Escaping The Wealth Illusion

Introduction

February proved to be quite a rollercoaster for Investors & Traders alike, as markets reacted to evolving U.S. administration announcements on policy, along with wider global economic data and the unfolding impact of January’s developments (mostly tariffs). These events made speculation difficult across the Risk On spectrum. In fact, those with the nerve to simply hold through it probably had the best of the outcomes, in larger number, in what was a rather interesting month.

Summary of Major Equity Markets

United States

As the first full month under the new U.S. administration, February offered further clues about their economic trajectory for 2025 with investor sentiment swinging between optimism and caution almost daily. Let’s explore shifts in equity, bond, and cryptocurrency markets, alongside key economic indicators, to refine our investment outlook for the rest of Q1 and beyond.

January’s volatility continued in the S&P 500 as it rallied 2.9% from open through February 19th where the index set another new All Time High at $6,147. A sharp decline of 4.6% through February 27th in reaction to more tariff announcements and some political posturing around Ukraine was softened by a final day rally, up 1.03% into the monthly close. Overall the rollercoaster returned safely to the station, closing for a modest 0.25% loss on the month. Per above though, that minor drawdown doesn’t tell anywhere near the story as markets found it difficult to predict the maverick that is POTUS.

The Dow had a similar overall profile, but with a little less upside to begin with than the S&P. No new ATH here and a modest 1.54% increase from open, over a shorter time period; the high coming on 6th Feb. From here we saw steady decline through the month with a large gap left open (from a volume imbalance perspective) which creates an area of interest to watch through March. Decline from the highs through the 27th was marginally less than the S&P at 3.84%, with a last day rally of 1.43% confirming a 0.97% loss on the month.

The NASDAQ followed the lead of the S&P more closely, with an impressive 5.17% surge from open through 19th of the month for a new All time High at $22,222, a number so perfect it can only come from a simulation! From here a steep decline of 7.47% broke the previous major low, before popping back above on the final day for a 1.78% daily gain. Overall the month was down 0.95% from open as the major tech players announced reasonably impressive earnings alongside the chaos caused by policy and geopolitical announcements.

Small-caps in the Russell 2000 continued their decline, down 5.38% overall on the month after a brief rally in the opening couple of days. Key structure was broken again on this index, a fourth time since December, making it difficult to confirm a directional read. Technically a breakdown having taken both sides of the previous macro range and broken structure again to the downside is more likely, but there’s no clear trade here for me so one for noting more than anything. It’s certainly at odds with the other majors which, despite January and February price action, to this analyst still posture to the upside, for now.

United Kingdom

Hot on the heels of January’s record breaking month the FTSE 100 continued to show strength in February. January was something of a surprise for the UK index so continuation of that strength into February will come as a welcome follow up for UK based companies. Overall the month finished 3.45% up and set another new All Time High on the 13th. This has been surpassed again in early March making it a run of 3 consecutive months with new ATH’s for the FTSE.

Higher than expected Inflation (3.0% Headline YoY vs 2.8% expectation and 2.5% previous) was perhaps a surprise after the 25 basis point rate cut at the start of the month and undoubtedly this combination of economic triggers had it’s part to play in both the early runup (+2.5% from rate reduction on the 6th) and the subsequent pullback (-1.89% from inflation print on the 19th). A strengthening pound likely gave investors pause for thought, but Defensive sectors like utilities and healthcare led the strong charge in February. Sustainability of this rally remains in question longer term, but UK Investors enjoyed another positive month nonetheless.

Europe

Arguably the EU50 enjoyed the strongest month of any of the major Indexes, posting a 5.64% gain open to close but, significantly, without the heavy mid month drawdown observed in other majors. The initial surge from open through the 19th (seeing a pattern here? That date and the policy announcements really had an impact worldwide!) saw an impressive 7.32% gain, before a 1.92% retracement and consolidation through month end.

