Sunday, November 27, 2022

End of year 2022 update

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.

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:

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. 

CPI


Some details on components of inflation coming down:
The action taken by the Fed to tame inflation:


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.

https://www.redfin.com/us-housing-market

Recession indicators:


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.

Global Purchasing Managers Index is trending down. The trend is an early indicator of recession. 

The Consumer Confidence Index is trending down. It is an early to concurrent indicator.

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 
  1. 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%)
  2. 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.
  3. 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.
  4. QS' support stayed relatively stable (4% decrease), going from 16.1% in 2018, to 15.43% in 2022
  5. 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. 
  6. 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.
  7. 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). 

Official results from Elections Quebec


QC125.com survey aggregator



   8. Using the qc125.com elections simulator, my prediction (below) assumed a premium at the poll for the PCQ and PLQ. That is; some voters, afraid to admit to pollsters that they would vote PCQ or PLQ, would still do so on election day. This was a misread as it did not happen at all; people voted much the same way they were polled. It did not change the outcome very much in the end, with the 2 PCQ seats going to CAQ, and 3 PLQ going to QS.
My qc125.com simulator's forecast


qc125 vs actual. Bang on in Chauveau.

qc125 vs actual. Iberville.

qc125 vs actual

qc125 vs actual

9. I also simulated (below) the improbable scenario where CAQ would get hammered at the polls and these votes would go to PLQ, PCQ, and PQ. I was trying to evaluate what the worst-case scenario would be, for the case where the pandemic would have birthed more conspiracy theorists voting PCQ, and the federalists would have feared Legault's recent immigration position, adding votes to the PLQ. With this simulation, I knew that there was no statistical way that 2022 would see a change of government as the outcome was still a CAQ majority.

So now, let me review and comment on what I wrote back on January 24th 2022:

"Quebecers are going to re-elect La CAQ (the centrist, populist party founded by retired businessman Francois Legault) with a crushing majority. Legault's team would have to make serious mistakes between now and October 3rd not to get another 4 years term with a lot more seats than they got in 2018.
CAQ will gain another 20 seats due to their management of the Covid pandemic, but also as they are now seen by the more "conservative" PQ and Liberals voters as a proven alternative to the old parties."

Pretty, pretty, pretty good; CAQ gained 16 seats. A definitive sign of approval of Legault's management of the pandemic. However, while some of the PQ voters did move to CAQ as forecasted, the same vote migration did not occur for traditional PLQ voters, who instead moved to PCQ, likely finding in Duhaime a more serious leader than the PCQ's prior leadership.

"Duhaime's Conservative party will get at most 5% of the popular vote if Covid-19 has abated by then and if the related social restriction measures are removed. Eric Duhaime has failed to make his party anything other than one of the whinos and the antivaxxes, with little substance otherwise. PCQ will get no seat. Duhaime will resign as the PCQ's leader and go back to being an opinion radio host. He will probably write a book about his experience during the Covid-19 years and as the leader of the PCQ. The book will sell less than 2000 copies."

I was definitely wrong here on the percentage. I did not account that the cost for the conspiracy theorists to express their discontent is null (they just have to vote PCQ). I should have realized that this zero barrier to whine would have been expressed in the first post-pandemic election (duh!). 
However, Quebec is not any more politically conservative than it was 4 years ago; 6-8% of voters are hardcore right-wing conservatives who will never find the CAQ far enough to the right. There are no more than 6-8% of voters that are truly crackpot conspiracy theorists, and they will go back to being ignored, shouting at clouds, but mostly out of the political realm (unless there's another pandemic). 7% to 10% of the electorate will remain with the PCQ. 
If you have any doubt that it can be any other way for the loonies, look no further than Max Bernier and his PPC, which is what the conspiracy theorists (les "coucous") would like Duhaime to emulate; 1% of the votes. As soon as Duhaime would start talking about "the new world order" or "Bill Gates and George Soros' plan for the end of the world", support for the PCQ would collapse.

Duhaime will stay around longer than I expected but I expect him to leave the PCQ by 2024, and he will, much like Mario Dumont, find a cushy job as a political commentator somewhere on TV or radio.

As I failed to consider that the PCQ is now very well-funded and Duhaime is now getting a six figures salary from it, there is also the possibility that this becomes his cushy job...


"Little change for Quebec Solidaire which will remain the default option for the left-leaning electorate."

That was and will remain 100% accurate for the foreseeable future; there is no appetite in Quebec for QS' approach to policies outside of the bracket of 13-16% of hard left-wing Quebeckers. 

