2023 Best Guesses
A short summary of my 2023 markets roadmap. I like reading things that challenge generally accepted views so hopefully they aren’t too mainstream. Byron Wien’s annual Ten Surprises has a definition I like to think about.
"A 'surprise' is an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is 'probable,' having a better than 50% likelihood of happening."I also have linked a few of the posts I’ve written recently (long gold thesis, general macro outlook) that expand on some of the below in greater detail.
China’s reopening does not have the same effect as the late 2020/2021 global reopening. Supply chains are no longer tight, rest of world is operating as normal and demand is being destroyed as a result of the synchronized global recession and rising unemployment. It becomes obvious that US wage data (already not very strongly correlated to inflation) has been distorted since COVID and as it turns out, employees don’t have much bargaining power in a recession. Inflation follows M2 down only all year and real rates plummet. Gold surpasses $3,500.
Long gold + Sept GLD calls.
After one last higher rates scare in Q1 on the back of China reopening (sell the news), central banks/governments and markets will be reminded of the constraints they’re operating under as it relates to current debt/GDP and rising fiscal deficits. Nominal rates move significantly lower for the first 3 quarters, bottoming in Q3 <2%.
Long treasuries + Sept TLT calls in Q1.
The Federal Reserve raises rates one more time on February 1st. As inflation continues to fall, markets object to the continued hikes and meltdown, forcing a Fed pause at or before the March 22nd meeting. Markets receive a slight reprieve before ‘sell in May’ holds true again. Fed rate cuts begin in early Q3 with additional stimulus thereafter. Yield curve control comes in Q4.
Short large cap tech and banks. Betting on rising credit spreads also makes for a good hedge, but high yield bonds outright will outperform equities as they incrementally benefit from crashing nominal rates.
In early 2023, Russia’s war with Ukraine continues with no drastic changes in either direction. By mid-year, the global recession and demand destruction sends oil to a $50/bbl bottom. This solves Europe’s energy problems in the near-term and allows them and the US to continue to talk tough on Russia.
I am secularly bullish oil so staying neutral in 1H.
As the Russian economy starts to deteriorate more dramatically, pressure on Putin increases ahead of March 2024 presidential elections. He escalates the war against Ukraine in Q3, reignites the secular commodity bull market (earlier than risk assets) and reinstates the ‘Putin price hikes’.
Long oil in 2H.
US CPI inflation readings bottom in Q4 due to lagged effects of housing, but forward looking markets are aware of what’s to come as oil and commodities begin rising again in Q3 through year end. New rounds of fiscal stimulus create the most difficult situation the Fed has had to face yet - fiscal dominance.
Long gold vs. treasuries after the Fed cuts for the first time.
Much to the dismay of the dollar milkshake theorists, the DXY falls all year ending ~90. All fiat stinks and capital flows to hard assets like gold. Emerging market equities kick off a secular outperformance trend.
Long EEM after risk asset liquidation event.
Bitcoin bottoms <$10,000 in the late summer market selloff that forces the Fed to cut rates. Microstrategy operates underwater while its net assets < liabilities and faces a bankruptcy scare as its underlying business deteriorates meaningfully - resulting in difficulty making interest payments. Ultimately it is avoided as the company begins selling Bitcoin, raises preferred equity and/or reduces its debt burden, potentially even selling the underlying business and becoming a de facto Bitcoin ETF.
Short MSTR.
Large banks and traditional financial services firms face serious problems and take the negative headline baton from crypto. Bitcoin regains its ‘inflation hedge’ narrative in late 2H and into 2024. It bottoms 1-2 months ahead of other digital assets (including ETH), the ETH/BTC ratio proceeds to hit 0.05 again before ending the year closer to 0.10 (highest since early 2018).
Long BTC vs. alts in 1H, long ETH in 2H.
Metropolitan areas revisit ‘COVID lows’ as urbanization flat lines. ‘Remote working’ becomes a bargaining tool for employers - “we have to cut your wages but you can work remote 1 more day per week”. All-time highs in institutional ownership of real estate and the associated private fund tricks (redemption gating, lack of proper mark to market, fund lockups, etc.) create a prolonged drag on real estate as the sell pressure takes years to clear amidst poor liquidity. Post-COVID population trends continue (out of NY, CA, IL / to FL, TX). Real estate in these markets (FL, TX) start to finally look attractive again in 2024.