A dovish rhetoric from the ECB and a weaker Euro (partly brought on by US tariff threats) boosted export heavy stocks in Germany and France in particular. Like the UK, January was something of a positive surprise for EU stocks but February’s continuation reflects genuine optimism about earnings resilience of European companies. In March we’ll need to keep a close eye on the looming EU vs US trade tensions as this could certainly put a lid on further momentum this side of the Atlantic.

Japan

Another sideways month for the TOPIX in Japan for an overall loss of 0.69%. At this stage we shouldn’t be overly surprised as this sideways action has been in play since August 24 as the index consolidates post a weighty drawdown (24%) in July 24. It’s not an index that looks particularly strong, but this range will resolve at some point, so we await directionality. Consolidation remains the theme, with questions lingering about BoJ policy adjustments in response to global trade shifts.

Bond Market Dynamics

US Treasuries

In February, the U.S. 10-year Treasury yield fell 7.81% from 4.559% to 4.203%, a 35.6 bps drop reflecting higher bond demand. This could stem from fears of a tariff-induced economic slowdown, as Trump’s 25% tariffs on Canada and Mexico (10% on fuel) and 10% on China, plus Canada’s 25% retaliation, raised consumer price and supply chain concerns. Global yield softening and policy uncertainty via tariffs and budget cuts likely drove something of a flight to safety in a tumultuous month.

For markets, this is bittersweet. Equities, like the S&P 500 and NASDAQ benefit short-term from lower borrowing costs, especially tech. Crypto, gains somewhat from risk-on tailwinds, supporting my (later in the year) $134k–$157k target. Bonds at 4.20% remain appealing, though falling yields raise duration risk. A flatter yield curve might signal recession, aligning with the H2 2025 view I covered in January, while USD strength (DXY holding fairly level around $106-$108) could soften, aiding emerging markets.

The drop suggests markets are pricing in growth fears over inflation, despite tariff pressures. While risk assets thrive now, small-cap weakness (Russell 2000 as highlighted earlier) hints at caution. The Q1–Q2 bullish outlook holds, but this yield shift may hasten a late Q2 defensive pivot if slowdown signals like weak retail sales continue to grow.

UK Gilts

UK 10-year Gilt yields dropped slightly in February (1.46%) to 4.464% but have already gapped up in the opening days of March to reclaim the February opening level. This was something of a surprise as the UK announced a 25bps rate cut earlier in the month and, like most markets, reacted sharply to trade war threat coming from the US.

CPI surprise may help explain somewhat with headline at 2.5% instead of the projected 2.6% and even more so Core, which came in at 3.2%; 0.3% below previous month and 0.2% below forecast. This appears to have boosted confidence in the steady handed approach adopted thus far by the Bank of England and UK Gilts are as a result becoming a relative safe haven amid global bond volatility. Upside is limited, clearly, but for those considering defensive positioning and who are comfortable with duration risk in their portfolio, the UK presents a reasonable option at present.

Eurozone and Japanese Markets

German Bund Yields had an interesting February, climbing from 2.387% to 2.549% on the 19th (there it is again!) before falling back to 2.3865% on closure for a round trip month. ECB signals for potential rate cuts in Q2 may have played a part here, but given the timing I think one can assume that the emerging threat of a US vs EU trade war (via tariffs) may also have played a significant role.

The Japanese 10-year was up from 1.294% to 1.376% through the month, but climbed as high as 1.450% by the 19th. The Yen weakened further as the BoJ retained it’s accommodative stance in the face of rising inflation (3.0% to 3.2%). There’s little of positive interest in the Japanese Bond market, as has been the case for quite some time, from a returns point of view.

Cryptocurrency Market Trends

February, Seasonally one of the best months for Bitcoin and the wider Cryptocurrency market. Only twice since 2013 had February been red for big orange and with the tailwinds of institutional adoption and the first ever US Government backing the asset class surely February would continue to be green. That’s certainly what the majority of Cryptocurrency market participants, myself included, concluded going into the month.