"Parti Quebecois will be decimated (less than 5 seats) for the following reasons:
    • The identity nationalists (the ones wanting Quebec to have a stronger voice. Which are not to be confused with the separatists) have found a home with La CAQ via Legault's stance on 'laicite' (Bill 21). A few percentage points will be moving from PQ to CAQ
    • Since PQ has all but abandoned the idea of pushing for Quebec's secession from Canada, its electors that were lightly right-leaning have migrated to CAQ. A portion of the lightly left-leaning electors will also move to CAQ, and some further on the left, will go to QS.
    • PQ does not have a charismatic leader that could sway the electorate. Therefore, only the hardcore independentists will hang on to the party as it slowly fades to oblivion. "
My analysis was also accurate for the PQ and the overall separatist agenda. As I wrote these lines back in January, the PQ polled at about 10% of voters' intention and it went down to around 7% average until mid-September. No-one really knew nor cared about PQ's leader Paul St-Pierre Plamondon. Concepts such as nationalism and independence cannot be rallying people without a strong, charismatic leader. 
Incidentally, PSPP revealed himself to be such a leader during the 2 debates. His clarity of vision (Quebec secession is back at the forefront), honesty, and communication skills shone through, bumping the polls by 3-4 percentage points, to what I would call the maximum PQ potential. PSPP was also helped in his own riding by QS candidate Marie-Eve Rancourt stepping out of the race after being caught replacing PQ leaflets with her own in Camille-Laurin (Bourget). As can be seen below, this secured the victory to PSPP who would otherwise have been second to the CAQ candidate.

The fact is; there is less appetite for independence in Quebec than ever before, as the few remaining areas where Quebec expresses its distinctiveness are satisfactorily covered by CAQ for most Quebeckers. I do not expect this to vary very much over the foreseeable, with the hardcore independentists stabilizing at 8-10% of the electorate.

What the elections revealed more than anything is an increasing democratic deficit whereas the percentage of votes and seats gained are poorly correlated. This is an obstacle to increased voters' participation as there is an increasingly justified perception that one's vote does not matter much in securing one's political representation.
It is also critical that a more representative government be elected to effectively hold it accountable to the population.

CAQ's Bill 39 which would have reformed the electoral process, while not perfect, would have gone a long way in addressing this situation.


Party Percentage of the popular vote Seats with current system Seats % with current system Seats with Bill 39 Seats % with Bill 39
CAQ 41% 90 72%
(+31 pts)		 75 60%
(+19 pts)
PLQ 14.4% 21 17%
(+2.6 pts)		 16 13%
(-1.4 pts)
QS 15.4% 11 9%
(-6.4 pts)		 14 11.2%
(-4.2 pts)
PQ 14.6% 3 2.4%
(-12.2 pts)		 10 8%
(-6.6 pts)
PCQ 12.9% 0 0%
(-12.9 pts)		 10 8%
(-4.9 pts)

These projections assume vote consistency when switching systems, which is less than certain.

Obviously, the issue with any reform aiming at a more representative electoral system is that it will invariably penalize the winner, thereby removing incentives to change.

That could be something Legault would consider as his political legacy in a final mandate if his party were to win the next provincial elections in October 2026.

One can dream that we would see a return to the average ~75% turnout that characterized the period of 1931 to 1998.

Ukraine war, and Russia

I did not have anything to say in January 2022 about the war in Ukraine because, of course, it had yet to start.

I did comment throughout the year here, here, and here.

As I stated before, I am not a military analyst, but I have a keen interest and built significant experience observing and analyzing the behavior of autocratic regimes. Whether the dictator is Putin, Xi, or Trump, they operate similarly, and they also fail in the same manner.

As such, I should resist the temptation to focus on what kind of weapon or tactics NATO countries or Ukraine should employ, and instead zero-in on what needs be achieved not only to win the war but, more importantly, to defeat Putin's regime for good. This is what will ensure enduring peace, and hopefully a better future for both Ukrainians and Russians.

Autocrats stoke nationalism when they fail to produce any signifiant advancement for those they rule over (or. at the very least, in the powerful entourage that benefits from their rule), or worse, when society regresses under their leadership.
They need to project strength to assert their power and for their opponents to 'bend-the-knee'.

Population and the dictator's inner circle will follow as-long-as he wins. Or, as-long-as he can keep the illusion of the win alive. 

(light red) Ukrainian territory occupied by Russia.
(green) Territory taken back by Ukraine.
June 25th 2022 vs November 25th, 2022

For the past half-year, Putin has no wins to show for. He has shown himself to be a poor strategist, unable to see the world past his echo-chamber.  

But while the enormity of his loss is clear enough for the rest of the world to see, true long-term peace can only be achieved with the demise not only of Putin, but of all the failed, old empire nationalistic nostalgia he represents. 

