Top 10 Macro-Catalyst strategies for 2023 markets

I don’t think its unreasonable to say 2022 was a mess for most investors. The S&P/TSX Venture Composite Index (INDEXTSI:JX) – the benchmark for Canadian startups and resource companies – notched an underwhelming 40 percent loss. That’s only a slightly higher malperformance than the NASDAQ composite (INDEXNASDAQ:.IXIC), which shed 33 percent of its value in 2022, the NYSE Composite (INDEXNYSEGIS:NYA), down 11.5 percent last year, or the S&P 500 (INDEXSP:.INX) down 20 percent in 2022.

The losses were expected, however, in view of the Fed’s commitment to socialize the excesses of its loose money policy of the last decade through higher interest rates while inflation surges. The year was a fascinating study of billionaires losing their shit, however, and the result is what can only be described as 2023 is a different world than the one we are leaving behind in 2022.

Here are the main macro, micro, geo-political and socio-economic fundamental changes that are going to shape the contours of financial markets this year:

  1. Inflation: The rise in prices across the world is a direct outcome of the excesses of central bank monetary policy. By flooding global markets with free money, they ignite and sustain surging demand, ultimately overwhelming the capabilities of existing production. Thus, more competition for only slightly higher volumes of goods creates higher prices as entities compete for limited supply. Our repeated warning about the inevitability of the explosion in inflation, which we began talking about in 2011 after the quantitative easing addiction had set into the Fed and foisted onto other G7 central banks as a result. The main effect of sustained inflation over time is, counter-intuitively, deflation in market liquidity. As input prices rise, producers see a falloff in sales as the higher prices marginalize a higher ratio of customers, and earnings suffer. Markets generally decline during periods of high inflation – especially if there is no stimulus offsetting the capital flight from markets.Inflation, as represented by the Consumer Price Index, indicated US inflation increasing by 0.1 percent to bring the annualized inflation rate to 7.1 percent, which was received positively by markets, albeit briefly.Central Banks only have one or two arrows in their quiver to fire at runaway inflation, and the primary one of these is:
  2. Interest Rates: We witnessed central banks led by the Fed raise rates at every meeting in 2022, resulting in a total increase from 1.5% at the beginning of 2022 to 4.5 percent at the last FOMC meeting on December 14, 2022. Higher rates have a broad deflationary effect as the higher cost of borrowing chokes everything from real estate to stock buybacks to private equity activity. There is no argument that higher rates smother the manic competitive purchasing during periods of cheap money and stimulus, but the economic damage inflicted by higher rates is primarily borne by the lowest 75 percent of consumers with no savings or investments.The fact that the Fed slowed interest rate increases to 50 basis points from the last year’s 75 basis point raises is indicative of the Fed’s growing sensitivity to the hardship its monetary policy is inflicting. It is likely the Fed is unofficially indexing its rate hikes to the CPI number, so the pattern at this point is anything at 0.1 percent inflation will earn a 50 basis point increase, and anything over that will trigger a 75 bp rise.
  3. Quantitative Tightening: The Fed’s balance sheet is scrutinized to assess the effects of its SOMA policy on market liquidity. Presently the Fed is reducing assets at the rate of 95 billion a month across treasury securities, agency debt and agency mortgage-backed securities. Combined with rising interest rates and inflation, this constitutes the third persistent negative catalyst for markets that will continue the dampening effect on markets and also slow capital velocity as investors become more cautious.As far as the “Fed pivot” is concerned, I was completely wrong about the Fed reversing course in November 2022, as the rising rates and higher inflation did not result in the market collapse I expected it would have by then. Instead, markets rallied vigorously throughout October and November, which was a head-scratcher for me. There are zero catalysts to support more buyers than sellers in this time frame, and so the circumstantial evidence suggests programmatic market support from US dollar interests behind the government. I know that sounds like a conspiracy theory, and it is, but how else do you explain that bullishness? Don’t say “contrarian investor mentality” cause that just doesn’t play.
