“It was a serious strategic mistake to phase out nuclear power. Germany simply does not have enough energy production capacity,” admitted Chancellor Merz. “In order to have normal market prices for energy production again, we will have to constantly support the process with funds from the federal budget. We cannot do this in the long term,” he continued. “We are now making the most expensive energy transition in the entire world. I don’t know of any other country that is making this transition as difficult and expensive as Germany. We set a goal that we now have to adjust, but we simply don’t have enough energy generation capacity.”
Overall: “And we are no longer just relying on the strength of our values, but also the value of our strength,” said Canada’s Prime Minister, addressing the Davos crowd, rather pleased with the turn of phrase. It was a well-written speech and perfectly articulated the predicament Canada and its peers now face. In fact, it was so spot on that Christine Lagarde felt compelled to push back. To have agreed would have been to acknowledge just how vulnerable the EU has become -- a reality Europeans are not yet prepared to fully confront. “We are building that strength at home,” Carney continued, determined, defiant. “Since my government took office, we have cut taxes on incomes, on capital gains and business investment,” he said, stunning a room full of sophisticated bureaucrats who have rarely encountered a tax hike, regulation, subsidy, or entitlement they haven’t loved. “We have removed all federal barriers to interprovincial trade. We are fast tracking a trillion dollars of investments in energy, AI, critical minerals, new trade corridors and beyond,” Carney boasted, as animated as is possible for a Canadian, sounding almost American. “We’re doubling our defense spending by the end of this decade, and we’re doing so in ways that build our domestic industries.” A few of us investors listening could be forgiven for wondering whether the chaos unleashed by America’s commander-in-chief might yet carry an economic silver lining -- whether existential panic and desperation might finally force the stagnant socialist economies of the West, with bloated welfare states, to unleash their entrepreneurial spirits. “We are rapidly diversifying abroad. We have agreed a comprehensive strategic partnership with the EU, including joining SAFE, the European defense procurement arrangements. We have signed 12 other trade and security deals on four continents in six months. The past few days, we’ve concluded new strategic partnerships with China and Qatar. We’re negotiating free trade pacts with India, ASEAN, Thailand, Philippines and Mercosur.”
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Tails: There are many ways to make money in markets. I tend to look for opportunities with explosive upside while also building hedges to make significant profits when markets dislocate on the downside. The reality is that both the right and left market tails are fatter than most people think. Fortunately, human history is filled with more economic miracles than cataclysms, which is why we no longer live in caves. But that doesn’t mean you should blindly bet on bull markets. Bear markets are devastating to long-term compounding and inflict deep psychological wounds.
Tails II: Everything I read articulates the bear case for humanity because of how America is now operating. That might be right, or it could be even worse. It’s all now being priced into markets. What’s odd is that implied volatility for stocks and bonds remain low, equities are basically at all-time highs, credit spreads are extraordinarily tight, and emerging markets are behaving fabulously. Despite the tariffs, the halt to immigration, and the unprecedented policy volatility, the US economy is doing quite well. Hedges are cheap, so own stocks and own protection.
Tails III: Gold and silver prices may be signaling something utterly terrible on the horizon, like another world war. But stocks and bonds don’t seem concerned. Such a divergence is not usually how markets operate. Maybe a different tail is developing. Perhaps precious metals are pricing in the risk of massive monetary inflation, a dollar collapse. Stocks might do well in that scenario, as money becomes worth less, nominal GDP grows, earnings rise, lifting the prices of nearly everything. But bonds should fall if that’s what’s ahead. So far only Japan’s bonds are tanking.
Tails IV: If there’s a silver lining to America’s destruction of the world order that we ourselves created (and benefited massively from) it may be that it produces an existential crisis that stagnant and failing nations need to spur real policy change. If a war with Russia and chronic economic underperformance was not enough to get European nations to finally integrate, devote massive resources to its common defense, slash regulation, and unleash innovation, then what hope is there? Draghi provided a roadmap, the EU Competitiveness Report. Nothing changed.
Tails V: Chancellor Merz finally admitted Germany made a grave error. Industrial production is at 2005 levels – 20yrs of growth gone. German electricity costs 2.5x more than in the US. Across the EU, electricity for industrial use is 2x that in the US and 1.5x that in China. EU per capita GDP priced in dollars was roughly equivalent to the US in 2010. Now it is 50% lower. And productivity growth is abysmal in Europe, while it has recently surged 4.5% in the US. So, the gap keeps widening. And remember that Europe currently has essentially no AI strategy.
