We are fast approaching Labour Day long weekend, the May Day holiday for the rest of the world except for America which celebrates it in Sep. We are almost into the mid-year mark and it’s time to review and reassess the macro sentiment for the latter part of 2023. By identifying possible macro trends ahead, we can hopefully strategize and finetune our investment portfolio to try to capture some alpha.
Looking back, the world is finally moving out of Covid after 3 years. Strangely, anything pre-2020 now looks dated and unrecognizable. It feels like another world away as we forget what normal looks like. Into 2023, some semblance of it is finally returning to our focus. For example, the past few months have seen a big increase in overseas travelling volumes and hardly much mask-wearing around us.
Even the favourite annual viruses have returned with a vengeance. Influenza is sweeping across everywhere. My flu shot in Dec did not prevent me from getting it twice in Jan and again in Mar when I went overseas for vacation. The common cold is probably also making a comeback later this year after the influenza pandemic, which just hit us from winter to springtime. The newer Covid strains are non-events as they are turning milder and trying to fight for attention even as they are more contagious.
This leads us to the first big thing to watch out for. China, the sleeping monster during Covid is finally waking up after final lockdowns in Dec and promises of more drops in movement restrictions. Internally, its citizens are now enjoying the freedom to travel within the country. Very soon, revenge-travelling Chinese tourists will swarm the world again. In 2019, 155 million had gone overseas and this year will see a big catch-up soon.
This will help the global economy recover as China’s manufacturing sector starts to crank up again. With better efficiency and productivity, inflation may be under control even as demand for raw materials spikes up. The strength of the economic engine of the 2nd largest economy in the world will have a waterfall effect on everyone.
The Chinese authorities have also given signs that it is loosening its grip on the economy, to give it a kick start. Alibaba has been allowed to announce its new plan to break up its monopoly into 6 entities to unlock greater value after the Ant Financial IPO was pulled down a few years ago. Buy Alibaba now! You get a 6 for 1 booster. The HK clampdown after the 2019 riots are completed. HK now competes for tourism dollars by giving away millions of free flight air tickets.
China might also help to stop the Ukraine war by bringing both warring countries to the table. There could be an agreed compromise for Ukraine to surrender some land to Russia in the bargain to stop the fighting that has crippled both sides after dragging on for more than a year. The biggest risk here: America and the EU seemed to be arming Ukraine to the teeth for a new spring offensive soon. All sides are tired of the neverending war and it does no one any good to try to carry it on for another year. Common sense needs to prevail over national pride and political idealogy eventually.
The next big risk is to predict the direction of the US economy. Recession fears have subsided a fair bit since last Dec. There have not been too many surprises to the financial markets this year unlike in 2022 where asset bubbles were popping left, right and centre as the aggressive rate hike cycle started.
The failure of American banks and Credit Suisse were swift and regulators actions were decisive. Some economists think that the recent bank failures were equivalent to a 50 bps hike shock to the banking system. There is now considerable debate on whether traditional banking is obsolete and if there is an alternative. I blogged about this topic a few weeks ago.
The Fed is expected to hike another 25 bps this week as they meet up for their May meeting. Barring any future bank failure surprises, I believe that this will be the peak of US rates for now as inflation will stabilize at this level for the moment. We will go back to the long-term historical levels of 3-5% rates, finally returning to the norm after 15 years of ZIRP (Zero Interest Rate Policy) due to the 2008 GFC.
The main 2023 interest rate worry is the risk that multiple leveraged loans could be up for renewal this year. Most will suffer a sticker shock of up to a 5x increase in interest cost. Over-leveraged positions may tip many corporations and individuals over the cliff after many years of borrowing to the max to let cheap money fund your business and investments. A rude wakeup call is ahead and that may result in some big failures that could shake the markets like SVB and CS all over again.
We are already starting to see weakness in the commercial property space as hybrid work is here to stay and the glut of office buildings gets worse. Shopping malls are also getting harder to justify as everyone is used to online shopping, thanks to Covid. Hopefully, this will not create a domino effect on the general banking system like the CDOs in 2008.
Overall, I am not pessimistic about 2H’23. Steady as she goes, I see a subdued recovery of the global economy where a recession can be avoided. The world is heading back to where it was before the pandemic nightmare and it takes a while to readjust to normal. The excesses of the last 10+ years of low-interest rate and funding costs are over and the overleveraged purge of weak positions has begun as we all get used to the old long-term normal again.
This week’s main big news was the firing of Tucker Carlson from Fox News and Don Lemon from CNN. Sounded pretty abrupt and brutal but it is becoming a way of life. Just like my sudden retrenchment 11 years ago after 18 years at the same bank LOL. Cost cutting is a big thing now after the many excesses during Covid. Joe Biden also announced his bid for re-election in 2024. Ageism is real everywhere. Political is messy, especially in America. So let the circus show begin!
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