This article includes some fictional analysis. The idea is simple: to analyse the present, with perspective, so that the trees do not prevent us from seeing the forest; and then venture to look ahead to the coming year. The article should not be considered as a forecast, but rather an exercise in reflection for your trading and investment decisions.
The current economic situation is a disaster; we have never faced anything like it this century. Globally, the vast majority of surveys, such as investor sentiment, consumer confidence, and business surveys, have deteriorated sharply. These surveys have plunged to minimum levels that, in many cases, are lower than those reached in the two points of maximum stress so far this century: the pandemic of 2020 and the financial and real estate crisis of 2008-2009.
It could be said that we have ‘enjoyed’ a period of unprecedented economic growth thanks to, one, "zero" interest rates, and two, the printing of money by central banks, which has allowed an irrational amount of debt to be financed. This imbalance has come to light at a time when commodity prices, which had remained dormant for years, have risen sharply. Inflation is on the rise, zero-rates are coming to an end, and the joint collapse of stock markets and bonds is unprecedented in this century.
University of Michigan consumer confidence index & global economic policy uncertainty indexSource: CMC Markets, University of Michigan and Economic Policy Uncertainty
Will 2023 be the year of the great reset
However, could central banks go back to buying bonds to get us out of this quagmire? As long as inflation is out of control, this appears unlikely. So, could governments return to expansionary fiscal policies to revive the economy? As long as interest rates don’t come down, deficits are too large.
In this context, comments such as those from France's president, Emmanuel Macron, when he spoke of the end of abundance, and renowned billionaire investor, Ray Dalio, when he commented that the great reset is near, appear plausible. In short, it seems that too many kicks have been given to the can, and something major could take place.
What could a future system look like?
At this point, the exercise in analytical fiction is at its best. The future will depend on what happens in the present. The following three alternatives then arise:
1. The system collapses because inflation is not controlled. Interest rates don’t stop rising, and we enter an unstoppable spiral of defaults. There would be no predisposition or time for international agreements, and each stick would have to bear its own candle. In this case, we could return to a kind of middle age in the style of the film Mad Max.
2. The system disarms little by little, like controlled detonations. The countries, aware of the situation, come to an agreement. Inflation allows states to meet part of their debts, citizens suffer an increasing tax burden, and a system of strict control is created. In this case, the dystopia would more closely resemble George Orwell's 1984, or Aldoux Huxley's Brave New World.
3. The system is once again reinventing itself thanks to science. Let's not forget that human beings are machines of innovation and invention when they are at their limits. Today's technology has unprecedented potential, as was seen in the search for a vaccine for Covid-19. Could scientists find a diagnostic system that saves states billions in healthcare? With all the resources devoted to fighting climate change, will we find a much more efficient energy that lowers our energy bills? A technological rescue that would boost growth, and make debt a mere anecdote.
Anything can happen; you have to be flexible
Circumstances can change rapidly, and one has to have a flexible attitude (without forgetting, however, that this is a fictional analysis). If you had asked me a few months ago when inflation was above 10%, this would have been my order of preference, or probability: Mad Max Apocalypse; 1984 Super Control; Tech Rescue. If you ask me now, the ranking would be 1984 Super Control; Tech Rescue; Mad Max Apocalypse.
For a Mad Max Apocalypse scenario, we could incorporate some gold and silver, which would probably be used as a more generalised means of payment. Add a few barrels of oil, and don't forget to stock the food pantry. And the most important thing: defence, because more than one person will want to rob you of everything you've accumulated.
In a 1984 Super Control scenario, a digital currency – cryptocurrency – could be imposed, or a new centralised currency could be created using blockchain technology (central bank digital currency, CBDC). In this case, assets related to cybersecurity, big tech, 5G, and social media could also find a home. The technological rescue scenario, incorporating renewable energy, biotechnology, aerospace, robotics, and driverless cars, is the most appetising.