Consider this, Consider this the hint of the century
Consider this, the slip, that dropped me to my knees, failed.
What if all these fantasies come flailing around?
And now, I’ve said…. too much
— R.E.M. – Losing My Religion
I probably should have codified these before the turn of the new year but I didn’t even think of doing one of these lists until someone mentioned it on Twitter a few days ago.
So, here it goes.
My predictions for 2023 and all center around the big theme of 2023, the loss of confidence in the world we’ve always known. In other words 2023 will embody the phrase we use down here in the South, “Losing my Religion.”
1) Inflation will return with a vengeance.
What we’ve experienced so far came from the big commodity pump-and-dump post-COVID. Commodities went through a massive run as more money chased broken supply chains in 2020-21. Then in 2022 the inevitable bust happened, but left us with commodity prices across the board at levels which used to be resistance on the long-term price charts which has now become support.
The next round of commodity-based cost-push inflation will mix dangerously with the growing realization that we can’t avoid things breaking. There will be no ‘soft landing.’ The hard landing may not happen in 2023, but the set up for it will certainly take place.
Cost-push will mix with Loss of Institutional Confidence to light the fire of real inflation versus tangible assets in a way we haven’t seen since the late-1970’s. We should see a return to increasing YoY CPI levels beginning in Q2 after the baseline effects are past and China’s reopening keeps a bid under commodities.
January will not set the tone for commodities in 2023, but more likely be a ‘false move’ overcorrecting against the primary trend, which is clearly higher.
2) The Fed’s terminal rate is closer to 7% than the ~5% the markets are handicapping.
The Fed hiked by 50 bps in Dec. The markets are signaling 25 bps on Feb. 1st. I think it will be another 50. In fact, my base case now is four 50 bp hikes followed by four 25’s by December for a terminal rate of 7% by this time next year.
Even I was surprised by the violence of Powell’s hawkishness in 2022. He did what I wanted him to do, be aggressive and attack the source of Davos’ power, the leveraged offshore dollar markets. He forced out into the open the unsustainability of a weaker dollar based on the clown show on Capitol Hill being worse than the real collapsing governments across Europe.
Powell’s plan has worked so far, forcing everyone to climb the wall of worry that The Fed Put is dead. That so many refuse to accept this is why markets this January, like last January, are completely mispriced. Until this is accepted, Powell will use every excuse to keep raising rates as fast as he can to ‘finish the job.’
Today’s job’s number and unemployment rate support this. Revised Q3 2022 GDP at +2.6% is another. The market keeps wanting to believe in a 5.25% to 5.50% terminal rate for this move. But if I’m right about #1 and structural inflation returns in Q2, the Fed will not slow down until we reach near parity with, of all people, the Bank of Russia.
Rising inflation makes this prediction a slam dunk
3) The Euro will collapse to $0.80 or lower
The ECB is trapped. It can’t accept higher rates but it can’t afford for the euro to collapse either. A falling euro means energy input costs skyrocket in real terms. While a zombie banking system and Sovereigns in debt to someone else’s eyeballs (e.g. $1.1+ trillion in TARGET2 liabilities) see budgets blow out with higher debt servicing costs.
ECB Chair Christine Lagarde bought herself some time in 2022 with the TPI — Transmission Protection Instrument — and some big moves to subvert the UK government, putting Brexit on the ropes. She’s behind the inflation curve worse than Powell is. But she can’t attract capital today without big rate moves, Powell’s beat her to that punch.
Ultimately, Lagarde will protect credit spreads while letting the euro go.
The EU still believes it can bolt on more problems like the UK and now Croatia (#20 in the euro-zone) to stave off the collapse of the euro by expanding its reach. We ended 2022 with the euro ‘painting the tape’ at $1.07. It’s already given us a preview of the volatility we should expect in this first week of trading.
The Eurocrats in Brussels still believe in the EU’s inevitability, not because it is true, because they have to. The EU is a religion to the political class of Europe and its Davos paymasters. They, like real communists, see this period as the end-state of capitalism and that the dialectic is true. History was written, as it were.
They are wrong. And the beginning of the end of the European Union starts in 2023 with another 20% to 25% collapse of the euro.
