IN-DEPTH: TRANSCRIPTION - UnderTheLens - 01-25-23 - FEBRUARY – Macro Themes for 2023
SLIDE DECK
TRANSCRIPTION
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Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussion purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
COVER
It is once again that time of the year when we outline our expectations for the most important themes for 2023.
In this first session of the year for the UnderTheLens video we will talk about the major Macro Themes for 2023.
In the upcoming version of LONGWave we will specifically detail our Investment Themes for 2023 that are supported by these Macro Themes.
AGENDA
Listed here are the last year’s 2022 Themes along with the 2023 themes we will be discussing in this session.
To the right of each Macro Theme is the highlight we will be primarily focusing on.
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Before we get into each 2023 Macro Theme I think it helpful to start with the larger picture for context.
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In this year’s Thesis Paper entitled “A Great Stagflation”, which is available on the MATASII web site, we used this generalized illustration to represent what we envision is ahead of us for most of this decade. We refer to as this era as the “Beta Drought Decade”.
We are presently in an era of fundamentally Economic Stagnation currently highlighted by Inflation beginning to transition towards Dis-Inflation and then the Deflationary impacts of the coming Recession.
With elevated Inflation, Slow Economic growth and soon to be seen surging Unemployment we will begin to feel what we have been referring to in our newsletters as “The Great Stagflation”.
This will likely be followed by a Debt Crisis, with government and central bank driven Hyperinflation, to support problematic Fiat Currencies and Unsound Money.
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Violent volatility in all markets – equity, bond, credit, currency and the Derivative/Swaps markets is highly likely to become the increasing norm as we exit the period that is generally referred to as the “Great Moderation”. An era which was punctuated by: falling rates, strong employment, mild volatility, weakening growth and historically strong financial markets.
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Though we see a weakening growth rate of inflation in 2023 as we fall into a recession, inflation is a long ways from being over and will be with us in waves throughout the decade.
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Inflation will be most likely be most evident and pronounced in “basic needs” products such energy, food and in the developed economies as imported goods & commodities.
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Inflation PLUS Deflation will both concurrently be with us, but in different areas and more accentuated in the different areas and at different times.
If history is any indication, they will both continue to come at us in waves.
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It is likely to be a difficult time for financial markets overall. The “Everything Bubble” is likely to regress back to more normalized values similar to how the markets behaved in the years following the NIFTY 50 bubble regression in the 70’s and the Dotcom Bubble collapse in late 90’s.
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This doesn’t mean markets will simply collapse! We can’t ever be certain because many the event drivers and decisions to be taken have yet to occur.
However looking at the major Macro forces currently soundly at play, their forces are likely to push financial markets in the direction of a major classic top. A top highlighted by the factors labeled here which again we highlighted in this year’s Thesis paper.
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Stagflation consists of three key drivers; i) Inflation, ii) Slow Growth and iii) Unemployment. You need all three to be “in play” concurrently to reap the unfortunate ravages that Stagflation evokes. All three will be felt in 2023.
I spent a lot of time exploding all three in this year’s Thesis paper so I will not do this here but instead highlight a more focused view for each in 2023.
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The first is Inflation which though it was evident to all in 2022, it will continue to be with us in 2023.
The area I want to highlight is how it will further accentuate a “Living Wage” Crisis. This crisis will not only be felt in the US, but globally.
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Markets are presently focused on the rate of change of Inflation. The rate is went up in 2022 and the rate it is presently falling at. Month-over-Month numbers are key to traders and to a lesser extent the Year-over-Year rate.
However, inflation is a cumulative issue to the economy. What I mean by that is that Inflation rates go up, but when they go down the prices paid do not! They not only stay up they continue rising but only at a slower rate.
Though costs continue to rise or possibly just remain elevated, Disposable Incomes are permanently damaged. That damage takes time to be felt as consumers and companies adjust.
Demand is normally forced down!
This chart was a feature chart at the world Davos conference this year as the World Economic Forum surveyed 1200 global leaders in all facets of economics, finance, and government. Out of over 30 major concerns the “Cost of Living” was number 1 – seen in the upper right. It was felt to not only be a concern but a crisis.
The top right box also highlighted: Energy Supply, Rising inflation and Food also seen at Crisis levels. All will be with us for awhile.
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We presented this schematic in early 2022 to warn then about what was unfolding and the waves we anticipated – and still anticipate.
At its core inflation has become about what you need – not what you want!
The sustained period of Asset Inflation will soon be dominantly behind. It was an era where new wealth allowed us to chase what we wanted which drove appreciation.
Instead of FINANCING what want we are entering an era about being able to PAY for what we need!
