As 2022 is coming to a close (it flew by so quickly!), let's look back at my predictions for the year, and I will give you my opinion on what I think 2023 and beyond have in store for us.
Jan 2022 entry: https://would-that-be-interesting-to-you.blogspot.com/2022/01/what-to-expect-of-2022.html
Mid-year update: https://would-that-be-interesting-to-you.blogspot.com/2022/06/mid-2022-update.html
Covid-19
Despite the recently announced variants which have fueled a new wave of cases in Singapore, the world has moved past Covid and the stats are encouraging.
The current death rate sits at about 0.36%, down from 0.44% in January 2022, but, more importantly, the total number of cases went from a 7-day average of 1,402,936 to 429,567 (70% reduction) for the same comparative periods, which is about the same as the seasonal flu.
Now, pretending to know how a virus will mutate is not science, and certainly not what I will do here. We cannot become complacent; funding for continued research on adaptive treatments and future vaccines is necessary.
However, at this point, touch wood and hope that the pandemic is truly behind us.
Hong Kong
Not much to say. Hong Kong is dead. Carrie Lam and the CCP killed it. It is not going to get better because the fundamentals are not changing: a dictatorship cannot survive in the long run and it will revert Hong Kong's amazing economic and societal progresses of the past 70 years.
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| HSI: If you had invested any money on July 1st, 1997 (retrocession) and held it to now, it would have not appreciated at all... That is, 0% ROI |
Expect more institutional rot, increasing corruption, stagnating GDP, further brain drains, and general exodus. On the bright side? Property will be a lot more affordable in 5 years!
China:
Xi completed the building of his truth-proof echo-chamber as he surrounded himself with cronies with terrible leadership track records, but with the one quality Xi wants above all, loyalty (here, here, here, and here).
The recent delay of release of GDP and other economic data is yet another sign of the deep troubles with the Chinese economy. The numbers finally came out. No surprise, they were good! That's great... if you are naive enough to trust them.
I believe that these figures can be trusted as much as last year's census data announcing population growth after a delay, and for the same reason: data ripples from local administrations to regional, and finally to national level, with some fudging along the way but without a central view at every step. Then, when the data rolls-up at the country-level and it is bad, additional time is required to further "massage" the data to make it palatable.
The reality is that China's population has not reached 1.4 million people and it is already decreasing (India will officially pass it to become the most populous country in the world in 2023). Not only has China's real GDP not reached its growth target, but it has likely been between 0 and 2% for the first time in 45 years.
Housing, where most of Chinese's population's equity is stored, keeps going down. This is going to erode support even for the most nationalistic Chinese person.
When you have a deluded dictator happily thinking he can do no wrong, the principal danger is his reaction when reality hits that not only winds are turning, but his serfdom also starts to see through the propaganda and reveals that he is not so strong, that the country is not doing so well, and, as a leader, he is not all that he pretended to be.
Typically (and Putin has made in infamous case of this in Ukraine), this means increased risk for our not so friendly dictator, to be using war to boost nationalism and support for his god-like leadership.
Obviously, I am talking about a potential invasion of Taiwan. Let us be clear that there is no scenario where Taiwan willingly accepts to be assimilated into CCP China.
As such, to answer the question as to whether Xi will launch an invasion, one must assess how distanced from reality dada Xi is, and how much power does he yield over the CCP.
The objective reality is:
- China's population is aging and sending youth, China's future, to a rhetorical war, would be the end of Xi
- Even the most optimistic scenario would see hundreds of thousands of China's precious boys die during the invasion
- Taiwan is an island. No invasion attempt can be made unannounced; a blitzkrieg is therefore impossible. Xi would not be deluded in thinking this would be anything but a protracted war
- A successful invasion would then require a multi-year occupation and reform. Millions of soldiers would be required
- There are no signs of military buildup in the short run.
There are some signs hinting that Xi might be more connected to reality and therefore less likely to start a war for Taiwan which would be even more foolish than Putin's for Ukraine:
- Xi is keenly aware that if what was supposed to be the second most powerful army in the world (Russia) got absolutely humiliated in Ukraine, the risk of humiliation over a Taiwan invasion would be even greater. Xi would never put himself in a situation where his legacy would be one of another 100 years of humiliation.
- Back in August, when U.S house speaker Nancy Pelosi visited Taiwan, Beijing scheduled unprecedented military exercises around the state island. However, it was revealed that, contrary to initial plans, "Chinese warships stayed at least 24 nautical miles away from Taiwan’s coast during recent military drills despite warnings from Beijing that they could come well within the island’s territorial waters,according to senior government officials in Taipei.". This was a definite tell that the whole exercise was meant to save face and appease Chinese nationalist and not a show of force that would risk starting WW3. Clearly, at the very least the Chinese military knew they needed to show restraint.
- With the past 2 years impacts of U.S sanctions on China in the tech sector, Xi was reminded that China is not able to live yet in isolationism from global-trade with the free-world. It might never be. And an invasion of Taiwan would certainly bring in drastic sanctions against China which its currently feeble economy could not withstand.
- It would take a few years for China to prepare for an invasion and the signs would be obvious. At this point, despite the rhetoric, none have materialized...
There is unfortunately no negotiated way out of this as one cannot talk sense with emperor Xi.
The best approach to ensure peace is therefore to continue and accelerate building the Taiwan porcupine, militarily, and psychologically. That is, for the free world to provide Taiwan with so much defensive military equipment that it would be virtually impossible for China to take the island. And make that military buildup ostentatious so the Chinese population, military, and, most importantly, Xi, are keenly aware of the consequences (Taiwan porcupinification here, here).