4) The War in Ukraine Will Continue Dangerously
The West is suffering under many illusions about what’s going on in Russia and, by extension, its war in Ukraine. The UK/US neocons believe, like the EU, that history is already written about Russia’s future –balkanization and collapse.
All pressure that the West places on Russia only exacerbates their demographic time bomb. China’s as well. And in that sense this is the race they are running. Can they grind up enough Russians to ensure that even if Russia wins the war in Ukraine the West wins because the long-sought breakup of the USSR/Tsarist Empire will be achieved.
For this reason neither the UK/US Neocons nor Davos believe having a reverse gear vis a vis Russia is the right play. This is their strategic vision, regardless of the costs to the West itself.
For Russia there is no other play for them but to continue increasing the costs on the West. The longer the war goes on the deeper divisions within the EU get. Those divisions then drive even more animosity within the Eurocracy towards the Brits and the Yanks, who some feel are taking advantage of the situation.
When as ardent an Eurocrat as Guy Ver Hofstadt is now frothing at the mouth about the costs of sanctions, you know the Mafiosi in Brussels are getting nervous. They are beginning to crack under the strain of this war of financial and political attrition Russia is so good at playing against its European partners.
Even though I’ve argued strenuously that the EU leadership walked into Ukraine with its eyes open, the 2nd tier of the Eurocracy did not. And those are the ones having cold feet now and who the Russians are hoping will drive a pivot from Davos off Ukraine.
At the same time, expect Putin to keep opening up new fronts for the US/UK to deal with, see my next point.
The UK/US Neocons’ only play, then, on the battlefield then is further escalation to the brink of a nuclear exchange, which these insane people think they can win.
The other option is assassinating Putin in the hopes that Russia goes mad, nukes someone and that justifies the unthinkable.
Either way we’re inching way too close to midnight for my tastes.
5) The US Will Leave Syria in 2023
The recent meeting between Russian, Syrian and Turkish Defense Ministers paves the way for a similar upcoming meeting between the three countries’ Foreign Ministers.
Once that happens, Syrian President Assad and Turkish President Erdogan will presumably sit down with Russian President Putin and end Turkiye’s involvement in Syria. This will hang their pet jihadists in Idlib out to dry and leave the US forces there heavily exposed.
We’re already seeing them come under rocket fire though you’d never hear about this in the Western press. I went over this in grave detail in a recent post.
By making the deals with Erdogan over becoming the new “Gas Hub” into Europe, Putin has effectively done to the US and UK what they always try to do to Russia, open up another front to distract it from the main problem, i.e. Ukraine.
Now Syria becomes the 2nd battleground for the US to decide if it will defend or will it suffer another ignominious retreat like Afghanistan?
6) De-Dollarization Will Accelerate / USDX Will Rise.
Along with the collapse of the euro, the US dollar will lose more ground in the global payment system for international commodities and trade.
These two dynamics will create a very weird moment where the USDX — the US Dollar Index — will rise but the US dollar will be under sincere pressure vs. gold, commodities, and other rising emerging/developed market currencies.
The USDX is heavily weighted towards the euro and the British pound but the Chinese yuan is not represented at all. So, from one perspective the US dollar could be in a bull market but from another be in a bear market.
The one thing holding gold back has been its lack of bull market versus the dollar. It’s not a ‘secular’ bull market in gold until it’s rising versus all currencies. Even if the USDX does nothing but hold its ground in 2023 versus the rest of its fiat competition, a rally in gold will still be fed by people the world over ‘losing their religion’ with respect to the dollar.
That said, that fall in faith will likely not outpace the fall in faith of the “Fed Put.” I expect the ‘religion’ of the Fed Put is still stronger than the dollar itself which should put upward pressure on the US dollar overall. Because, let’s not forget that overseas US dollar synthetic short positions, known as US dollar-denominated debt, are still pretty biblical in size, keeping a strong bid under the dollar globally even as its position as a reserve and trade settlement currency erodes.
Because of all of these competing forces — inflation, de-dollarization, war, etc. — the last US dollar bull market for the foreseeable future should be on tap in 2023. For how long? It’s a good question, I can’t answer.
But I do know that it’s tied to #7 and to the Fed’s need to keep raising rates…
7) Saudi Arabia will de-peg the Riyal
In fact, I also expect the Hong Kong Dollar peg to fall, but maybe not in 2023. It depends on the strength and rate of internationalization of the Chinese yuan this year.
