|
|
Musings Report 2023-2 1-7-23 2023 Investment Outlook: The Year Everything Happens at Once
You are receiving this email because you are one of the subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings reports: they're a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
2023 Investment Outlook: The Year Everything Happens at Once
I'm continuing my series of Investment Outlooks that are not predictions but attempts to illuminate potentially key drivers and variables of the investment/speculation universe.
Everyone wants a trend or meme that they can follow to make money in a low-risk, predictable fashion. For example, "don't fight the Fed," buy Big Tech, bet on higher interest rates, etc.
I don't see this desire for primary predictable trends being fulfilled in 2023. It's more likely to track William Gibson's famous line: "The future is already here, it's just not very evenly distributed."
That is, everything everyone expects / predicts will happen at once, just not everywhere at once. It will be a jumble, not a clear trend.
Those expecting inflation will find it, those expecting deflation will find it, those expecting a stock rally will get a rally, those expecting a crash will get a crash, and so on.
The basic driver is the forces that drove reliable trends have all weakened or reversed:
1. ever-lower interest rates lowered the cost of credit/capital to near-zero
2. the deflationary forces of globalization: everything got cheaper and disposable
3. expanding workforces increased income and consumption
4. credit/asset bubbles created wealth without productivity improvements or sacrifice
5. energy supply kept up with rising consumption
6. the external costs of the "waste is growth" Landfill Economy (pollution, depletion, etc.) were ignored / not priced in
These titanic forces still have the momentum of recency bias: most people expect the 2020s to be an extension of the 40-year Bull Market in Everything.
Feedback (doing more of what's failed) and buffers (print more money and everything will be fixed) are working to maintain the status quo sand castles as the tide rises.
Those castles closest to the sea will dissolve first (the periphery I often refer to). Those with resources will be shoveling sand to build walls around their castles.
But the tide is relentless and so we're in a period of flux where those benefiting from the status quo are fighting the erosion of all the forces that enabled the status quo to reach such heights.
As they lose ground, they redouble their policy efforts, pushing policies to new extremes--extremes which further destabilize the system.
The global economy is a complex self-organizing adaptive system, and so blunt-force policies intended to protect the status quo stability end up generating unintended consequences which have their own consequences (the second-order effects I often mention).
Those trying to control the system will find their control is imperfect.
Long cycles are now in play. Interest rates fell for 40 years--the longest such run in recent history. Now interest rates will rise for some period of time, likely culminating in a financial crisis with no easy resolution, because printing money--the solution for the past 40 years--will be the problem, not the solution.
Demographics are also in play. Workforces are shrinking, the number of retirees living off the earnings of the workforce is soaring.
The world desires ever greater quantities of energy and consumption, but the cheap, easy to exploit materials have already been exploited. Now everything will become more expensive, regardless of technological improvements.
Physical, chemical and cost limits will matter.
Whatever we seek, we can find--but that may prove ephemeral.
Look at these charts of the S&P 500 (SPX), the primary index of the US stock market, a casino of $40 trillion sloshing around.
Here's the Bearish pattern: a downward-sloping channel.
Here's the same chart with the Bullish patterns: positive divergence in indicators/price and an inverse head and shoulders.
Which one will prove correct? That's unknown. But given the sour gloom of near-certain recession, a massive rally wouldn't surprise me in the least.
As Santiago Capital tweeted last week (I'm paraphrasing here): what's the Black Swan nobody sees? How about the Federal Reserve succeeding in tamping down inflation without triggering a recession or market collapse?
A Black Swan indeed.
As for bitcoin, the crypto-sector is embattled, and regulatory responses are still very much up in the air.
But a mildly bullish case can be made for a pop higher in BTC and cryptos, however limited in scope and duration it might be.
There may not be any long-term rally; there could be a rally higher, then another slow decline to previous lows that proponents do not believe are possible (for example, BTC to $5,000 or lower).
So what do we do in such a mad carnival, such a mixed bag, such a swirl of forces contesting the tide?
One approach is to seek so-called deep value, sectors with actual revenues and products/services filling predictable needs that have been left for dead, sectors nobody will touch with a 10-foot pole.
One such sector is cannabis, which has been completely destroyed, with losses ranging from 65% to 99%.
The federal government continues to list cannabis as Schedule 1, as dangerous and addictive as heroin. As long as the government clings to this absurdity, the sector may well be dead in terms of financial viability.
Will this ever change? That's unknown. The risk of guessing when cannot be reduced to zero.