I rarely like to be on the side of consensus as, in markets especially, consensus generally is the losing side. The irony of this asset class, one built on consensus, operating from a price action perspective against it isn’t lost on me! But alas, this is how it played out, like it has done so many times in history. I like to be contrarian, but only when I have reason to be and on this occasion I didn’t. A lesson for all newbies that no-one can ever be right all of the time and anyone who claims to be is, in my experience certainly, either a liar or didn’t understand the question!

As it turned out Bitcoin and Crypto in general got caught up in the back and forth which affected Risk On markets, as we discussed earlier. For the first 3 weeks of the month it was sideways consolidation with a potential ABC risk always looming on the chart. Week 4 and targets for this C were met swiftly with an 18.77% drawdown confirming a 17.39% drawdown for the month. March started positively (on yet more POTUS crypto news) but has since given back most of those gains.

For what it’s worth my view on Bitcoin hasn’t changed. It remains in a strong Macro uptrend and has completed a large corrective structure into areas I’ve shared on my charts for months. Nothing yet has invalidated my $134k – $157k base case. Invalidation remains firstly at the current lows (~$78k) and confirmed with weekly closures below ~$73k. If these levels are breached I consider something else (and there are left tail risks here). Until then, no drama for this investor: I’m positioned and I execute the plan unless invalidation is presented.

The most significant news for the Cryptocurrency market came on March 2nd, as I write this report. I poked a little fun at the Bitcoin Maxi community in January (absolutely warranted!) for their reaction to the multi asset reserve hinted at by the incoming US administration, an outcome I’d been quite vocal on since middle of last year. An excerpt from January with a high level overview of these thoughts is copied below.

This has once again set the Maxi community on fire, but this investor hasn’t changed his mind on the sensibility of this as an overarching goal for a strategic reserve. Utilising an asset with significant counterparty risk on it’s own, one that you can’t control by it’s very design, was never likely to be received well by policymakers. A more acceptable endgame would be splitting such a reserve between Bitcoin and a number of locally owned and operated assets that can be controlled through mutually beneficial regulation, something that the new administration has made very loud noises about.

Those knee deep in the Cryptosphere will argue relentlessly about the validity of those assets mooted for inclusion, based at worst on their tribal attachment to their own bags and at best on their utilitarian view of the merits of each project. But, in my mind at least, even the latter argument (the only one of the two worth consideration!) fails, as from a risk perspective the utility, decentralisation, or use case (and everything in between) matters far less than longevity, location and influence. This is why I namechecked SOL, ADA and XRP in January and why I was not surprised in the slightest when they appeared on the POTUS list of assets despite so many telling me they couldn’t possibly be.

The next question though is do they all make the cut in the end? I’m not saying there’s a history of this administration saying one thing and doing another…….no, actually, that’s exactly what I’m saying. As always, the proof will be in the pudding, so let’s see where we get to later in the year.

From a technical perspective both XRP and ADA still look bullish here, I favour continuation (eventually). XRP has completed a break and retest of its ATH candle body close (where the volume resides) which coincides with the previous bull run high on a monthly scale and sits well within it’s weekly range despite giving back most of the “Trump Pump”. ADA similarly looks to be in a good bullish structure, well inside of weekly range with a retest of previous wave 1 high. Nothing is for certain on any asset and I have clear invalidation points for both, but the potential inclusion in a US strategic reserve is certainly another tailwind to add to their positive columns.

From a wider market perspective, I still favour upside momentum (with the usual retracements/consolidations) through at least H1 of this year and I’ll review again through summer as the potential for defensive positioning across the Risk On sphere emerges.

Key Economic Data Releases

Federal Reserve (Fed)

ISM Manufacturing PMI came in at 50.9 versus both previous and forecast of 49.3. An actual greater than 50 in this metric generally indicates industry expansion and is considered a leading indicator of overall economic health.

Non Farm Payroll was above expectation, 183k versus 176k previous and 148k forecast. Unemployment claims ticked up slightly: 219k versus 208k in January and 214k forecast but overall unemployment fell from 4.1% to 4.0% against a 4.1% forecast. I think these numbers represent a continuation of the balanced labour market theme discussed in January, which one might expect with any recession fear coming further into the future (H2 at the earliest).