It is therefore critical for this war to be won by Ukraine without the shadow of a doubt, in terms that the average Russian would recognize as an unacceptable loss; where Russia would be to end the war with less Ukrainian territory than they were controlling before their invasion on February 24th, 2022.

The shame brought to the Russian nationalists' psyche could then only be appeased with the repudiation of Putin's actions and, eventually for most Russians, of his ideology. 

That is the key mistake some make about the conflict; the path to peace is not in giving an off-ramp to Putin, rather, it is to give the Russian people one...

[2023-APRIL-03 Update]
I had mentioned before that sinking the Black Sea fleet and destroying 100k Russian soldiers would be undeniable evidence to the Russian people that Putin is lying to them and would lead to his dismissal.  Well... now with 200k Russian soldiers dead or incapacitated, I was surprised not to see the common Russian people rebel against authority more than they have done. 
That was until I realized, thanks to this video, that Putin knows full well not to antagonize its support base; up to now, he has made sure not to send soldiers from the densely populated regions of Western Russia (and criminals) to the front. As such, his propaganda machine can continue working for his supporters.


Crypto

Turns out that 2022, as I had alluded to in January, was indeed the year of reckoning for crypto.

The sad part is that some honest people put hard earned money into the pyramid scheme and lost of lot of it.

However, on the bright side, this is overall a good thing because it cleansed a bubble of libertarian delusion that could eventually have metastasized into the real economy. It failed before that (miserably). 

As of now, no-one has ever been able to give me a valid answer to the following question: "What problem is crypto solving for?". No matter how elegantly, effectively, and brilliantly the concept is presented. No matter how smart the people building the crypto world are. If the true answer can be reduced to "crypto is not currently solving any problem", failure is unavoidable.

Is liberal democracy dying?

No. 

With Bolsonaro losing in Brazil (note that I did not write "with Lula winning"), Putin losing in Ukraine, Xi seeing his support fading as he oversees massive destruction of wealth in China, and Trump getting pummeled during the mid-terms (and potentially getting indicted for his multiple crimes), the end of 2022 has given us great hope for liberal democracy...

But, that will be the subject of more analysis in 2023...


Have a great end of 2022!





Supporting and additional reading material:

Ukraine:
2022-11-06: Western air-defence systems help Ukraine shoot down moremissiles
https://www.economist.com/europe/2022/11/06/western-air-defence-systems-help-ukraine-shoot-down-more-missiles
2022-11-26: U.S. and NATO Scramble to Arm Ukraine and Refill Their Own Arsenals.

Crypto:
2022-11-09: Is This Crypto’s Lehman Moment?
https://www.nytimes.com/2022/11/09/technology/cryptocurrency-binance-ftx.html
2022-11-10: Instead of revolutionizing finance, crypto is largely repeating its mistakes. 
2022-11-10: Bankman-Fried Vows to ‘Give Anything’ for Capital as FTX Flails
https://www.bloomberg.com/news/articles/2022-11-10/bankman-fried-vows-to-give-anything-for-capital-as-ftx-flails
2022-11-12: Sam Bankman-Fried charmed Washington. Then his crypto empire imploded.
2022-11-17: Man At Center Of GOP Vote Fraud Hype Lied, Pleads Guilty.
2022-11-23: How Crypto Goes to Zero.
2022-11-25: Bitcoin teeters after Grayscale owner DCB reveals it's $2bn in debt.

Liberal Democracy:
2021-01-11: 60 Minutes. Georgia election official refutes Trump's voter fraud claims
2022-06-24: Barr Laughs Off Election Fraud Allegations In ‘2000 Mules’ Documentary
2022-09-21: GOP congressional candidate said US suffered from women’s suffrage and praised organization trying to repeal 19th Amendment.
2022-11-09: Abortion rights advocates score major midterm victories across U.S.
2022-11-09: 2022 Exit Polls
2022-11-10: Why is it taking so long to count votes in Colorado? Here’s why — and other ballot counting questions, answered
2022-11-11: Here’s what got my Gen Z friends to turn out at the polls
2022-11-12: U.S. intelligence report says key gulf ally meddled in American politics
2022-11-13: 7 reasons to be optimistic about the future of democracy
2022-11-26: Election deniers lose races for key state offices in every 2020 battleground
2022-11-26: New state voter fraud units finding few cases from midterms.

Trump:
2022-11-07: Trump and other Republicans are already casting doubt on midterm results
2022-11-13: Trump is only good at speaking to the losers in a language they understand
2022-11-25: Trump’s Latest Dinner Guest: Nick Fuentes, White Supremacist
2022-11-27: Republicans shrug off Trump '24 bid: 'The excitement’s just not there'
2022-11-28: Was Election Denial Just a Passing Threat? Or is it here to stay?

Posted by at