Economies of Sale

The Maple Syrup is Hot, and I’m Pouring

Soundbite: Canadian Prime Minister Mark Carney's Davos speech put it bluntly, uttering a phrase that has caught the media's attention: "We are in the midst of a rupture, not a transition." However, what followed from that truth could turn out to be a watershed moment: "We believe that from the fracture, we can build something bigger, better, stronger, more just." Welcome to the Marshall Plan 2.0. Carney drew a line, stating that "the rules-based order is a fallacy, that "the strong can do what they can" and countries who hope that compliance ensures safety are mistaken.

We had argued that the world had changed last weekend when Europe asserted itself, acting, as Carney put it later that week, "to rebuild sovereignty." The Canadian leader laid out his version where "middle powers" caught between the superpower bookends of China and the United States must "act together...creating a dense web of connections across trade, investment, and culture." The only problem for the U.S. and U.S. markets is that the original Marshall Plan was authored by America, whereas for 2.0, we are exiled. 

We have ricocheted from the U.S. entering Venezuela, which had sparked concern over a world divided into spheres of influence; thanks to PM Carney, we may be entering a realm of alliances between developed countries that span across continents. This is the logical response to American and Chinese supremacy, where, as Carney described, "the most powerful pursue their interests, using economic integration as coercion."

Seventy-eight years ago, the Marshall Plan was drawn up to rebuild war-ravaged Europe by lifting trade barriers and modernizing industry to ensure that the continent would prosper and promote democracy. It was a plan borne of optimism, identical to the theme the Prime Minister championed, saying “intermediate powers like Canada are not powerless. They have the capacity to build a new order that encompasses our values, such as respect for human rights, sustainable development, solidarity, sovereignty and territorial integrity of the various states.” It was a truly statesman-like speech and received a well-deserved standing ovation.

He laid out the urgency of action, believing the rules-based international order is broken because “great powers have begun using economic integration as weapons, tariffs as leverage, financial infrastructure as coercion, supply chains as vulnerabilities to be exploited.” There are two options facing these middle powers, aside from continued subjugation:

• Withdraw and raise walls, which leaves individual countries weak and competing against one another, or,
• Actively shift strategically toward “broad engagement.”

Carney outlined what Canada has done to shift its posture, given this rupture. In December, his administration finalized a partnership in the Security Action for Europe (SAFE), the program allowing for $180 billion debt issuance toward defense spending. This will free Canada from its dependence on U.S defense contractors and open new investors and customers to the country as all 27 EU members increase their defense budgets. Last year, his government signed twelve trade and security pacts across four continents, capped this month by new strategic partnerships after meeting with China and Qatar.

Because we fear our recent moves have severely isolated us, we can only hope the administration watches a “Friends” re-run and changes course.

While it is economically impossible to cut out either China or America, the Prime Minister has laid out a plan for all others to maneuver around the aspirations of the two superpowers. If successful, that realization should lower growth forecasts in both China and America, with negative long-term implications for U.S. capital markets.

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Rounders

Soundbite: We published a December 18 Substack titled “Silver Bells” where we were skeptical about the bullish calls for $100 silver and $5,000 gold. The round numbers ended up acting as a magnet for price. We wrote: “People talk about Bitcoin’s vertical rallies (remember them?) but nothing explodes like silver when it enters a buying climax phase…when silver hits its concluding stages of a rally, the size of the final bars dwarf anything that has come before them.” Correct on the dynamic, but wrong assuming the $80 level was the blow-off top target because China’s export controls introduced the potential for a massive restriction on global supply. From our perspective, the bottleneck in Chinese supply plus the debasement trade has been sufficiently discounted.

Silver is cyclical. There will be cheaper substitutes found and alternative supply chains formed that will cause the price to reverse, typical of every commodity squeeze. While that is not on the immediate horizon, anyone buying here for the long run must consider the downside that will be the result of an economic downturn.

With China's move to control their domestic stockpile, not only in silver but other critical metals, we must consider this a regime shift. This is precisely what Canadian PM Carney meant when referring to “using supply chains as vulnerabilities to be exploited.” We now must consider what constitutes the new silver price floor. Silver held $15 consistently for six years from 2014, until the commodity got turbo-charged by the pandemic fiscal stimulus. The floor moved to $20 until Trump won in November 2024, then support moved it up to $30. When silver shot above $50, the January 1980 and April 2011 highs, it went vertical. This conforms to what we typically see at the end of a metals rally where the markets experience the most violent buying and short covering.

Technically a good case can be made that the commodity has hit the limits of its rally, with confirmation on a close below $90. The average daily range has doubled in just one month, which is indicative of a buying climax.

Silver's annual rate of change is higher than any other one-year period except for the 1980 Hunt brother’s squeeze that saw silver up 6-fold (silver has “merely” tripled since January 2025). On a quarter-over-quarter basis, silver’s recent jump matches the percentage rise over the final three months of that stunning 1980 rally. Our next resistance level is $119 in futures as Bullish Consensus hit its most optimistic level in its 34-year history. Importantly, that sentiment indicator is displaying a negative divergence, falling recently despite the latest push to all time record prices. 

