So much happened in America this week. 2 powerful Jan 06 sessions piled on more damning evidence on the orange one. The supreme court also just overturned Roe vs Wade last night. These 2 events will have lots of ramifications plus new late-night comedy material into the US mid-term elections in Nov. The long-delayed tightening of gun rules was also finally passed after multiple needless death of innocents.
I am trying to make sense of what is happening in the world today and perhaps make a few bold predictions and forecasts for the rest of 2022. By writing it down in my blog today, I can reflect on them in the future to see how many I may have gotten right or if I was totally off the mark. This will also help me plan and formulate my investment strategy for 2H’22.
I want to look at 5 major trends at the top of my mind now which will likely shape the way the rest of the world will be heading into 2023. They are the political state of America, the Ukraine/Russia war, China’s Xi legacy, the interest rates playbook and oil prices. Hopefully, they will help to crystalize my thoughts for a proactive fine-tuning of my investment portfolio.
(1) America will be in an upheaval mode going into the Nov mid-year elections as the GOP and Democrats throw up obstacles and divisive issues in the path of the voters to desperately sway their opinions. We have already seen guns and abortion rights dividing the nation recently. The 06 Jan insurrection committee sessions will also pour kerosene into the flames as the groups battle it out.
The next 5 months will see political parties throw everything but the kitchen sink into the confrontation debate to win votes. It seems like a sure thing that GOP is likely to win back the Senate and Congress now, given the sky-high inflation environment. But nothing can be certain until then. We are going to see a more divided nation where core issues will bring up heated discussions. Too much democracy and first amendment rights plus the freedom of speech results in a powder keg of explosive conversations and even violence going forward.
(2) The Ukraine war has dragged on for too long already. Russia is rapidly losing its military inventory as the world feeds more weapons to Ukraine to fight back. Countries can now gladly send their expiring weapons over to them for defence against the Russian bear. The American military companies are laughing all the way to the bank with roaring new orders from all countries, especially the Europeans, as they need to stock up again. Viva La Americano!
Everyone will only want to buy American weapons now as Russia becomes a pariah. Uncle Sam has a win-win situation to massively write off at least $40+ billion of military equipment knowingly that these new fundswill go directly to support the mighty American military industry juggernauts.
Russia has changed its end game focus from conquering the whole of Ukraine to a narrower focus as they realized this is not a walk in the park. They are likely to capture the Donbas region at all cost, then call it a victory and return home. It is Crimea all over again. They cannot afford to have an unending war with ever-increasing causalities.
The sanctions will eventually bite hard unless China provides a lifeline. Russia and China have a long-term objective to break out of the world’s dependency on the USD Swift system, price commodities in another currency other than the USD and promote another alternative ie. RMB. 2 separate world blocs will evolve as the Western and Eastern hemispheres lock horns.
(3) China’s Xi is waiting to be re-elected to an unprecedented 3rd term by autumn this year. The zero Covid strategy makes no sense but yet they are holding to that policy. Is there something the rest of the world doesn’t know or is it because China has to steady the ship at all costs until Xi is re-elected?
Once Xi has won the mandate to run again, China will likely go full steam ahead to open up for business and unblock all supply chain bottlenecks caused by the Covid lockdowns. The Chinese are always a pragmatic race that prefers long term prosperity over war in their 2,000 years history.
(4) Will inflation give way to a recession and then stagflation? The Fed just hiked 75 bps and is likely to do the same at least 2 more times to contain the inflation monster. We should see peak inflation happening within the next 3 months. Interest rates should stabilise around the 3-4% level which is the long-term historical average. The last 14 years of post-GFC ultra-low interest levels will not return.
Deleveraging has happened in a big way in the last 6 months. The cheap money excesses since the 2008 GFC had been deflated substantially with broad drop of proces in the range of 75 to 90% in many assets. I do not think that there will be further domino effects to race down to a new low.
(5) Oil prices look shaky at current levels and is unlikely to head higher. Biden will arm twist the Middle East to increase production with the promise of enabling more new weapons purchases (win-win for America again). Failing this carrot approach, they will bring out the big guns to threaten them with new sanctions.
Just adding another million barrels a day of new output by Opec might do the trick to bring prices below $100. An oil tax holiday is a standby option at the expense of lower government revenues. Oil frackers can also be called to arms to “patriotically” defend the country as their cost of production now is $55 per barrel or even lower after a string of bankruptcies in that sector. The frackers just need to turn on the pipes to pump again. The environmentalists have to postpone their wish list for the greater good of the country. Biden will time the oil “rescue plan” into Q4 to time it nicely with the mid-term elections. He can then declare victory over the slaying of the inflation beast.
To sum it all up, the above 5 scenarios point to a turbulent 2H’22 filled with volatility due to risk events. They all seem to conclude into the month of Nov. There will be a lot of repositioning and posturing as portfolios are rebalanced. One should be careful from now till the end of the year. Investment opportunities have to be double and triple-checked before entering as our cash pool diminishes.
I believe that if the worse case happens and the economy weakens further into early 2023, the central banks will start to ease and print money again. This is the tried and tested put option to prevent a financial calamity which they have been doing so successfully since the 2008 GFC. It is an addictive drug that has no other alternatives nowadays. And the Kraken will be released again.
Investment-wise, I have to be nimble from now to year-end. I look to start trimming down some of the deadbeat stocks I own to increase my cash position. I will only invest more if I have done thorough research on the company as I conserve my remaining funds. I will continue to observe the crypto space and wait for it to stabilize further.
Bottomline, I need to strengthen my overall portfolio to prepare for the recovery and rally into 1Q’23. All my predictions may not pan out as forecasted. But the 5 major trends I listed above all seems to point to a timeline that is consistent with a turnaround for early 2023. I will continue to plot and plan ahead. Wish me luck!
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