© Reuters.
Investing.com – The good news is that 2022 is almost over, a nightmare year for both stocks and bonds. Now the bad news: While 2023 is likely to be better, it won’t look that way for a while.
At least not until the major disconnect between central banks and markets on inflation expectations is resolved. And at least not until China has enough herd immunity to get back to work and play after the COVID-19 surge. The showdown in Ukraine between Russia and the West is another issue likely to get worse before it gets better. Whether all or any of this is enough to draw the world’s eye to Elon Musk’s wealth is another matter.
Here’s what you need to know about the financial markets in 2023.
1. Central banks and markets facing inflation/recession
There is no doubt that next year’s mass market theme will be the battle between central banks and inflation.
Last week’s events – taken literally – have greatly increased the risk that the world’s two biggest economic blocs will be pushed into recession by further raising interest rates.
The Fed’s “dot chart” showed most policymakers support raising the upper limit of the Fed funds target to 5.4% next year, while European Central Bank President Christine Lagarde said threatened up to 150 basis points of tightening over the four months. Arriving.
The problem is that the markets think both institutions are deceptive or simply have not considered such rhetoric. Short-term interest rate futures also point to the expectation that the Fed will start cutting interest rates in the second half of next year, as already evident weakness in housing and commodities will spread to the rest of the economy.
US equities, in particular, are still priced at 18 times forward earnings and therefore have no protection from downside valuations should a looming recession materialize.
From today’s perspective, the key variables appear to be the ability of the US and European labor force to offset some of their inflation losses with steep wage increases and how quickly the oil market tightens as Chinese demand returns. And both questions are still very much open at the moment.
2. The second year of the war for Russia
The balance of risks to the global economy has become inextricably stalled as the Russian invasion of Ukraine has progressed. And if it continues, all sorts of tail risks will remain, from the collapse of Russia’s oil supplies to – God forbid – the use of nuclear weapons. However, if a path to peace is found, normalizing food and energy supplies could have a dramatic effect on business and consumer sentiment globally.
The war is against Russia, and it’s hard to see what would change if the West continued to support Ukraine. Neither the United States, France, Germany or Italy will face national elections this year, which could help keep that front together. However, the economic price of this support is also increasing.
Europe, in particular, is rapidly entering a recession, and while this winter could pass without Russian energy supplies, the cost of replenishing empty gas stocks as spring arrives may be too high for many European industries to defend its presence in the world of markets.
Putin also does not face elections. Its greatest dangers are mutiny by an army that has already lost more soldiers than the Soviet Union has lost in a decade in Afghanistan (according to unverified Ukrainian estimates), and popular outcry as the death toll – and the inflation rate – is constantly increasing. However, the biggest risk to global markets is what will follow those events. Furthermore, hardliners like Yevgeny Prigozhin, who runs Wagner’s mercenary force, are more likely to seize power in a concerted way than a fragmented anti-war opposition, and are also more likely to wield that power sporadically. In all respects, the war is likely to get worse before it gets better.
3. The dangerous rebound from China’s reopening
It gets worse before it gets better, a theme that extends to the world’s other economic power, China.
While the fate of wars is inherently unpredictable, predicting the progression of a deadly virus is usually much easier. Shocked by the first sign of protest against their party, China’s Communist leaders threw caution to the wind and effectively let the coronavirus blow. It should also monitor Chinese consumers for herd immunity and the release of animal spirits, but only after a surge in infections and deaths unlike any seen so far in the three years since the virus first emerged. in Wuhan.
In the past two years, strict public health regulations have been the main reason for China’s anemic growth. But next year, with regulations largely lifted, the main factor will instead be fears of a virus for which Chinese medicine still has only partially effective treatments.
Fear may remain within manageable limits as long as China’s healthcare system isn’t overburdened, and recent reports of sharp increases in emergency capacity suggest that authorities are at least trying to keep pace with the times. However, if cases outstrip the system’s capacity, deaths will rise, and the behavior of China’s consumers and industrial workforce — like those blushing their cheeks at Apple’s (NASDAQ: ) iPhone City in Qingzhou — will become extremely volatile.
Here too, as for points 1 and 2, the balance of risks is precarious in the first half of the year, albeit with the potential for a strong rebound in the second half if Beijing’s calculated gamble bears fruit.
4. Compress
Speaking of gambling, 2023 is shaping up to be the year that cryptocurrency runs out of luck. And the 12-month governance scandals, culminating in the horrific collapse of FTX and the arrest of its founder Sam Bankman-Fried, have so badly eroded trust that an even bigger implosion could be enough to bring the entire asset class to an end.
There is also no shortage of candidates, but it will be particularly intense to highlight two “too big to fail” names. Both Binance – the world’s largest exchange – and Tether, which operates the world’s most valuable stablecoin network, have failed to dispel doubts about the adequacy of their reserves and the legitimacy of their business models in recent months.
And the events of December have set an ominous tone for the next few months: Mazars, the legal and accounting firm hired by Binance to “prove” the quality of Binance’s reserves, withdrew its approval last week and suspended all activities with cryptographic companies.
Critics also speculate gloomily on the evidence that Binance’s US operations are no better protected than FTX’s. And don’t even mention the Justice Department’s investigation into suspected money laundering on behalf of Iran and others, which will likely conclude next year.
5. Mars will seem more attractive
If there’s a man on the planet big enough to be the subject of global markets in 2023, it’s Elon Musk. This column believes that Musk will not be the CEO of Twitter or Tesla (NASDAQ 🙂 in 12 months.
Predicting Twitter isn’t difficult either. Musk himself asked his Twitter followers if he should step down. And almost 60% said “yes”.
In effect, all this does is create an atmosphere that misleads the agency about a decision already made by its creditors. And Morgan Stanley (NYSE:) and others are sitting on billions of dollars in bonds they signed to buy Musk on Twitter, which they can’t sell now.
That debt, along with the additional billions spent to finance a leveraged buyout of software company Citrix, is fueling the entire M&A and leveraged lending market that is essential to Wall Street’s bottom line. And the quickest way to lift the blockade is for the banks to take over Twitter, kick Musk out, and implement Plan B, whatever it is.
Musk’s control over Tesla is also slipping. After the recent $3.6 billion share sale, his stake in the automaker fell to 13.4%, not close enough to warrant control. For comparison, descendants of Henry Ford (NYSE:) still own 40% of Ford’s voting stock, while Ferdinand Porsche controls 53% of Volkswagen (ETR:).
And that wouldn’t be a problem if 2023 is shaping up to be a stellar year for the auto industry and Tesla stock is realistically priced. But it isn’t, and it isn’t. Tesla has already been forced to cut prices in the US and China, its two biggest markets, and there are signs of a looming catastrophe in the US auto financial market next year that could accelerate a nationwide price decline.
And despite falling more than 50% this year, Tesla shares are still trading at more than 53 times trailing earnings. These gains won’t survive significant declines in the US, Europe and China — for reasons discussed above. – are very possible. And it could jump, it could be pushed, but our guess is that one way or another Musk will have found a way to spend more time at SpaceX when we write the preview for 2024.
