The Global Outlook For 2023
January is time to look ahead for the year. Sadly, way too much depends on the Federal Reserve and world central banks.
Michael Howell writes:
When bureaucrats create money out of thin air, they create a mess. Alasdair Macleod tells us:
While Fed chairman Powell appears hell-bent on bringing inflation back down to a 2% target, many fear he will cave under political pressure…and inflation will continue to soar. Investors are scrambling to avoid “impoverishment.”
The US dollar is under fire. Macleod adds:
It’s time for a big picture discussion.
As a client of WHVP, I contacted Managing Partner Urs Vrijhof-Droese. His global perspective is excellent.
WHVP are asset managers, investing clients’ money around the globe. There are no model portfolios, for over 30 years they’ve invested real money and been held accountable.
Their investment challenges are complex. They must factor in various currencies as part of the equation. Unlike many US portfolio managers, they also invest in precious metals to hedge against inflation.
DENNIS: Urs, thank you for taking time to help educate our readers about what is happening around the world.
While pundits predicted 2022 to be a good year, their predictions did not come true. How did we do in 2022?
URS: Thank you Dennis for having me.
Since the financial crisis, markets have generally only known one direction – up. Central banks fueled markets with ultra-loose policies for over a decade. People tend to forget reality; thinking the party would go on forever.
It was a challenging year, but we ended 2022 on decent terms. In the fall of 2021, we began positioning our portfolios more conservatively. As you said, our portfolios are usually tailor made so we do not have one performance number. Overall, we ended the year in mid-single-digit negative territory.
Our main headwind was the USD, which strengthened by about 8% in 2022, meaning a devaluation of the counterpart, the six currencies CAD, CHF, EUR, GBP, SEK and JPY. The third quarter was particularly difficult.
As the USD started weakening, we recovered many of our losses. We are pleased, since it shows that the underlying investments held up very well – most of the negative performance came from the strong USD, which in our perspective will not be sustainable.
DENNIS: Spain announced a $10.6 billion package to “ease inflation pain”. The US “Inflation Reduction Act” was estimated to cost almost $2 trillion. What a joke!
Victor Davis Hanson tells us:
World banks created trillions and politicians went on ridiculous spending sprees, inflation is a world-wide problem.
Until governments around the world curtail their spending, will inflation continue to destroy our wealth?
URS: Central banks have become overzealous with their fiscal policy. That is not how the system was set up. The central bank’s primary task should be to keep inflation under control and, in cases of chaos, become the lender of last resort. However, they’ve focused on politicians and Wall Street. Whenever things got uncomfortable, central banks jumped in to help.
Early on, central banks struggled to get inflation up to 2%. They never really questioned the system back then. When inflation started to overshoot, the Fed officials said it was “transitory” holding off on increasing interest rates. The lag in reaction helped their “member banks,” Wall Street and the politicians.
Now the Fed, and world central banks, are behind the 8-ball. They were forced to react because they risked riots from people who were severely affected by rising prices. It was interesting that the combination of almost non-existent interest rates and the fractional reserve system, the desired 2% inflation target was so difficult to reach. As they pushed all this money into banks, it sat there like unused gunpowder.
Most politicians don’t understand how the monetary system works, and don’t care as long as they can keep spending. With higher inflation, politicians’ tasks should be to curtail unnecessary spending and not finance any more stimulus packages. Stimulus packages just add more gunpowder into the system, increasing inflation even further.
As long as the politicians don’t reign in spending, there is a high risk, that inflation will stay well above target.
DENNIS: Since 2008, world banks have spent freely, while coordinating their efforts to create relative parity among world currencies. Now, world banks are raising rates.
When you factor in the additional borrowing necessary to fuel huge US deficits, do you feel some other currencies will do better than the USD?
URS: Yes. The potential for a weaker USD is very high.
The U.S. ignored inflation. It’s like a wildfire. There was one hotspot, the watchdogs were not careful, and now the situation is almost out of control. They reacted, rapidly raising interest rates, attracting foreign money, strengthening the USD.
When investing globally, it’s important to keep short-term movements in perspective and focus on long-term trends.
The Swiss franc has been a very effective way to protect your wealth, especially compared to the USD. Inflation became a worldwide issue, rising above 10% and more. In Switzerland, the high was about 3.5%.
The strength of the Swiss franc (CHF) helped reduce the impact from our main trading partners in the Eurozone. The higher prices from imports have been leveled out by the much weaker Euro. The U.S. is also an important trading partner. While the U.S. dollar became stronger against the CHF, it didn’t stay that way, ending the year very close to where it started.
Unlike many countries, the Swiss central bank is entirely independent from politics. Not just in theory, but also in reality. We are confident, that this will continue to be the case.
DENNIS: Gold held its own in 2022, what do you see happening going forward?
URS: Despite short-term volatility, gold has proven itself as a long-term store of wealth.
The interest rate increases caused gold to suffer. Expecting central banks to “walk their talk,” as things get tough, is questionable.
We anticipate central banks lowering their interest hike steps and eventually stopping. Corporate profits should decline, negatively impacting share prices.
We expect inflation will come down, however, not even close to 2%.
This is a great environment for gold. If gold starts to rally, silver and mining companies will follow.
Gold could easily hit $2,000 and silver to $30 per ounce. Expecting it to shoot “to the moon” appears unrealistic. Eventually?? Maybe, but taking profits and rebalancing regularly is key.
If central banks stick with the plan, we will get through this faster. Company evaluations will be reasonable again and free market interest rates will return. We seek out companies that will provide good performance for the next decade.
DENNIS: Wolf Street reports on the status of the USD as the global reserve currency:
The USD share is dropping and now Russia, China and Japan are dumping US dollars.
Do you see the downward trend continuing?
URS: Good, tough question. Many governments want to reduce their U.S. dependency, the question is how they dump their USD.
Countries generally hold USD in the form of debt. As the debt matures, they don’t renew it. The U.S. will have to find another lender, at much higher interest rates, which could lead to a further devaluation of the USD.
DENNIS: One final question. Bloomberg reports, Credit Cracks Widen With Distressed Debt Ballooning. They estimate it to be near $650 billion.
Inexpensive credit was extended to companies not normally considered creditworthy. Until that is purged out of the system, do you see things turning around softly and quickly?
URS: In a word, no. Banks provided cheap credit for companies that had no chance to survive. As debt matures, companies roll over to new debt; a fun game when rates are at 5,000-year lows. Today it is difficult to find lenders if you don’t have a proven business case.
Soft landing? Maybe for a short time, but it’s a dead-end street.
Central banks have their backs against the wall – trying not to show they’ve lost control. Thinking there is an easy way out is naïve.
While the world recovers from the political fantasies, plus an unwarranted stock market bubble, individual investors must remain diligent and stay on top of things. Investing in assets denominated in foreign currency can provide much-needed diversification and safety.
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