Tails VI: It’s hard to get structurally positive on Europe. But if there is a bullish right tail to America’s strategic shift, it is that nations throughout the world which were sinking beneath their welfare states, making self-defeating economic policy choices (like Germany), dependent on the US to buy their exports, and relying on the US for defense, will now wake up from their long slumber. And this will spark a global boom, that will strengthen Europe/UK, Canada, Japan, and many other liberal democracies. Their strength will help America keep Russia, China, and NK in check. This is not currently priced, but markets behave as if this scenario might unfold.
Anecdote: “Want to know what I think will happen?” asked my father in the mid-1990s. I had lived in London since 1992. At first, I explored solo. I’d call a travel agent on Friday and buy the cheapest last-minute ticket to anywhere. Every European country was different, but each looked down on Americans in much the same way – we were idealistic and unsophisticated. It never really bothered me. Surrounded by the magnificence of European art and architecture, the history, languages, accents, I felt rather unsophisticated, truth be told. And besides, if Europeans thought we lacked culture and class, they would someday discover we were the few Americans who bothered to get a passport. When Europeans called us hopelessly idealistic, I considered it a compliment. But it was intended to suggest we were naïve and sought solutions to problems that worldly people knew to be intractable. To me, their cynicism reflected a deep psychic wound, inflicted in two World Wars. I also felt Europeans had suffered so many humiliations that they had a need to feel superior. So, I was fine with it. And besides, I’d explain they would much prefer to live in a world run by idealistic Americans than cynical ones. Now in 2026, they’re discovering just how a world run by cynical Americans feels, operates. It’s not pretty. Anyhow, I loved the UK/Europe and told my father all about it. I explained how British education was superior. How I admired Scandinavia’s social harmony. How safety nets allowed society’s less fortunate to retain their pride. I described Europe’s wonders. The things Americans could learn. Figured I’d live there forever. He listened carefully. He’d first traveled abroad in the Airforce, stationed in the wasteland of South Korea at that war’s end. America’s G.I. Bill was his only way out. He earned Masters Degrees, a PhD, explored, invented, built. And he said, “Eric, you’ll travel all over, see so many interesting places, people, you’ll love it. Then someday, you’ll look around and realize there are ***holes everywhere and you’ll move back home.”
Good luck out there,
Eric Peters
Chief Investment Officer
One River Asset Management
Week-in-Review: Mon: Canada CPI 2.4% (2.2%e). Eurozone CPI 1.9% (2.0%e), Core unch 2.3% as exp. China GDP 4.5% as exp, IP 5.2% (5.0%e), ret sales 0.9% (1.0%e). EU in talks to impose retaliatory tariffs, should Trump follow through on threat of a 10% tariff on EU for Feb 1. Japan 40-year bond yield hits 4% for first time since debut in 2007 amid PM Takaichi’s plan to cut the sales tax on food. MLK Day. Tue: US Supreme Court is not ruling on pending challenges to Trump’s tariffs before its four-week recess, leaving tariffs in place, with next scheduled courtroom session on Feb 20. Japanese bond market selloff sees Finance Minister Katayama calling for market calm. Greenland PM tells population to prepare for the unlikely scenario of a possible invasion. S&P -2.1%. Wed: Mexico ret sales 4.4% (2.8%e). UK CPI 3.4% (3.3%e), Core 3.2% (3.3%e). South Africa CPI 3.6% as exp, Core 3.3% (3.4%e). South Korea GDP 1.5% (1.8%e). Australia unemp rate 4.1% (4.3%e). Trump announces he will refrain from tariffs on EU, citing a framework of a future deal in regards to Greenland after meeting with NATO Secretary General Rutte at World Economic Forum in Davos. S&P +1.2%. Thu: US init jobless claims 200k (209k e), GDP ann. QoQ 4.4% (4.3%e). BOJ target rate unch 0.75% as exp. Putin says he is ready to commit Russian assets that are frozen in the US to rebuild Ukraine after a peace treaty is concluded. S&P +0.6%. Fri: US UMich sent 56.4 (54.0e), leading index -0.3% (-0.2%e). Singapore CPI unch 1.2% as exp. Taiwan IP 21.57% (12.00%e). FEMA halts planned terminations of some temporary disaster relief workers as massive storm moves across the country. California sues Trump administration for giving Sable Offshore Corp permission to restart a controversial oil pipeline in the state. S&P flat. Sat/Sun: Trump threatens 100% tariffs on Canada if it signs trade deal with China. ICE kills protestor in Minneapolis.
