What To Look For In 2023
The financial questions that I am thinking about
As we head into 2023, here’s what I’m thinking about, worried about, and hopeful for. Happy new year!
Has inflation peaked?
It would be an understatement to say that inflation is the most important thing driving markets right now. Along with the future path of interest rates (which is very much inflation driven right now), it’s pretty much the only thing investors care about.
It’s a relevant question both at the macro level and the micro level. At the macro level, if we do have a recession next year it will be because the Fed drove interest rates too high for too long in fear of inflation.
At the micro level, inflation without adequate wage growth makes us all poorer. Yet rising rates and the anticipation of a slowing economy mean that companies are less willing to hand out large raises (you would need a >7% raise to make more in real terms). I worry that too many companies will adopt a “well you should just be happy to have a job” attitude towards their employees while at the same time raising prices on their customers, which further contributes to inflation.
Is zero COVID in China over? And will its economy be ok?
China’s about-face on COVID is as abrupt a policy change as you will ever see in modern politics, especially in a one-party system like China. But as bad as zero COVID was, going from one extreme to the other will also be problematic.
China was scared let COVID rampage through its population due to several reasons — a largely unvaccinated elderly population, lack of confidence in its domestically developed vaccines, little prior exposure to COVID (thanks to its previous strictness), and an easily overwhelmed health system. Now as it downplays the threat of COVID and allows its citizens to carry on as normal, those fears are being realized. Fever medications have sold out at many pharmacies as the hoarding of health supplies hearkens back to the early days of the pandemic in other countries.
At the same time, China is still reeling from a property crash. While the government has promised some relief to troubled property developers, the Ponzi loop of constantly pre-selling future condos in order to fund the construction of currently promised condos has broken, possibly forever. This type of process requires a ton of trust as well as some naivety. Once that trust is broken and people wise up to the underlying shadiness, it’s nearly impossible to spark things up again. If China can get over the COVID hump, then perhaps a surge in consumer spending can nullify some of the property pain. But if its health system gets overwhelmed, then it will suffer both a humanitarian crisis as well as an economic one.
What will replace crypto, tech, and venture capital?
For much of the past few years since the pandemic, it looked like crypto, the tech sector, and VC-fueled startups were unstoppable. Sales were good, institutional money was rushing in to chase returns, celebrities were more than happy to pump their favorite meme stocks and crap coins. Then inflation and higher rates ended the party.
Suddenly profits and valuations mattered. Many of the best investments of 2020 and 2021 declined 80% or more in 2022. The destruction of trust from the implosion of TerraLuna and FTX ushered in a new crypto winter with knock-on effects that hurt the semiconductor industry.
Markets don’t need an exciting headline to keep chugging along (profits drive long term returns, not narratives), but in the short-term a shot of adrenaline from something exciting could get the stock market out of its doldrums.
For better or worse, greed drives risk taking. And perceived opportunities for large windfalls (whether real or not) drive greed. Right now the world seems overly cynical as market returns this year seem to imply a complete lack of opportunity. Cheaper valuations are good for future expected returns, but valuation is a terrible market-timing indicator. Long-term investors should feel better putting their money to work now versus a year ago — but don’t expect a quick turn around.
Some additional questions
Last but not least here are some other concerns that I may write more about in the future:
- What’s the next geopolitical shoe to fall?
- Will American politics (I’m looking at you Republican Party) deteriorate further?
- How much of a slowdown will the U.S. housing market suffer?
- Can the jobs market and the American consumer stay strong?
- How will Europe remain economically relevant in the coming years? And how will it deal with Russia, which it’s relied on for natural gas (for heating) but is not a pariah?
- Are all genius founders (like Elon) jerks in disguise?
- Is hybrid work truly the future or will companies use tighter economic times to push their employees to show up in person?
Cheers and happy new year!