As 2024 draws to a close, we sat down with Andrew Hunt of Hunt Economics to review the key economic and market developments of the past year and discuss what may lie ahead in 2025.

Looking back at 2024, Hunt gives himself a solid "B+ or even an A" in terms of forecasting the year's major themes. In a year when the sluggish economy took a backseat to liquidity-driven financial markets, Hunt rightly focused on the importance of following the liquidity, while also anticipating the pickup in volatility seen around August. As the U.S. election approached, Hunt kept investors on an even keel despite some surprises in the extent of political polarisation.

The resilience of the U.S. credit boom in the final weeks of the year took Hunt by surprise. As he noted back in mid-2024, the high carry costs in private credit channels mean this is a credit boom that must keep expanding or die out. While some weakness emerged recently, the market's upward trajectory and liquidity-driven nature shone through.

Turning to 2025, Hunt sees the coming year as potentially the end of the old economic regime taken to a "ridiculous extreme" rather than the clean start of a new paradigm. Stress points are already emerging, from the blowout in U.K. gilt-bund spreads to recessionary indicators in the U.K. economy, to the market impact of political events in France, Korea and Indonesia. The prospect of a second Trump presidency could further stress test the system and expose its weaknesses.

Hunt envisions a crescendo of the liquidity-driven model playing out in early 2025 as the new administration injects $500-700 billion into the financial system by drawing down the Treasury cash balance. This "last big liquidity wave" could power a positive start to the year for markets.

However, the accompanying tariffs may stoke inflation just as Treasury issuance picks up in Q2 to replenish the cash balance. The resulting selloff in bonds would stress the financial system, particularly private credit. Hunt draws a parallel to Japan in 1989-90, where an inflation scare and credit boom ended with a rapid transition to disinflation, deflation, and economic slowdown.

For the U.S. in 2025, Hunt sees a possible trajectory from an inflation scare in Q2, to economic slowdown in Q3, to a dramatic monetary policy response by Q4 - potentially even a return to quantitative easing by the Fed and other major central banks. While this stabilizes economies, it may plant the seeds for inflation in 2026-27.

The upshot is a prospective "wild ride" for bond markets in 2025. Hunt advises staying cautiously long in Q1, looking for signs to get defensive in late Q1 as liquidity wanes and inflation picks up. He then suggests preparing for a strong policy response if deflation fears take hold by mid-year. Once the "deflation scare" is on, it may be time to position for an overly generous policy easing that swings the pendulum back towards inflation.

While the exact path will depend on how events unfold, 2025 will likely be an eventful, volatile year for financial markets. The key will be staying attentive to liquidity conditions and the evolving inflation/deflation narrative. If 2024 sharpened investors' instincts, those skills will certainly be put to the test in the coming year.