Summary - It’s not good and it’s been that way for a while.

I’m not exactly doing a victory lap - after-all real problems hit real people’s lives - but I did kinda predict the current economic mess for some time now. But my overriding feeling is one of anger rather than anything else. How could the nexus of central bankers / politicians (and media - they were cheerleaders in all this) have pushed us, deliberately, into the brink of a recession?

How did we get here? Briefly:

• Lax and dumb regulation combined with complex financial products which led to the financial crisis of 2008/2009.

• Central bank printing money (QE) in response to the crisis and lovin’ it! Who doesn’t like free money?

• Ridiculously low interest rates. Even negative rates because deflation’s baaaaad. Leading to mal-investment, because who needs profit when you can invest in this nice shiny techie thing which will monetise in Autumn 2052? It’s groovy granddad!

• Inflation in asset prices.

• 2010-2020: More QE er, because, we can? And we don’t like taxing or cutting expenditure.

• Hysterical over-reaction to COVID. Close the economy of the world for two years, send people home and print baby print more money and helicopter that into people’s pockets.

• Stand back and watch that inflation roar. Grrrrr!

• Stand back and watch as the world’s supply side mismatches with demand.

• War in Ukraine. Western sanctions. Higher prices.

• The result: Technical recessions, high inflation, raising interest rates leading to - in 2023 - a real recession and real unemployment.

That’s my summary of 2008-2022 with a little forecast thrown in at the end. Of course I could be wrong, and hope I am, but I don’t have faith in our political / financial masters anymore to do the right thing.

It’s an easy equation: politicians have a desire, bankers are their pimps to scratch that want and we, the general public, well you know our role in this scenario.

Tim - like the BoE in September - pivots. To a more serious article.

Inflation

I’ve been sounding the alarm about inflation for a couple of years now. The hysterical reaction to COVID where policy makers deliberately closed down much of the world economy and then borrowed and printed money on an industrial scale could only end one way; inflation. The one aspect of this that should be transitional is the jobs of central bankers and politicians who wilfully caused double digit inflation to happen.

And no, the war in Ukraine isn’t the (primary) cause of inflation. Of course, it does have a second tier impact. Just like the sanctions imposed as a result of the war also do. I predict - despite the lamentable absence of any push for peace - we will finally get some kind of settlement in 2023. It won’t be perfect. These things never are but at least the world can move on.

Central banks belatedly turned off the printing presses in 2022. Too late. They then started raising interest rates to dampen down the consequent inflation. Too late. They then started to unwind their bloated balance sheets. Too late. Timidly. Real interest rates are still inflationary (ie, interest rates - despite several rises - are less than the actual rate of inflation).

Where will this go in 2023? China opening up will help with some supply issues. As would the end of the Ukrainian War. The interest rate rises may start to pull back some of the mal-investments made in the era of cheap money. But I think the biggest driver in reducing inflation will be - regrettably - the oncoming recession which will destroy demand.

Of course, bankers and politicians are just people. And so fallible. And so they could ‘pivot’ and start up the printing presses again. It’s an addiction that’s hard to kick. Governments seem obsessed with spending way in advance of their tax raising abilities so the temptation is always there to monetise the debt rather than sell it (or cut spending). I can’t call this one.

My prediction? Inflation will decline over the year but will remain stubbornly above the 2% guidance. I suspect central banks, with the connivance of their political masters, will start fiddling their targets upwards (or use ‘ranges’ to hide their incompetence).

Interest rates will rise - at a slower pace - in Q1. And then stop. There’s always a lag with these macro interventions and the danger is to overdo things. I think the bankers will wait until Q4 to see what happens. I’m backing the consensus view here but it seems to be a sensible prediction.

The Crypto Winter & the decline of Tech Stocks

The air came out of the crypto bubble in 2022 as the year ended with the destruction in value of the various tokens and the end of many associated companies. Fraud didn’t help the sector. I’ve often thought crypto was a technology in search of a role. The first - and purest reason - was the distrust of fiat currencies. Very noble. This is actually the real reason why they will become increasingly regulated in 2023 and not necessarily the ostensible reason given; to ensure against fraud and money laundering. The speculative aspect will hopefully die away and then - pace Bitcoin - we might be left with distributed technology that could be used in many useful ways (conditional contracts, FX hedges, even the buying and selling of gold).

The decline in the FAANG stock value was bound to happen (throw TESLA onto this pile). I think this was just a correction and not something more substantial. I mean, much as we might not like to, we all use Amazon and Google don’t we? They’re not going anywhere. And I’ll probably upgrade my Apple phone this year. However, as the recession bites, some of the more subscription model dependants - Netflix, Disney - might continue to get a (well deserved) kicking. Reading is better for you anyway.

What’s Facebook by the way? Wasn’t that big a few years ago?

Equities

I was never really into the ‘latest thing’ type of tech stock financed by cheap money that was poured into companies that never paid dividends. So my own portfolio of solid performers did okay in 2022 but also a hell of lot better than, say, my various (managed) pension pots which seem to be composed solely of FAANG stocks (and so got hammered during the year). Thanks arrogant, overpaid fund managers. Here, have a £150 bonus. You’ve earned it guys.

The FTSE 100 was broadly flat from beginning to end of 2022 (up 0.66%). The usual reason given is that the index of the UK’s largest registered companies is a) broad based across various sectors and b) it is a flag of convenience for many non UK companies and so not massively reflective of the narrow UK economy. This compares favourably to the more domestic focused FTSE 250 which lost 21%.

Comparables: DAX: -13%, CAC - 9.2%, S&P 500 -19%, Nasdaq -33%, DOW -8.7%, Nikkei -11%. Gold: broadly flat in USD but up 13% in GBP (disparity due to the 10% drop in the sterling / USD rate during 2022), Bitcoin -60%

Equities: 2023 outlook

Here are my tips for 2023. Clearly I’m throwing darts at board with a blindfold. Don’t take anything I say as investment advice.

Miners. Whether you are an eco warrior or not, the world runs off the precious stuff we extract from the earth. China opening up will inevitably create more demand for raw materials. Also, miners typically pay good dividends. A subset of this is the gold mining companies. Gold has stealthily been making a comeback in 2022. I imagine this will continue in 2023 as money flies from the fool’s gold of Crypto. Continual high inflation will also support this flight to gold in 2023.

I’m also cautiously watching nuclear. The world urgently needs a secure and clean source of base load energy that doesn’t pollute. Modern nuclear fits the bill - whether large scale reactors utilising molten salt Gen IV reactors with potential waste eating technology or small modular reactors (SMRs). So I’m watching Uranium mining companies in 2023 plus companies that are involved in the value chain of creating energy from the various chemical processes along the way.

Lastly, energy companies. We need traditional oil and gas as we transition to other forms of energy. The big energy companies are diversifying and I tend to look at them as part of the solution and not the problem. So whether from the perspective of the present day or the future, these companies are a good bet.

I’m basically saying buy value stocks with good dividends but take a flutter on nuclear if you can.