If the Chinese population, aware of the ineluctability that a war with Taiwan would be long and that they would lose their boys, that losing face is a high probability, and that the Taiwanese population is quite content in being free, then unification through an invasion will never really be anything but Xi's pipe dream with no effective popular support.
U.S: Economy
The economy is still extraordinarily strong, with no unemployment (3.5%, which is frictional unemployment), GDP rebounded.I think the scarecrow of a deep recession in 2023 is fomented by investment banks trying to prevent the feds from raising rates some more, as cheap money fuels investments, which has been lining their pockets for the past 15 years. They are reactive rather than looking at the fundamentals which is that inflation is there because of excess demand in an extraordinarily strong economy, limited by short-term external factors (war in Ukraine, Covid pent-up demand). As such, these IBs have been providing mostly biased opinions, over analysis, here, here, here. Now, when faced with reality of stocks being resilient, they turn their views 180 (here, here, here)
Inflation:
While inflation is a concern, it seems that the Fed's intervention and other measures such as tapping the U.S oil reserves are showing results, with price indices going down from the peak in June.
The action taken by the Fed to tame inflation:
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| Fed Funds Effective Rate |
The current Fed target rate sits at 4% at of the end of November. The massive recent increases seem to have achieved their goals, with inflation peaking in June.
It would seem to me that a final rate plateau of 5% with an announcement of a rate increase slowdown would send the appropriate signals to the markets.
It also is now evident that lowering the rates starting in August 2019 was a mistake, fueling inflation worldwide (other countries tend to take their cue from the U.S. Here, here). That was pushed heavily by none other than Trump himself.
"Mr. Powell also made clear that the bigger risk to the economy was in not acting to tame inflation, noting that if the Fed over-corrects, it has the tools to walk that back. The bigger economic risk is “if we don’t get inflation under control because we don’t tighten enough.”
I think that the most beneficial impact of the higher Fed rates is going to be the cooling of the housing market (here, here, and here). Deflation of this bubble is a lot more desirable than a recession causing burst.
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| https://www.redfin.com/us-housing-market |
Recession indicators:
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| Yield curve is deeply inverted. A strong leading indicator of recession. |
The following indicators are not as reliable as the yield-curve inversion as indicators but when the signals they send align with the YC's, it strengthens the case for predicting a recession.
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| Global Purchasing Managers Index is trending down. The trend is an early indicator of recession. |
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| The Consumer Confidence Index is trending down. It is an early to concurrent indicator. |
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| U.S unemployment is a late indicator. As such, it is not a predictor of recession but rather, would confirm one has occurred. |
Overall, and everything else being equal, I have trouble seeing where a deep recession would come from in 2023:
- Crypto currencies are deflating, and that bubble is isolated from the real economy.
- Housing prices are easing slowly; no mortgage-backed derivatives to create a sudden break.
- Techs are deflating but this already has been discounted for and has had minimal impact on unemployment, no serious impact on the economy
- U.S personal saving rate is low and trending down, so it could not fuel consumption during an impending recession, but with the overnight rate at 5% once stabilized, the Fed will have ample room to cut rates to revive the economy should it need to.
- The Fed balance sheet unwinding could be headwind, but it started in June to little effect on the economy, and the Fed is in in full control of when it stopped, and it can easily be reversed.
Besides for the fact that the recession signals are there for 2023, it does seem like the U.S. economy's fundamentals are strong and we are in for a "technical recession" rather than a true economic reset.
Unrelated but interesting: A little economic nugget that I thought was interesting as a contra-point to what some billionaires are screaming at the top of their lungs from their echo-chambers ; no, California is not going down the drain. Quite the contrary: "California Poised to Overtake Germany as World’s No. 4 Economy. Contrary to popular belief, the Golden State has proven resilient, outperforming its US and global peers."
In Quebec
The Oct 3rd 2022 provincial elections
- Voter's turnout was low, but mostly unchanged, from 66.45% in 2018, to 66.15% on Oct 3rd, 2022. Note that this is about the same turnout as the historically high 2020 U.S presidential elections (66.8%) and the 2019 Canada General Elections (67%). It is also much higher than the 2022 Ontario provincial elections (43.53%)
- CAQ saw an increase in voters' support (+9.5%), from 37.42% of eligible voters in 2018, to 40.98% in 2022. That translated into 21.6% more seats for the CAQ.
- PLQ got a beating, with support going from 24.82% in 2018, to 14.37% in 2022 (-42%). That translated into 32% fewer seats for the PLQ.
- QS' support stayed relatively stable (4% decrease), going from 16.1% in 2018, to 15.43% in 2022
- While PQ's support decreased by 14%, from 17.06% of eligible voters in 2018, to 14.61% in 2022, its representation got hammered, going from 10 to 3 seats (-70%) in parliament.
- PCQ went from 1.46% of the popular vote in 2018, to 12.91% in 2022 (+784%). Yet, this did not translate into any seats for the Parti Conservateur du Québec.
- Whoever was following survey aggregators sites like QC125.com, would have had no surprise as to who would win, be the official opposition party, and which party leader would be elected and which would not (see below charts). Survey results were all within a 10% margin of errors, and QC125.com accurately predicted the outcome of the 2022 elections. As such, back 6 months ago, my own predictions which were based on data from QC125 , were also quite accurate (more on this later).
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| Official results from Elections Quebec |