Headline CPI came in above expectation at 3.0% YoY (2.9% forecast and previous) and 0.5% MoM (0.3% forecast) with Core inflation coming in at 0.4% MoM, double the previous month and 50% above forecast (0.3%). In the context of trade wars and tariffs announced by the new administration this metric is one I expect to see expand rather than contract through the remainder of H1. This is net positive in the short term for asset markets but longer term remains to be seen.

Retail sales fell sharply, down -0.9% month on month versus forecast of -0.2% and a previous month of +0.7%. This isn’t overly unusual for February, but something to monitor if everyday Americans are spending less with inflation trending upwards.

All things considered the US economy is still signalling resilience which is good for asset markets and plays with my view that we have at least H1 2025 before I start to look at rebalancing my portfolio and taking a more risk off stance.

Bank of England (BoE)

MoM GDP growth showed signs of life with a surprise 0.4% increase versus previous and forecast of 0.1%. CPI though also came in hot, headline at 3.0% versus forecast of 2.8% and previous month of 2.5%. Retail sales were up 1.7%, well over the 0.4% forecast following a January that had a decline of -0.6% and that doesn’t play well for rising inflationary fears. With these datapoints then it was something of a surprise to see a 25bps cut to interest rates, down to 4.5%.

These are though lagging datapoints so one worth monitoring closely over the remainder of H1 rather than scratching the head about too much now. I do wonder though if this is the bottom, for the moment, for UK rates. The FTSE’s resilience discussed previously along with an uptick in inflation and rising consumer spending contrasts with these fundamental datapoints, suggesting external factors (e.g., currency flows) are at play.

European Central Bank (ECB)

CPI and Core CPI remained steady across the Eurozone at 2.5% and 2.7% respectively. In January the ECB had already announced their decision to lower the three key ECB interest rates by 25 basis points. The deposit facility, the main refinancing operations and the marginal lending facility decreased to 2.75%, 2.90% and 3.15% respectively from 5 February. They again hinted towards further cuts in Q2 if inflation concerns continued to soften but this remains in question given the looming Trade War with the United States and the threat of reciprocal tariffs.

All things considered, February’s data supports cautious optimism in the Eurozone.

Bank of Japan (BoJ)

CPI came in above expectations (3.1%), rising to 3.2% YoY, another move up from last months 3.0%. Interest rates remain unchanged, but market expectations are that they’ll likely raise in the coming months. Some predict a single rate hike to 0.75% sometime during the third quarter of the year based on recent signals. The current rate remains at 0.5% though following the January increase. 

Emerging Risks

Geopolitical Tension

U.S. tariffs escalated tensions, with Canada’s retaliation followed by Mexico threatening 20% tariffs on U.S. exports. China signalled potential countermeasures, while Europe and Japan brace for Trump’s next moves having threatened tariffs as a retaliation to VAT (a silly comparison as I’ll get into later). Trade wars are heating up, with consumers likely to bear the brunt through inflation which we’ll come to in a moment.

There’s also the tension around Ukraine, with Trump trying to manufacture a peace deal by threatening the removal of US support unless Ukraine agrees to a mineral deal with the US, no doubt one that sees Trump himself benefit greatly. He’s a businessman who understands how to use leverage, whatever you think of him, so seeing him do so in a situation with wide reaching global consequence really shouldn’t be a surprise to anyone. The outcome of this will most certainly have an impact on markets as well, so one must remain cognisant of the fine margins at play in this arena.

Inflation Concerns

Service sector inflation and tariff effects pushed U.S. CPI higher, with global spillovers evident in Japan and the UK. Though the Eurozone held steady in February, one might expect follow through here too in March so certainly something to be watchful over. Rate cuts remain elusive in the US, challenging my recession timeline somewhat, though H2 2025 still looks plausible as consumer spending weakens.

Currency Fluctuations

The USD remained strong with the DXY more or less level in February. This has started on a downward trajectory in March but as inflation fears and potential rate stickiness emerge this could hang around for a while. Emerging market currencies and the yen took hits, amplifying import costs and multinational earnings risks. Ideally we’d like to see a weakening Dollar to help provide liquidity to asset markets as the global debt refinancing cycle begins in earnest into Q2/Q3.