Oil prices are going higher once China’s economy is past the Omicron 2.0 wave crashing over it right now. The Saudis have been tendered the offer by China’s Xi to begin weaning itself off the US dollar. Crown Prince Mohammed bin Salman seems agreeable to this.
When (not if) the Saudis put their first oil tender up for bid in Shanghai, that will signal the end of the currency peg that created the petrodollar. It will be a subtle thing that will gain steam over time, just like Russia and China diversifying their holdings into each other’s debt and currencies has taken years to develop.
So, the petrodollar will continue to die by a thousand cuts. The Saudis will lead OPEC+ out of the US dollar arena, validating both China’s onshore futures markets while also moving a significant amount of the gold trade away from London to Hong Kong.
By hedging their oil profits in gold on China’s international exchange they strengthen both the onshore (CNY) and offshore (CNH) yuan markets and laying the foundation for a much different financial future, including one where the Hong Kong dollar either floats or re-pegs itself to the yuan, likely the former.
8) Oil will Open 2023 Near the Yearly Low
The fundamentals for oil are truly bullish. China ending Zero-COVID just after the EU put its idiotic price cap on seaborne Russian oil was a strategic move to subvert “Biden’s” wish to refill the now nearly depleted US Strategic Petroleum Reserve at or below $70 per barrel.
He may get that from domestic producers for a while. But Brent ended 2022 at $86 and a little downside momentum may be in place with early US dollar strength, but then fundamentals easily overcome this.
“Biden” will not refill the SPR at $70 per barrel now that China just blew up the entire “deflation through higher rates” narrative. The US economy has held up better to the Fed than expected. Even Q3 GDP wasn’t uniquely terrible. The jobs report and low unemployment rate, while possibly artifacts of a changing labor market, still give us signals that the US economy isn’t as bad as many want it to be at 4.5% Fed Funds Rate to validate their place in the commentariat.
Europe is getting a small reprieve with the extremely mild winter so far, pushing energy prices down, especially natural gas, for now.
The global recession talk is vastly overblown until something fundamentally breaks. Anyone looking at the end of the year book squaring in things like the Reverse Repo balance (+$300b in one week) is overthinking the problem. The banks are allowed to tailor their reserves to present whatever quarterly numbers they want. It’s been going on since the Bernanke Era.
As such, I see a kind of perfect storm for oil here. Russia will pull production off the market and shift exports from St. Petersburg (Urals grade) to Kosmino, near Vladivostok (ESPO grade), nabbing higher prices in the long run.
Arab OPEC can’t hit its production quotas as it is and China’s reopening its entire economy.
The Davos demanded ESG investment protocols have the oil industry anywhere from $600b to $1trillion underinvested in exploration and production and that number is rising.
Increased demand, tight supply, low replenishment investment and WAR. Even a moron or Joe Biden can see that $70 per barrel Brent is out of the question for any significant period of time.
9) Dow Jones 40,000+
As we enter 2023 the Dow Jones Industrials sit right around 33,000. It was a tumultuous 2022. After hitting a new all-time high a year ago at 36952.53 it was all downhill for most equity indices.
The stronger USD fueled a lot of capital reorganization, interest rates were finally forced higher by the Fed and incessant talk of recession kept everyone selling first and asking questions later.
But in this ‘pivot-obsessed,’ low pain environment, relief rally after relief rally was snuffed out until finally in Q4 the Dow made everyone stand up and take a little notice as to what was happening… flight to quality into tangible assets with deep liquidity pools.
The Dow lost 8.7% in 2022. The S&P 500? 15.8%. The NASDAQ? 27.7%
For all of the bitching gold bugs did in 2022, gold was up 1.6%
If we begin to move into the next stage of stagflation (#1) then the Dow will continue to outperform the broader US equity markets as well as major foreign equity markets.
2022 Foreign Performance:
German DAX in 2022: -9.2%
Euro Stoxxx 50: -7.2%
FTSE 100: 1.2%
Are those indexes sustainable given the economic outlook for Europe and the ECB following the Fed up the rate curve lest everyone ‘lose their religion’ in it? Or will the still weakly expanding US economy look more tasty to global investors and the hopeless Brits look insanely overvalued?