These are secular issues, not the cyclical issues we have grown accustomed to.
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The “Great Moderation” is highly likely over. The Great Moderation began with high rates falling and has been maintained by continuously falling rate until we reached the zero bound.
It has changed because historically when Inflation gets above 5%, for any period of time, the adjustment to the cost impact and crushed disposable incomes has a profound and lasting effect.
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The second element of Stagflation is Economic Growth. This is now beginning to happen as this cyclical business cycle comes to it inevitable conclusion. This business cycle has had a long duration and was primarily sustained by multiple rounds of Quantitative Easing which delivered its intended stimulus goal of bringing demand forward. Therefore it would be expected under normal circumstances to be a harder recession than normal.
Of course such a reality is politically unacceptable!
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Unfortunately the realities are exactly that – reality!
An inverted yield curve at historic levels of inversion is screaming RECESSION. However, it may be signaling more than just that. It is clearly saying the Federal Reserve is behind the curve and is currently making a serious mistake in its slow response in lowering rates.
Of course this is the problem with Stagflation. To fight inflation you need higher rates. To fight slowing growth you need lower rates. The preverbal “Catch 22”!
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Global Manufacturing growth is not only slowing but has now entered contraction. A reading below 50 is contraction and yet rates are still elevated. Remember, it still takes a year for reduced interest rates to work their benefits through the economy.
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The International Monetary Fund (IMF), World Bank, OECD, WEF and every global institution who monitor these numbers is all out warning in the strongest way possible of their concerns.
Remember, these institutions don’t normally do this and historically have been proven much too optimistic.
On the left in this slide is the IMF forecast showing a global slowing to 1.1% in the developed economic.
On the right in red is the World Bank’s current forecast showing a global low in 2023 of 1.7%. To quote the World Bank:
"Global growth is slowing sharply, with worldwide economic output projected to be just 1.7% in 2023. The downturn will be widespread and any adverse developments risk pushing the global economy into recession. Slowing growth affects 95% of advanced economies and nearly 70% of emerging markets and developing economies - with the potential for increasing poverty rates in some regions.”
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The surest way to confirm these numbers is too look at the US consumer who has long been the engine of global consumption demand. That engine appears to be quickly stalling as the Covid-19 stimulus checks and loan, mortgage & rent forbearances expire.
Shown here on the top left if a plummeting US rate compared to a resulting exploding level of credit card debt.
Shown on the bottom right is the resulting inflation driven interest rates on credit cards that US Consumers are facing.
Shown on the right is the Charge-off rate that cards such as the Discover card which traditionally targets to low to middle-income households. Wall Street was simply completely caught completely off guard by it.
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Credit loss provisions across the Big Four banks this quarter jumped the most in a decade (excluding the Covid-19 shock). Banks clearly see a wave of defaults is coming.
The credit cycle has turned as this business cycle comes to an end.
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The third element of Stagflation is Unemployment. Frankly, this is the least appreciated of the three elements of Stagflation.
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We first started warning about the degree of layoffs already occurring in November. It was getting little attention when we outlined the facts shown here. It has only got worse since but again seems to still be under reported.
I think the lack of coverage is because the numbers seem small in comparison to what we have seen historically when the numbers were 40 or 60 thousand in a major corporation.
Today, since outsourcing and downsizing occurred, employers don’t have large numbers. That is why it is important today to look at the layoffs as a percentage of the number of employees.
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This chart is an easy way to visualize this. On the left are the headcount and cuts during the 2008 Financial Crisis for major banks. On the right is what has occurred recently.
The vertical black lines approximate headcounts of 75,000. Headcounts are dramatically less so even minor cuts will have major impacts within these organizations. Corporations like the banks shown here have been squeezing employee headcounts during the last decade to maintain profit levels as sales growth has slowed. With inflation surging the ability to cut headcount to shore up profit squeezes in greatly impaired.
The Financial Times in London is reporting and I quote:
Banks are gearing up for the biggest round of job cuts since the global financial crisis, as executives come under pressure to slash costs following a collapse in investment banking revenues. The lay-offs — which are expected to be in the tens of thousands across the sector — reverse the mass hirings banks made over the past few years and the reluctance to fire staff during the Covid-19 pandemic.
“The job cuts that are coming are going to be super brutal,” said Lee Thacker, owner of financial services headhunting firm Silvermine Partners. “It’s a reset because they over-hired over the past two to three years.”
Banks including Credit Suisse, Goldman Sachs, Morgan Stanley and Bank of New York Mellon have begun to cut more than 15,000 jobs in recent months, and industry watchers expect others to follow suit, emboldened by the headline-grabbing plans already announced.