AI Sector Uncertainty

Deepseek’s impact clarified slightly since January: its cost advantage is real but overstated. U.S. tech firms regained ground as a result, though long-term competitive pressure remains a wildcard risk we should be aware of, given how much the AI bubble is propping up the main US indexes.

Assets of Interest Moving Forward

• Gold: Up ~2% in February as a hedge against inflation and currency volatility. Still a contender if yields plateau and on a long term basis I am seriously contemplating a small allocation here in place of traditional fixed income in a balanced portfolio.
• Cryptocurrency: Bullish Q1 outlook holds, with Bitcoin eyeing $120k+ post current retracement and altcoins targeting a $2.5T–$3T market cap. For me those projects announced as part of the US Strategic Reserve make the most sense and I positioned here long ago. I don’t have any SOL (as a matter of personal preference) but I do hold XRP, ADA, XLM, DOGE and BTC. I expect positive tailwinds for these coins into H2 this year.

Potential Portfolio Adjustments

Currency Hedging

For those with international exposure, consider hedging against the dollar, especially if your investments are in regions where the local currency might depreciate. With the DXY posturing strength technically and the Fed signaling for higher rates for longer (net positive USD) any positions you hold in US equities (for example) that are denominated in local currency are likely exposed to higher currency risk through 2025, particularly H2 if (if!!) a recession does come and we see QE used to stimulate growth.

Sector Rotation

Utilities and healthcare gained traction in February: early signs of a defensive shift. Too soon for me, but worth watching. Again, with 3-6 months minimum remaining in an equities (and general risk on) bull market I think it’s a little too early for this approach and won’t be in my considerations for Q1, but again warrants mention given the hawkish tone change and longer term outlook. I think this likely a consideration that will stay on here till end Q2/Q3 time before I look at it seriously.

Cryptocurrency

If you have an appetite for high risk, increasing allocation slightly and targeting U.S.-based altcoins with regulatory tailwinds may be a reasonable play for the remainder of 2025. With ETF’s on the horizon, SEC cases being dropped near weekly and the incoming administration adopting a positive stance on digital assets the risk/reward for sensible plays here is favourable in my opinion.

Equities & Risk On

In case I haven’t said it enough! I think we have 3-6 months minimum in this bull trend across the Risk On classes. My personal taste, for now, is to continue to allocate the majority of my capital here (along with cryptocurrency) and milk as much return as I can before I anticipate becoming more defensive later in 2025. I’ll review this again at the end of Q1.

Looking Ahead: Remainder of Q1

Trade Wars, Tariffs and Tycoons. The three T’s are where it’s at in my view for the remainder of the quarter with an eye on US data releases through March and the Fed Funds rate decision on the 19th. We’ll also get an update on the FOMC economic projections to set market expectation for the coming quarters.

We should see if Trump (our Tycoon) can broker a peace deal in Ukraine (to his mineral benefit of course) and we should get more detail on how the US plans to approach the digital asset space going forward. Tariffs have been implemented for Canada (and by), Mexico and China so we should have some early detail on the local impacts on the US economy by month end and we should also have a little more detail on how Trade Wars with Europe and the UK might play out going forward too.

Part of me thinks Trump is trying to “pull a Reagan”, the republican president generally thought to have had the best economic record of our times. This was achieved mainly by tanking the economy (and markets) early in the term where it was easy to blame the previous administration (as we’re seeing constantly!) by using the levers he had available to him as President without the need to pass laws through Congress.

As he starts to lay the foundation for his economic policy through these law changes later he can recover by mid terms and the latter part of his Presidency to great acclaim. This theory does play with my H2 fears for this year and in the context of what we see from the White House at present is something of a concern. It obviously doesn’t play too well with my 6 months remaining Risk On thesis though!

Time will tell.

Spotlight: VAT is not a Tariff!