If we have another year like we did in 2022 where high inflation outpacing nominal growth drives tangible asset investment we should see an outperformance from the US vs. Europe as the currencies collapse and the ECB’s tools prove inadequate. Emerging Markets, depending on their proximity to China and the US may have banner years, especially those that underperformed in 2022.
10) Biden is Impeached
This looks like the long-shot of 2023, but I think we are very close to the moment where Sen. Joe Manchin (D-WV) goes one step further than Kyrsten Sinema (I-AZ) and not only leaves the Democrats but flips to the GOP, giving them the outright majority in the Senate (50-49-1)
Even though Kevin McCarthy didn’t lose his bid for re-election as House Speaker, which has turned CSPAN into must-see TV these past few days, the fight itself is indicative of serious change coming to Capitol Hill.
This is the essence of the ‘counter-revolution’ in the US I wrote about a few weeks ago.
The soft underbelly for Biden at this point is FTX and divulsions of the US Gov’t’s censorship activities on Twitter. All of these things, along with corruption in Ukraine, can easily be tied back to Biden.
The majority of people are so black-pilled at this point that they believe nothing will ever change on Capitol Hill. But the first rule of good investing is remembering that the majority is almost always wrong.
And it is the sudden realization of their real power by a critical mass of people that alter the landscape literally overnight. So, while it looks like Matt Gaetz (R-FL) and Lauren Boebert (R-CO) tilted at windmills against a terminally corrupt Uniparty, they are simply fanning the smoldering embers of long-thought-dead principles on Capitol Hill.
This was the subject of my latest podcast with Bill Fawell, the state of the revolution in the US. {N.B. Bill and I discussed his Cycle of Revolutions in Episode #110 last summer}
And when you read the rules deal that McCarthy signed to get elected, this is a recipe for the weakest Speaker from a Uniparty perspective we’ve had in decades. It’s a win. A small win but a win nonetheless.
Since the mid-terms, this transition period has exposed yet even more malfeasance by GOP leadership and the natives are more than restless. They are angry. There is no appetite for what the GOPe is selling (out) anymore.
The façade of the two-party system is over.
The 2024 election cycle begins in a few months and the mood of the country will tell you which of those up for re-election that will happily cross party lines to save their skins.
It still leaves open the idea of Donald Trump swooping in after McCarthy tries to betray this deal. Matt Gaetz told you the plan when he nominated Trump from the floor.
Embedded in the deal crafted are sincere nods to exactly the kind of signals to fiscal conservatism – halting the budget at FY 2022 levels, balanced budget in 10 years, 3/5ths vote on tax increases, etc. — that I’ve argued is needed to back up Powell and the Fed’s monetary tightening.
Congress has a bigger wall of worry to climb to regain its credibility than the Fed does, but this is a good first step. It’s the step the world wants as well.
Whether it will hold together or not is absolutely up for grabs. But more weakening of the Uniparty in the coming weeks sets the stage for getting rid of Biden and the rest of the vandals on Capitol Hill.
There are a ton of ‘manilla envelopes’ being passed out right now. There is a lot of arm-twisting and overt threats happening. The Davos Mafiosi on The Hill will call in every marker. We will see a lot of surprising behavior from unlikely sources in 2023. The energy is there for something big and the incentives are lining up.
Sacrificing “Biden” on this altar may be a small price to pay.
In closing I want you to remember that few of America’s “enemies” want the US to collapse in a disorderly manner, not even China.
Davos is the only one with that agenda in mind because it fuels their megalomania.
The strident anti-US commentariat is a curious mix at this point of shills for foreign powers, egoists who can’t bare to be wrong, and anti-capitalist ideologues talking their book. The thoughtful are few and far between and I fear they’ve been gaslit into making huge analytic errors about what’s really going on.
But when you think through what’s happening right now, everyone wants a rational, less arrogant US to settle down, accept a smaller piece of the future pie, and get back to business. Our criticisms leveled at both Europe and the US is their colonial behavior and their imperial attitude.
So many will ‘lose their religions’ in 2023 that the changes which come will blindside people, including me. Honestly, looking at this list, I think many of these predictions err on the side of caution.
That’s the core issue driving all of these trends and my predictions stem from it.
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