One Certainty For The Year

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Recession 2023 - This year, look for the letter "R".

A third of the global economy will be in recession this year, according to Kristalina Georgieva, managing director of the International Monetary Fund (IMF), and 2023 will be more complex than last year. There is no way out because the US, the EU, and China are all slowing simultaneously.

Who is at fault? China’s President Xi Jinping is the front-runner. President Xi – he can’t get it right. China’s zero-Covid policy, promoted by President Xi from the start of the pandemic, meant that lockdowns erupted across the country during 2020-22, disrupting global supply chains and exacerbating inflation everywhere; it could hardly be otherwise given that China accounts for nearly 20% of global GDP (GDP). As workers were compelled to stay at home, the supply of commodities decreased, causing prices to rise.

And now, following the hasty abandonment of the zero-Covid policy at the end of last year, the Covid virus and its variations are ravaging China and upsetting supply chains as businesses struggle with a labour crisis.

“For the next several months, it would be terrible for China,” said Georgieva. “The impact on the Chinese economy would be bad, the impact on the region would be negative, the impact on global growth would be negative.” China is probably going to slow down global growth rather than accelerate it. Georgieva declared, “This has never occurred before.”

Permacrisis

That, according to the Collins English Dictionary, was the word of the year the previous year. 2022 was draining almost immediately. The much-anticipated US recession of 2022 has been pushed back to this year if it comes at all; not everyone agrees with the IMF’s leader, despite widespread predictions of a recession in the US caused by increased interest rates.

The constant rising of US interest rates may not have created a recession (conventionally defined as two consecutive quarters of fall in economic activity). Still, the higher rates were highly destructive to investors in equities, bonds, and cryptocurrencies in 2022.

The most significant long-term US government bond price decline since 1788 occurred last year. It was the worst return for bonds and stocks since 1932. The S&P 500 index lost $11 trillion in market capitalisation at its lowest point in 2022, about equal to the total yearly economic production of Canada, Germany, and Japan. The production of France or the UK was lost in only the tech stocks.

Cryptocurrencies had a terrible year in 2022. The famous National Bureau of Economic Research (NBER) in the US conducted research that was released in late December and concluded that “wash trade” accounted for, on average, more than 70% of the reported volume on each unregulated crypto exchange.

Wash trading is a type of market manipulation when a trader or traders concurrently purchase and sell the same security to create the appearance of activity. It’s forbidden and undoubtedly immoral. According to the NBER research, “trillions of dollars yearly” are wasted on washing. This may only corroborate existing theories, but crypto enthusiasts won’t be deterred.

It may also encourage TS Lombard, a forecasting consultancy, to make a “non-prediction” for 2023, according to which a new cryptocurrency dubbed LOLcoin “would arise and swiftly acquire popularity, motivating many individuals to deposit their life savings in it.”

Where to turn?

For investors in most assets, including real estate, 2022 was a terrible year. In the US, new mortgage applications in Q3 2022 were down 47% year over year; in the UK, November had the most significant monthly decline in property prices since 2008. Swedish home values have decreased by 15% from their peak in early 2022, while Deutsche Bank predicted a 25% decline in German home prices at the beginning of December.

Where else might you have gone to safeguard your wealth?

Consider central banks, which have amassed more gold than at any point in the previous 55 years. It almost seems like central banks were stockpiling supplies for an impending storm. According to some observers, the larger central bank purchases of gold are intended to send a clear statement that they don’t want to be overly exposed to the US Dollar. In 2012, the central bank of Russia had more than $150 billion in US Treasury bonds; today, that amount is closer to $2 billion, while gold has increased to more than 1,350 tonnes.

Additionally, gold managed to hold onto and even extend gains made in prior years, while the majority of other asset classes took a severe hit last year. Early in January 2022, the price of gold in US dollars was $1,795.19 per ounce; on January 1 of the current year, it was $1,823.70, a marginal increase of approximately 1.6%. The growth during the same period was much more pronounced in Pound Sterling terms, coming in at 14.5%.

Given that the US Federal Reserve increased interest rates to a range of 4.25%–4.5%, the highest level in 15 years and a strengthening of the Dollar, this was a remarkable accomplishment. The issue is: What might the gold price have been if the Dollar hadn’t been so strong? Generally speaking, a stronger Dollar tends to reduce gold prices. There is no way to respond to such a counterfactual.

When may the Fed stop raising interest rates? If it stays loyal to its statement from last December, rates will increase to between 5% and 5.25% this year. The earliest rate decline we can currently anticipate is in 2024.

Even if the consumer price index (CPI) has already decreased to 7.1% from 10.7% in the UK, inflation still disturbs the sleep of those in charge of economic policy in the US. Though it is still far from the “goal” of 2%, authorities are committed to stopping inflation and will keep raising interest rates until a recession appears imminent.

Covid, supply chain problems, and the Russian invasion of Ukraine are frequently cited as causes of inflation. Still, the real culprit—a significant rise in the money supply during Covid’s worst days—is just as frequently overlooked.

The M2 measure of the money supply (which includes fiat currency, savings deposits, and shares in retail mutual funds) increased from about $14 trillion to above $21 trillion between 2018 and the beginning of 2022, where it is currently. In the most recent recession, which lasted from February to April 2020, more than 24 million Americans lost their jobs, and US unemployment reached 14%. It’s different now since the US employment market is still quite robust, and average hourly wages have increased by around 5% since last year.

The risk for 2023 is that the Fed will continue to tighten the money supply beyond what is necessary and cause a recession. At this point, it will start to lower interest rates and may even feel the need to give voters more “stimulus” money in a Presidential election year. The US economy is still running very warm, if not hot. The UK is rapidly showing indications of a recession; in 2022, there were 47 store closings each day, which was the highest rate in five years.

It’s going to be a challenging year again.

Do you have any advice for us? Let’s discuss this in the comments below.

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Latest Update on January 6, 2023

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