Pursuing deep value is fraught with risks. Those who are confident commodities are the guaranteed deep value plays have a point: real stuff that's scarce goes up in value.
But the casino of global markets is influenced by action on the margins of supply and demand and speculative excesses, so oil can fall from $147 to $35 even though the long-term picture is arguably deep value.
In my experience, it's wiser to accept the disorder and unpredictability rather than futilely seeking a durable trend to ride.
The market excels at throwing both Bulls and Bears off the bus. Placing bets that current trends will endure is risky. Placing bets on new trends taking hold is equally risky.
This suggests accepting that every position is short-term, and accepting that risks are structurally higher in such a swirl of conflicting forces.
If no speculative position meets our standards of risk and return, cash is a position, too, as many smart people remind us.
Assuming even calculated risks will become losses is a safe assumption, and assuming we'll get our head handed to us on a platter regardless of what we do will inform our decision-making processes with useful caution.
One last factor I see as under-appreciated is the tremendous reserves of speculative fervor that have built up in the past 25 years.
Huge fortunes have been made by betting on speculative bubbles rising higher than prudence suggested was possible. (I'm old enough to recall the torrid gains triggered in the late 90s by a positive semiconductor book-to-bill ratio.)
These gains still fire the imaginations of speculators large and small, and so any rally in a speculative asset--which now includes every asset--will be chased with great vigor and confidence.
In other words, the desire to speculate on something, anything, is still immensely strong. That desire will manifest in one asset or another, inflating new rallies and pulling in punters far and wide.
But the tides are relentless and any such speculative frenzy is unlikely to last as long as the proponents expect. Gains may best be harvested before greed distorts our risk appraisal mechanisms.
Machiavelli's wisdom applies here: "The wise man does at once what the fool does finally."
In other words, perhaps there will be no sure things anywhere in the speculative universe.
It will take multiple crashes to whittle away at this speculative fervor. The forces strengthening sand castles will gain the upper hand for a short while, and spectacular gains will be reaped, and then the tides will erode more sand castles and valuations will fall.
The process of draining the pool of speculative fervor will take years. If there is anything that's a sure thing, it's that the pool of speculative fervor will be drained, as impossible as that seems in this moment in history.
At truly tradable lows, speculative fervor has been extinguished. All the trend-following gamblers' sand castles have been washed away, and the prudent have given up guessing as a fool's game.
Where does all this leave us in 2023? I would venture there are five principles that would serve us well:
1. Understand every investment is a speculation and calculate the risks accordingly.
2. Manage our calculated risks tightly. Take nothing for granted. If the opportunity to gain is highly uncertain, avoid speculating. As Sun Tzu advised: "If a battle cannot be won, do not fight it."
3. Understand gains may be both impressive and fleeting.
4. Given the rising tide, limiting our losses (to inflation, deflation, etc.) may take precedence over racking up gains.
5. Flexibility and nimbleness become the most valuable traits / assets in periods of flux. Lao Tzu: "Rigidity leads to death, flexibility results in survival."
Highlights of the Blog
Who Would Benefit from a Severe Global Recession? (1/6/23)
How Easy Is It To Become Middle Class? (1/5/23)
Misunderstanding War, Money and Prosperity (1/2/23)
Best Thing That Happened To Me This Week
Planted six rows of vegetable seeds and some of each sprouted. Now we wait for the seedlings to be strong enough to transplant.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
California finance department spokesperson explains how state went from record budget surplus to possible $25B deficit-- depending on the capital gains reaped by the top 1% for 50% of state income tax revenues is not sustainable....
20 Entertaining Uses of ChatGPT You Never Knew Were Possible -- yawn...
The Perils Of Endemic COVID-19--nobody's interested until they get it...
Over $30B of NFT Trading Volume on Ethereum Is Wash Trading, Research Suggests--how to destroy credibility and trust in one easy lesson....
The Metamorphosis of Prime Intellect (novel)(via Tommy C.)
The New Geopolitics of Global Finance (Brad Setser)
"Just as financial intermediaries globally had to absorb U.S. 'subprime' (household) risk prior to the global crisis, now they have to absorb U.S. interest rate risk."
Will the Chinese renminbi replace the US dollar? (Michael Pettis)
An Exorbitant Burden: Why keeping the dollar as the world's reserve currency is a massive drag on the struggling U.S. economy.
"There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things." Niccolo Machiavelli
Thanks for reading--
charles |
|
|
|
|
|
