Jig

As the clutch goes in on the trading year, there is much to consider. A year defined in most part by the Ukraine war, but coloured by the implosion in all things cryptocurrency, Elon Musk and governments, led by the little bit ‘ooh-err’ Truss/ Kwarteng hit squad, that appear to be struggling to handle the repercussions of a decade long binge on free money. Year-head pieces lead on the imminent recession. That this appears to be the most expected recession in recent memory, led by the not-seen-before inversion of Bloomberg’s patched together global yield curve and other forward looking economic indicators, suggests that if there is one certainty it is that it won’t come out the oven as expected. Economists have form, and it’s not calling it right. So, if a mild recession is expected and ‘baked in’, the options are either: no recession, or deep recession. Take your pick. The other curiosity is on inflation. It’s slowing, no question; mathematically it must slow. That prices remain at punishing levels for a squeezed consumer appears not to matter, the rate it is slowing. Some even suggest it’s about to go down as quick as it’s gone up. That Chairman Powell admitted this year, after a particularly uncomfortable double-digit print, “we understand better how little we understand about inflation” was refreshing, but not something to inspire confidence. What furrows the brow though, is that if inflation does tip lower, their appears to be a widespread expectation that it will stop at the much longed for 2% rate, and then settle and continue as is. That the 2% target was introduced by an off-the-cuff remark on TV by a New Zealand Central Banker in 1988 is surprisingly overlooked. Move along, nothing to see here. The real world is not so neat, which explains why some market gurus have suggested it might not stop at 2%. As per the oft cited pendulum, it swings beyond expectations both ways. Up and down. History also shows inflation often recedes, pauses, and then goes again. And goes hard. All told, if the most powerful Central Bank doesn’t really understand inflation, there’s not much hope for everyone else, but there is no doubt the lagged effect of the spectacular 2022 rate hike fiesta will bite through next year. Given how fast those hikes have come through, they could bite quite hard. Expect corporate earnings to be crushed, more monetary bazooka-ring and an ensuing, frantic blow-off top in risk assets, a la Michael Flatley, before a whizz-bang-pop puts a large full stop to the era of policy experimentation and consumption driven excess. After that, it’s possibly a sober story of real assets, sovereign default, and a multi-year run for selected emerging markets. Amongst, many other, hard-to-predict events.

Happy Christmas.