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2023 Predictions...
As I’ve written many times about the economy and markets, we never know where we’re going, but we ought to know where we are. The bottom line for me is that, in many ways, conditions at this moment are overwhelmingly different from – and mostly less favorable than – those of the post-GFC climate described above. These changes may be long-lasting, or they may wear off over time. But in my view, we’re unlikely to quickly see the same optimism and ease that marked the post-GFC period. Howard Marks Sea Change
We should listen when Howard Marks speaks.
Marks has been at the top of his game for nearly five decades. He’s one of the best distressed-debt investors. So he’s been through a few credit cycles.
So when Marks signals a “sea change” in the financial world… our ears should perk up.
We’ve quoted him many times in previous missives. His memos are required reading in most financial circles. But this one rang differently. (Again, you can read his latest memo here.)
Sea changes are disruptive. They cause chaos. Mostly from uncertain places.
The so-called, “unknown unknowns.” Or the infamous “black swans.”
You see, investors can model out the possibilities and fallout of the Russia-Ukraine war. The monetary hawkishness of the Federal Reserve. The opening and closing of Chinese commerce due to enforced COVID policies.
But there’s no ability to model the unknown-unknowns. Like a terrorist attack. A new deadly disease. And so on…
It’s what makes economists’ predictions so wrong. Because they’re based on what we know.
For example, who might’ve guessed the U.S. indexes would’ve doubled off the lows, after the entire world shut down due to COVID in 2020? Or that oil is lower today than at the start of the Russia-Ukraine war? Or that the Federal Reserve would actually follow through on rate-hikes?
The point being that Mr. Market will make sure to cause the most amount of pain to the most amount of people, most of the time.
So what is the outlook for 2023? Here’s three cannon fodder possibilities for what could happen next year and beyond. (These aren’t predictions from us. Rather, they’re thought-provoking conversations. Ones we’re thinking about out loud.)
1) The Markets Rally In 2023
Sentiment is so bearish… no one believes this is possible.
There are so many headwinds in front of us.
Inflation. Recession. Major global supply-demand imbalances. A hawkish Fed. And hawkish central banks around the world. War.
Almost no one believes the markets can rally next year.
Is that the “pain trade?” Could be…
2) The Federal Reserve Doesn’t Pivot In 2023
The bond market — one of the true signals of investors’ forward guidance — doesn’t believe the Fed can maintain a tighter monetary policy for that much longer.
They believe the Fed will pivot in some form or fashion in the second half of next year.
Why? Because the markets believe inflation is falling fast due to recession. Fast enough to signal to the Fed to pause their rate-hiking cycle. And soon after to cut rates.
But what if they don’t?
What if inflation doesn’t fall and the Fed keeps its hawkish rhetoric and raises higher than most think?
After all, the markets have been wrong all year. And continue to get it wrong. They still don’t believe the Fed. The Fed has told the world they won’t stop until rates are positive across the entire yield curve. That they will likely keep going until unemployment hits 5%.
Meaning they could be wrong again in ‘23.
3) We Enter A Lost Decade
The past 14 years have conditioned investors to believe the Federal Reserve has their back. That quantitative easing and low interest rates are the new normal. That markets recover quickly after they’ve bottomed.
This year, the market has done anything but. Investors are still holding out hope that 2023 could be the recovery year. That it’ll get back to previous highs in the next 12-18 months.
Maybe it will. But what if it doesn’t recover next year? What if it doesn’t recover in 2024 either?
What if markets don’t recover for a decade?
We can be sure that 99% of investors aren’t prepared for a lost decade.
The only person who has spoken about a lost decade is Stanley Druckenmiller. We wrote about a lost decade back in September. Here’s Druckenmiller’s take:
“There’s a high probability in my mind that the market, at best, is going to be kind of flat for 10 years, sort of like this ‘66 to ‘82 time period.”
A lost decade would devastate investor enthusiasm.
So maybe 2023 could be a good year. Lulling investors into the hope phase… then rug-pulling them in 2024 and beyond.
Remember, Mr. Market loves causing pain to most people. This isn’t out of the question.
Conclusion:
Who knows what will happen next year? Trying to predict the “what” isn’t worth your time. Reading insights from others — including our own — should be used for informational purposes only.
What you should do instead is prepare. Don’t predict.
The only thing we know for certain is that there are no absolutes.
But the knife is still falling.
And the smartest investors of our generation — Howard Marks, Stanley Druckenmiller, and the like — are all calling for more volatility and more uncertainty. That’s not good.
Therefore, it’s prudent to listen. And adjust accordingly.
The ONLY thing you need to do is do whatever lets you sleep well at night.
Good investing,
Lance
P.S. Hope you and your family have a happy, healthy, and prosperous New Year.
P.P.S. You didn’t think investing was going to be easy… did you?