We had mentioned five weeks ago that no one in their right mind would be long crude and short silver, and that made it an interesting spread. Another is long Bitcoin vs. silver, with the former receiving six times silver’s ETF inflow, despite being down almost 25% in the last six months. It is something we are monitoring.

This silver spike does introduce inflationary pressures, and when we consider the delayed tariff effects as they work their way through the system, we believe it could change the monetary policy calculus for central banks globally.

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This Weekend’s Other Storm

Soundbite: Forget about the snow, and let’s put this weekend’s tragic news aside for the moment. Saturday, General Zhang, the highest-ranking general of China’s People’s Liberation Army (PLA) who was seen as Xi Jinping’s closest military advisor and ally of over 40 years, was accused of leaking nuclear information. Additionally, the top commander in charge of Taiwan operational planning was also removed. This is part of Xi’s anti-corruption campaign that has seen perhaps fifteen top generals, 170 divisional generals, and many defense industry executives removed over the past three years. While it can be seen as more of the same, this weekend’s action is clearly a move to quash any power centers inside the military that could dislocate Xi’s absolute hold on power.

This can only be seen as a political purge over the military and extends Xi’s isolation within his government, following what Putin has done at the Kremlin. Both leaders have disincentivized their advisors to avoid giving them any information that may displease them, and some may say our administration may be making the same mistake, hopefully to a smaller degree. 

Continuing down this road can lead to a strategic mistake by Xi if he is being shielded from negative events by staff members who are rightfully paranoid. The geopolitical landscape is already shaky, and if Xi is replacing competent bureaucrats and military personnel with obedient pawns, then the overall level of uncertainty has ratcheted up, and higher market risk premia are bound to follow.

The stunning fact about this purge is that the command personnel that were just stripped of their command were chosen by Xi personally.

Sources within China have offered a range of implications, with many saying this pushes out the timetable for Taiwan occupation. Their reasoning is that Zhang was central to the effort to modernize the military and prepare them to invade Taiwan by 2027. It is possible that Xi believed they were moving too slowly toward that goal and cleaned house. Others are postulating that there were growing tensions between the PLA and Xi, and the decapitation of the military was staged to avoid a military coup. If there is any truth to the coup rumors, Xi’s doubt (or fear) about the military hit an extreme, and he has moved to head them off.

Where does this leave us? Three Kings who can shoot someone on Tiananmen Square, Fifth Avenue, or Red Square and get away with it, and are hollowing out their once strong institutions. As we have asserted, the market implications from the recent emergence of geopolitics have rendered passive strategies and superficial reasoning inadequate. With the chaotic fallout this weekend, we are even more convinced of that.

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What to Look for This Week

(All times E.S.T) 

1. Wednesday, January 28 at 2:00 p.m. The Federal Reserve should keep their fed funds rate unchanged at December’s level that fell 25bps to a range of 3.5%–3.75%. We expect anticipation to be high for the press conference, but we anticipate the event to be, in Fedspeak, a nothing burger.
2. Tuesday, January 27 at 10:00 a.m. January Conference Board Consumer Confidence. We are focused on The Labor Differential (Jobs Easy to Get minus Jobs Hard to Get) as an indicator of labor market strength, but the headline Confidence Index has also fallen for five consecutive months and is approaching COVID lows. We will also look for clarification on consumers’ views of their financial situation: in December, readings for consumers’ Current Financial Situation went negative for the first time in almost four years while Financial Situation Expectations were the most positive since January this year.
3. Friday, January 30 at 8:30 a.m. December Producer Price Index. November’s Core PPI reading rose to a four-month high of 3.0%, from 2.9% in October, and above 2.7% consensus expectations. This will not have much of an impact unless we see an outsized jump. Note that Q1 2025 Core PPI averaged 3.8%.

FOMC Voters Speaking: Perhaps the most important event could be President Trump Speaking Tuesday, January 27 and Wednesday, January 28 at 8:30 a.m. where he could announce a new Fed Chair before the FOMC meeting. Rick Reider is now the leading candidate based on his belief that the Fed could be a major force in lowering mortgage rates. Fed blackout Period until Wednesday, January 28, FOMC Press Conference by Chair Powell at 2:30 p.m. Vice Chair Michelle Bowman speaks Friday, January 30 at 5:00 p.m. after many traders have left their screens for the weekend. The Bank of Canada’s Press Conference is scheduled earlier that day, and Tiff Macklem, Governor of the BoC, speaks at 10:30 a.m.

Earnings: Wednesday stacked for tech earnings, but Tuesday, January 27 before market, both United Parcel Service (UPS) and Union Pacific (UNP) report, which could shed light on consumer and corporate demand. Wednesday, January 28 before market, ASML Holding, N.V. (ASML) and after market, Microsoft (MSFT), Meta Platforms (META), Tesla (TSLA), International Business Machines (IBM) and Lam Research (LRCX). Thursday, January 29 before market Caterpillar (CAT) on capex build and global economy, and Mastercard on consumer; after market, Apple (AAPL) and Visa. Friday January, 30 Exxon Mobil (XOM) and Chevron (CVX) may say something about Venezuela, and American Express (AXP) on consumer, all before market.

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By Peter Corey

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