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  • Richard Murff

Well, That Sucked...


The year that was…was just terrible. Epically so. The stock markets took their worst beating since the financial crisis and the bond market had its worst year since ever. Even the hallowed British gilts almost imploded, and that’s saying something since it was the Brits who invented the government bonds back in 1694 in an attempt to outspend the French crown in an arms race.


2022 was also a year that nearly everyone from investors to the Fed got wrong. The thinking was that the inflation Biden created while trying to beat Trump in a stimulus race would go away. So naturally we’re kicking off the New Year with a raft of predictions from the same people who whiffed last year so badly. In the defense of the market gurus, the late chaos wasn’t really created by anything that we’d call the market fundamentals. The inputs to the global financial situation in 2023 are geopolitical, which is driven by commodities, behavioral phycology and Game Theory.


What the Hell Just Happened?

Oh, sure, all the Monday morning geopolitical analysts claim that they knew Mother Russia was going to try to eat her neighbor, she’d been nibbling at Ukraine’s toes since 2014. The truth is that it caught most of us off guard. Personally, I missed it not because I wasn’t looking, but because it was such a colossally stupid maneuver with no good way to climb down, I figured that the man had to be bluffing. Evidently I got 2022 wrong as well.

Now, in addition to the first major European war since the 1990s and the largest since the 1940s, the world is facing a geopolitical decoupling inconceivable a generation ago, along with an energy shock not seen since the 1970s. Free markets are in retreat before protectionism, and troubling emergence of bail-economies is going to blow government debt to the moon. On the bright side, all of this makes the implosion of the crypto-markets seem merely tedious, no worse than a being cornered by a crypto-bro at a Christmas party.

More troubling for the set whose portfolios aren’t guided by memes, corporate profits may be trend downward for the foreseeable future. Financial firms reckon that roughly a third of the S&P 500 profit growth over the past 20 years have been generated by historically low taxes and interest rates. Interest rates have hockey-sticked, hitting those that borrowed at floating rates first, but that only affects about 11% of the S&P 500 immediately. The bulk of corporate debt will need to refinance at some point, but only God and Jay Powell can say what rates will be when the time comes. After the massive bail-outs and stimulus, government are going to take a bigger bite in taxes at the same time that workers are demanding higher wages. Profits are going to get crunched.

And yet… nominal sales were up some 4% despite an uneventful Christmas. That’s sounds good, but doesn’t factor in inflation, which was up 9% for the same period. Basically, people are spending more, not really buying more.


What Are We Going to Do About It?

Well there is no mystery about what the Fed plans to do about it: raise rates until something snaps. Although, just why investors won’t admit that this is the plan is something of a mystery: The case history against knocking off early with inflation and energy shocks is both limited and clear. Jay Powell appears to be trying his best to be clear, concise and not spook the crap out of the markets, but investors keep betting that the era of cheap money will make a quick return.

The bottom line is less that the market thinks that Powell won’t do what he says, but that he’s simply wrong about inflation. And he might be, but prices are looking annoyingly sticky. The stock and bond markets will factor this is, but more pain is likely, certainly in segments like private equity and property where mark-downs are slower to happen.

In short, don’t expect rates to drop by summer, the likely scenario is that the late market chaos returns to normal parameters by then. Let’s factor in a recession: two quarters, but not a year. Annoying, but noting we’d call a crisis.


And What is That Going to Do?

Fintech is likely going to see a shake-out as the sector took in a lot of funding from investors during the pandemic when cash was cheap. In short, they took the money, and now they need to put out.

Energy prices will fall, but not by much, which cuts both ways: At the beginning of the conflict in Ukraine, Russia was holding all the energy cards in Europe. As the conflict drifts into a second year, the cards are shifting away from the Kremlin. Moscow may have shut off the taps, but the longer they keep them off, market share and capacity erode. As Europe has withstood the weaponizing of its energy, and as the flow of oil around the globe shifts new outlets that the EU is sourcing would not unwind. The Middle East has shifted from Asia to Europe to make up the shortfall as sanctioned Russia oil has shifted to Asia. If Russia withdrew from Ukraine tomorrow, it’s doubtful that the European demand for Russia energy would resume.

Still, Europe is facing an energy crisis, and its heavy industry, including carmakers, are limiting production as firms don’t see how they can pass the costs on to consumers. What this means is that US and Asia carmakers are going to have a competitive advantage.

Another industry likely to boom is Tourism and Travel as airlines are expected to return to profitability sometime in 2023 after the losses and debt that came with the pandemic beat-down. And if you are looking someplace to go, the Arab world will get a boost post-World cup as it is not currently on fire and the high energy prices the Europeans are shelling out are making the place splashy.

So what is our official 4717 prediction for 2023? Something along the lines of “not great but not as bad as all that.” Hell, by certain metrics we can’t even tell if we’ve already had an mild recession this year. Everyone is confused. Drinking helps.

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