VAT is applied uniformly across all goods and services within the local jurisdiction, whether they’re produced domestically or imported. At each step of the supply chain, businesses charge VAT on their sales but can reclaim any VAT they’ve paid on purchases. This means only the value added at each stage is taxed, avoiding the cascading effect where tax is applied on top of tax.

A trade tariff, on the other hand, is a tax or duty placed on imported goods specifically, aimed at regulating international trade. They serve multiple purposes, including protecting domestic industries from foreign competition, raising revenue, or retaliating against trade practices deemed unfair by the imposing country (the latter being the claim here). Unlike VAT, tariffs are not applied uniformly; they’re selective and can vary significantly based on the type of goods, country of origin, or trade agreements in place. They’re imposed at the border upon importation and paid by the importer (generally with that cost passed on to the local consumer by way of higher prices).

Why VAT Isn’t a Tariff: Uniformity vs. Selectivity

VAT is a broad-based tax that applies to all consumption, regardless of the origin of the goods or service. It applies to local goods the same way it does imported goods. In contrast, tariffs are selective, targeting specific goods from specific countries. The application point is also very different. VAT is collected at various points in the supply chain, culminating with the end consumer, whereas tariffs are applied at one specific point: the border when goods enter the country (paid by importer).

So, VAT affects all domestic and imported goods equally in terms of taxation, as such promoting a level playing field in terms of taxation. Tariffs, however, distort this level playing field by making foreign goods more expensive, skewing competition in favour of domestic producers.

In conclusion, while both VAT and tariffs increase the final price of goods, they serve different economic functions and are applied very differently. VAT is fundamentally about taxing consumption in a neutral manner across all products and services where tariffs are explicitly about controlling imports, often with protectionist motives. The distinction lies not just in their application but in their economic rationale and their impact on trade dynamics.

TL:DR

Claiming VAT is equivalent to tariffs and applying one internally because of the other externally is both disingenuous and silly. It’s essentially applying another countries local tax to your own consumers. It’ll raise additional revenue, sure, but it’s not a tax on foreign countries, it’s applying a foreign countries tax to your own citizens and, essentially, if they’re to be applied like for like as claimed, giving other nations control over setting your local sales tax for imported goods, which your own citizens will pay.

Countries who use it are unlikely to ever change their VAT stance in the face of tariff threats because VAT applies to ALL SALES in their jurisdiction, not just imports, local too. It’s an important part of their overall economy, essentially a local sales tax (for US readers). The tariff being threatened is not paid to the country charging VAT, but the VAT collected in that country is. So asking a country to remove VAT they do collect tax income from to stop an import tariff in another country that they don’t pay or collect any tax income from just makes zero sense from an economics perspective.

So yeah, it’s a false equivalence and I’d be really surprised if POTUS, a smart guy, didn’t know that. This isn’t reciprocal tariffs, it comes across more as a bargaining chip. So with that in mind, I start searching for alternate incentives for him to make the claim…….

Conclusion

February 2025 built on January’s foundation, with markets navigating tariff shocks, inflation upticks, and tech recalibrations. Risk-on assets held relatively firm from a structural perspective despite the mass panic across the market(s), led by tech and crypto, though cracks appeared in small-caps and consumer data.

Q1 remains a window for gains, but H2 recession risks loom larger as tariffs and trade wars reshape the economic landscape. Flexibility and vigilance will define success in this volatile year.

Build your plan, know your invalidations, execute without emotion.

At times like these we see massive swings from week to week in sentiment, with a fear & greed index that’s almost bipolar. Markets live to suck the life out of you, to make you irrational and to feed off your bad choices. As one of the greatest investors the world has ever known said: “Markets are hugely efficient at transferring wealth from the impatient to the patient”. And in the words of another: “There’s a time to go long, a time to go short and a time to go fishing”. For me, I’m at the watering hole with my fishing rod. Vigilant, yes, flip flopping between macro thesis on a daily basis, absolutely not.

The hard work is done, the positions are set, now I wait for target or invalidation. Patience.

“Lang may yer lum reek.”