Weekly Close: S&P 500 -0.4% and VIX +0.23 at +16.09. Nikkei -0.2%, Shanghai +0.8%, Euro Stoxx -1.0%, Bovespa +8.5%, MSCI World -0.3%, MSCI Emerging +0.7%, Bitcoin -5.7%, and Ethereum -10.2%. USD rose +1.2% vs India, and +0.2% vs Turkey. USD fell -3.1% vs Australia, -3.0% vs Sweden, -2.8% vs Russia, -2.3% vs Chile, -1.9% vs Euro, -1.9% vs Sterling, -1.7% vs South Africa, -1.6% vs Brazil, -1.5% vs Canada, -1.5% vs Yen, -1.5% vs Mexico, -0.4% vs Indonesia, and -0.1% vs China. Gold +8.4%, Silver +14.5%, Oil +2.9%, Copper +2.0%, Iron Ore -0.6%, Corn +1.4%. 10yr Inflation Breakevens (EU flat at 1.84%, US -1bp at 2.31%, JP +5bps at 1.97%, and UK +7bps at 3.12%). 2yr Notes +1bp at 3.60% and 10yr Notes flat at 4.23%.
YTD Equity Index Returns: Colombia +24.5% priced in US dollars (+20.1% priced in pesos), Korea +17.7% priced in US dollars (+18.4% priced in won), Brazil +15.1% in dollars (+11% in reais), Chile +14.3% (+9.7%), Turkey +14.3% (+15.4%), Hungary +14.1% (+12.6%), Israel +11.4% (+9.4%), Denmark +10.8% (+10.5%), Taiwan +9.8% (+10.4%), Mexico +9.8% (+6%), South Africa +8.8% (+5.9%), Russell 2000 +7.5%, Greece +7.3% (+6.8%), Sweden +7% (+4.5%), Japan +7% (+7%), Singapore +6.3% (+5.3%), Saudi Arabia +6.1% (+6.1%), Norway +5.9% (+3%), Netherlands +5.7% (+5.1%), Thailand +5.6% (+4.3%), Belgium +5.2% (+4.7%), Poland +5.1% (+4.3%), Vietnam +5% (+4.8%), Australia +4.9% (+1.7%), China +4.6% (+4.2%), Canada +4.6% (+4.5%), Portugal +4.5% (+4%), Philippines +4.4% (+4.6%), HK +4.2% (+4.4%), Austria +4% (+3.6%), Malaysia +3.7% (+2.4%), UK +3.3% (+2.1%), Euro Stoxx 50 +3.2% (+2.7%), Finland +3.2% (+2.8%), Indonesia +3% (+3.5%), UAE +2.9% (+2.9%), Argentina +2.7% (+1.4%), New Zealand +2.3% (-0.7%), Germany +2% (+1.7%), Spain +1.9% (+1.4%), MSCI World +1.6% in US dollars, Czech Republic +1.4% (+1.2%), NASDAQ +1.1%, S&P 500 +1%, France +0.4% (-0.1%), Italy +0.1% (-0.3%), Switzerland -0.2% (-0.9%), Ireland -0.8% (-1.3%), India -6.1% (-4.1%).
Disclaimer: All characters and events contained herein are entirely fictional. Even those things that appear based on real people and actual events are products of the author’s imagination. Any similarity is merely coincidental. The numbers are unreliable. The statistics too. Consequently, this message does not contain any investment recommendation, advice, or solicitation of any sort for any product, fund or service. The views expressed are strictly those of the author, even if often times they are not actually views held by the author, or directly contradict those views genuinely held by the author. And the views may certainly differ from those of any firm or person that the author may advise, converse with, or otherwise be associated with. Lastly, any inappropriate language, innuendo or dark humor contained herein is not specifically intended to offend the reader. And besides, nothing could possibly be more offensive than the real-life actions of the inept policy makers, corrupt elected leaders and short, paranoid dictators who infest our little planet. Yet we suffer their indignities every day. Oh yeah, past performance is not indicative of future returns.