  4. Covid-19 is not over – not by a long shot. Deaths in the United States and Canada from Covid were higher in 2022 than in 2021 and 2020 by a lot. According to the Center for Disease Control, total excess deaths attributed to COVID-19 in 2020 were 307,619, in 2021 was 541,843, and in 2022 was 790,000. So ignoring all of the subjective and interpretive debate going on, the disease we call COVID-19 not only continues to mutate and evade vaccines, but it is killing increasing numbers of people every year. This means that, as a competitive organism, it is winning. This means for the second year in a row, human life expectancy has decreased.There are two macro-effects of this reality to be considered from an investment perspective. a) demand is declining as more people die at a faster rate, and b) economic momentum is thus reversed, even though the latent GDP figures do not accurately reflect that yet. (Mostly because the excess liquidity from the last decade continues to appear as a demand driver in the data for several years after it is withdrawn.)The reason COVID is gaining is because the higher percentage of ignorant humans who reject science also have a disproportionate influence on government policy since they are more inclined to inflict their opinions rooted in ignorance on the broader population. Governments are sensitive to populist sentiment, and so the prevailing attitude by global governance is to let Darwinistic Survival of the Fittest prevail.China has withdrawn its zero-Covid militancy, and estimates put total cases at 800 million by the end of January. If you think that’s not going to incubate a whole new round of variants, you haven’t been paying attention. The constricting effect of this on productivity has yet to be seen at full bore, though the massive inflation of prices for everything produced in China is a byproduct of diminished Chinese output due to COVID.The vast majority of COVID deaths continue to be among the unvaccinated, and the China-produced vaccines are generally ineffective in the current environment, as they lack the biopharmaceutical firepower to keep up.
  5. Russia/Ukraine War drags on, making weapons producers and military suppliers relatively well-performing. With US$97 billion now earmarked for Ukrainian military support by the US for 2023, those stocks could see an improvement in earnings that could be reflected in a higher share price. In particular, Lockheed Martin Corp. (NYSE:LMT), Boeing Co. (NYSE:BA), Northrop Grumman Corp. (NYSE:NOC), General Dynamics Corp. (NYSE:GD), Raytheon Technologies Corp. (NYSE:RTX), and Leidos Holdings Inc. (NYSE:LDOS) will likely outperform in 2023Russia’s latest tactic of nightly missile attacks on Kyiv are reminiscent of a certain Nazi regime’s failed strategy on London in World War II. Clearly, Vladamir Putin is unfamiliar with the concept of “those who fail to study history are doomed to repeat it”. Russia and China fail to recognize they are being outflanked by US interests in the global energy matrix since the US interest in keeping the war going – apart from the obvious fortunes being minted by the companies mentioned above, is to put Ukraine in the position where it will have to open up its estimated 10 trillion cubic feet of near shore natgas to US investment, which will eventually supplant the gas to Europe that used to flow through Nord Stream I and II.
  6. US/China trade war is not widely appreciated as it is, to some degree, an out-of-sight, out-of-mind scenario. But while the US quietly blocks Chinese access to advanced component electronics for everything,  China is thus being forced to accelerate its own expertise in that arena. This is affecting the cost of everything electronic since the incremental elimination of cheaper Chinese made gadgets  – along with the forced re-domiciling of manufacturing away from China – make the entire sector more expensive.
  7. US Dollar Strength continues for many of the reasons above. Despite this, the relative performance of gold, in comparison, belies a waning conviction in the ability of USD to hold its value long term, especially as the arbitrary nature of the most recent US$1.7 trillion budget approval, which came in at over 4,500 pages, demonstrates clearly that the US is now at the point where its budget needs to be massive just to maintain interest payments on future borrowings, which indicates there is an inevitability factor to the “when” not “if” the Fed does eventually pivot decisively at some point in the future.
  8. Crypto Collapse is a stop-motion animation cartoon featuring fringe characters like Sam Bankman-Fried, Changpeng Zhao, Michael Saylor, Cathie Wood, and the man with the most natural name for a globally despised villain, Elon Musk. Estimates suggest 80 percent of Bitcoin investors are net negative on their positions, and the dwindling miner profitability is as red a flag as ever there was. Has anyone thought to consider what financial reason there would be to underwrite the massive energy and computing costs of all these crypto things if their value continues to fall? They call it “decentralized”, but it is in fact, centralized in the community that supports it, the machines on which it runs, and the financial system in which it will soon be fully regulated.As we have warned consistently since the first Bitcoin crash from US$287 to $83 in 2013, this is a Ponzi scheme of biblical proportions that is going to disappear just as soon as the G7 Central Banks get their CBDC house in order.
  9. Global Economic Recession is well underway, just not visible in the GDP for the reasons stated above. It will worsen before it improves, though, with the multiple threats to aggregate demand inherent in this list, it could be a long way off.
  10. Climate Disasters are anathema to the international mainstream media cartel, and so the urgency and imminence of the cumulative effects of collapsing ecological systems as a result of human overpopulation and land development remain absent from the news, for the most part. The average life expectancy of humans will continue to decline incrementally until it declines dramatically as a result of a convergence of climate catastrophes happening at the same time.

 

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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