacturing hurt by the energy crisis and Chinese competition. The debt brake prohibits fiscal stimulus, which is now creating a political crisis. In France, the situation is the opposite and yet similar: fiscal profligacy and a rising government debt has forced an austerity package and a political crisis. The UK is also stuck in a quagmire of economic and political woes. The previous "periphery" is doing better, but with the three largest economies in dire straits, Europe as a whole is set for another year of slow growth.

Europe's ills are structural. The US is more innovative, with a deeper capital market and more rapid growth in tech sectors. The American stock market has been growing much strongly than Europe's for years. We see worrying signs of a European brain drain as an increasing number of start-ups move to the US. Klarna's decision to list in New York is just one of many troubling signs.

This has implications for bond markets and currencies. The Fed will indeed cut the Fed Funds rate – but not at all as much as markets previously anticipated. The weak European economy means the ECB needs to cut more, from a lower level. The consensus view as of now is a big spread of almost 200 bps a year from now. This means the USD will stay strong, and probably strengthen even further.

The "Trump trades" – US tech, USD and bitcoin – have been profitable so far and will probably be so for some time yet. However, during 2025 strains will be developing.

• One is the growing American government debt, which may balloon further if the new administration pursues its election promises of tax cuts. So far, we have not seen any bond vigilantes on the horizon yet.
• Another is Trump's transactional and US-centric view on tariffs. It is obvious that the president-elect sees tariff threats as a legitimate weapon to use both against rivals and allies, and in many negotiations about anything from immigration to drug smuggling and currencies. We do not know how other countries will respond and what the final outcomes for trade and financial flows will be. This makes forecasting extremely difficult.
• US stock markets are beginning to look stretched. A lowering of the corporate tax may give it another shot in the arm. But valuations are high, concentration to a few tech giants is record-high, and the market is sensitive to monetary policy: disappointments from the Fed could be a problem.
• The bitcoin frenzy is driven by hopes that the crypto asset one way or the other will be included in a US "strategic reserve". How this may be done is unclear; legal squabbles are likely – as is opposition from the Fed. The potential effects on monetary policy and the USD are impossible to gauge.
• The green transition is meeting headwinds. The US will "drill, baby, drill" and a number of high-profile green projects are stalling. Not least in Sweden this could have negative repercussions.

All in all, genuine uncertainty abounds – and then we haven't even mentioned the dangerous geopolitical situation in Ukraine and the Mid-East...

At Dahlgren Capital, we stick to our strategy of searching for high-yeld assets with comparatively low volatility. We invest primarily in unlisted tech companies, specialising in AI and automation, with a strong cash flow. We search for listed companies who would be better off unlisted and buy them out. For stocks, we prefer small and mid-cap where valuations are not so stretched. We have left credits as yields are coming down, and we keep some cash to be able to make quick moves if opportunities show up. The strategy has been successful so far and we hope it will do well also in 2025.