I encourage you to check out the link on the bottom right of this slide to the layoffs of 101 companies in just 3 counties in the Silicon Valley area which Wolf Richter had to manually pullout of California state filings to get any visibility to.
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This chart going back to the 1950’s shows a trend line in red that gets larger with each instance of economic problems. Corporations have become accustomed to immediately cutting staff while the total economic cuts get larger.
With the percentage of employees now being the key number and the total layoffs of all companies growing, it points out just how devastating the impact could be to the economy during next major period of layoffs.
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A new area of concern for 2023 is the fallout from the recent US mid-term elections where the House majority was passed to the Republican Party.
With a ~$1.7T Omnibus Bill being pushed through as the last act of the departing Democratic House, we can fully expect the upcoming lifting of the Debt Ceiling to accommodate the spending to be a major point of contention.
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Frankly, the lifting of the Debt Ceiling (SHOWN HERE IN GREEN) is usually nothing more than a joke. Congress has a record of simply seeing no need to restrict spending (SHOWN IN RED) and a Debt Ceiling is only for public consumption of creating some appearance of fiscal responsibility.
However, with the 15 rounds it took to elect a House speaker for this congress, who had to make major concessions to the right wing fiscal conscious “Freedom Caucus”, this is highly likely to be much different battle this year.
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That fight has already begun with Treasury Secretary Janet Yellen immediately saying because the debt ceiling has not been lifted she has already been forced to take emergency steps to pay government expenses to avoid a government shutdown.
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The “rub” here is she can’t issue new Treasury debt until the debt ceiling is increased and therefore will be forced to spend down the Treasury General Account (TGA) until it is passed.
The lack of new Treasury issuance will potentially have a major impact on interest rates if Fed Funds rate and Quantitative Easing Policies to fight inflation are maintained.
As I have pointed out in my newsletters, Secretary Yellen is extremely sly and there is a lot more going on here than meets the eye. I will leave that discussion for our newsletters, but suffice it to say interest rate volatility can be fully expected with the fear, sudden panics and instability that go along with the threat of a US debt default.
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Another volatility trigger is likely to be delivered by Geo-Political pressures as a result of the ongoing shift to a Multi-Polar world. This will be brought to the fore with the dissolution of the Petrodollar and emerging threat of a BRIC led Commodity Cartel.
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The creation of the PetroDollar system in the 1970’s was major contributor in shoring up the burgeoning US trade deficit debts and President Nixon’s sudden shift to an non-gold backed fiat based US dollar.
With the increasing possibility of Saudi Arabia and other OPEC countries increasingly willing to trade oil in other than US dollars which the understanding calls for, we can expect worried market to react. Fewer US dollars required abroad to buy oil in US dollars can only add to US domestic inflation pressures as those dollar IOUs are returned to the US as claims.
We additionally worry about pressures on commodity prices as the trade consortiums of the 144 commodity export dependent economies become increasingly aligned with the BRICS (Brazil, Russia, India, China, South Africa) through China’s Belt & Road Initiative (BRI) and the Shanghai Agreement, amongst other anti-US arrangements.
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We also see issues with falling US Productivity and changing demographics becoming increasingly important in 2023. Both are longer term secular changes that are “coming home to roost”.
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Though US productivity has been in a dramatic freefall since Covid-19 hit, has realistically been in a downtrend since the Dotcom Bubble burst in 2000.
Since China entered the WTO in 2002 10’s of thousands of manufacturing facilities have left America. These were high paying jobs that have not been replaced with equally high paying jobs to the prior percentage of the workforce. This is proving to be a mounting problem as standards of living are being reduced as the middle class in America is being crushed. As a 70% consumption economy the US cannot survive a consumer unable to continue to consume at these record levels.
Since the US consumes more than it produces and lives on rising credit to sustain consumption the clock is ticking on how this will be resolved. A potential era of stagflation will only compound an intractable problem.
Further overlaid on this problem is the reality of the US labor force rapidly shifting demographically with Baby Boomers retiring and spending less; while the student debt laddened Millennials and Gen Zs replacing them are barely able to afford rents.
These are not just economic and financial problems but social problems which increasingly the government will be expected to solved.
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What does all this mean for 2023?
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It means problems for the financial markets and likely a lost decade of sustained positive returns.
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However, that doesn’t mean no investment nor trading opportunities!
It will increasingly be an era for the nimble and well informed.
We will talk about the 2023 Investment Themes that go with these Macro Themes in the upcoming LONGWave release.
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If we are right about our expectations for falling Standards of Living to go along with these developments, then it is extremely important that you get your investment strategy in place now!
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As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
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I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2022 turn out to be an outstanding investment year for you and your family.
Thank you for listening
