2022 was a year of surprises: Russia’s invasion of Ukraine, persistent inflation fueled by energy costs, the collapse of FTX and crypto markets, the revelations of the Twitter Files, and one of the worst equity markets in recent history, to name but a few.

2023 is poised to present some equally challenging circumstances.  Here are twelve trends, events, or surprises that may come to shape and define the year ahead.

Inflation Returns. I may be the minority report here, but I do not believe we’ve seen the end of – or worst of – inflation in the U.S. I argue that following a lag in which price growth appears to moderate, CPI inflation returns to the 8% to 12% range, where it persists for the rest of the year. This will be cost-push inflation, not demand-pull (see the second point below), and a lagging result of trebling the money supply in the U.S. since 2009. Stagflation returns, with the Misery Index (inflation plus unemployment) hitting new highs.

U.S. Economy Enters Recession. This is a less controversial proposition at this stage, as most economists and analysts agree that recession looks highly probable for 2023. The first half of 2023 is likely to be characterized by negative GDP, rising unemployment, and an insecure consumer. The wave of layoffs which began in the tech sector in 2022 spreads to other industries, and migrates down from large-cap corporations like Meta and Amazon to small and medium sized enterprises which are disproportionately impacted by the slow down.

European Energy Crisis Worsens. While in the near term Western Europe may be spared the worse possible outcomes due to a mild winter, the underlying factors which led to the energy crisis haven’t been resolved. Germany, the EU’s largest economy, made a Faustian bargain believing that it could abandon its coal industry and any nuclear aspiration and instead place their trust in the Russians—against all historical experience—and a green utopia. France similarly backed away from their path to energy independence—nuclear power—and are paying the price. While both have recently repented of these sins, the path to recovery will take years, not months. In the meantime, supply shortages will continue to plague these economies.

Oil, Crypto, and Gold Perform.  Energy markets will continue their bull run for the foreseeable future as a result of continued supply disruptions and refinery constraints. Bitcoin and Ethereum emerge from a long, dark crypto winter, but altcoins remain frozen out. The dollar begins a long, if slow and turbulent, slide from 2022 highs, as peak demand from rapidly rising interest rates eases.

Continued Rise of Resource Nationalism.  The unforgettable geopolitical lesson of the pandemic era has been that just-in-time supply chain dependence on countries that many or may not have a nation’s interest at heart represent a dangerous strategic folly.  It’s well and good that we learned this lesson when we did. Countries around the world are now aggressively working to realign their supply chains and ensure that they have strategic resources in adequate supply to meet unexpected, Black Swan events. Look for increasingly protectionist and nationalistic policies to dominate trade discussions.

Traditional Global Alliances Break; New Ones Form.  Long-standing partnerships, such as the U.S.’s relationship with Saudi Arabia, have already begun to unravel. Expect further strengthening of the China and Russia led alliance involving former U.S. allies, or at least non-aligned such as India, Turkey, South Africa, and other “BRICS” aspirants. Most vulnerable to geopolitical shifts are countries in Africa, Southeast Asia, and South America. Because of sanctions warfare and incoherent or at least inconsistent foreign policy, the U.S. ends up in a net deficit position, losing more friends than it gains in this process.

U.S. Dollar Dominance Continues to Erode. Hard money returns to favor, with commodity backed currencies taking the spotlight. Alt payment systems, petrodollars being replaced with petrorubles or petroyuans, as well as central bank issued digital currencies, will all conspire to slowly erode the U.S. dollar’s share of global financial and trade flows.

The West, Weary of Cost of Ukraine War, Sues for Peace.  While it may not be realistic to think that Russia can bomb the Ukrainian people into submission, the increasing costs of supporting Ukraine’s war with Russia will challenge political leaders across the West. This fatigue will increase as more citizens start to ask reasonable questions about whether hundreds of billions of dollars or euros might not be better spent to take on some of the domestic economic and social challenges that these nations face at home. Eventually, Western governments and Putin each decide that a half a loaf is better than no loaf at all.

Domino Effect of Exposure. The recent uncovering of high level frauds and corruptions involving U.S. government agencies and personnel continues. Increasing transparency leads to accountability. Eventually the evidence becomes too overwhelming to ignore; arrests, trials and convictions ensue. Congressional hearings lead to wave of resignations and first steps toward fundamental institutional reform.

China Barks, but Doesn’t Bite, at Taiwan. While we should expect the growling and barking to grow louder, with more frequent air space incursions, naval activity, intimidations and outright threats, it is highly unlikely that China invades Taiwan in 2023.  While China most certainly would prefer to confront Taiwan while the Biden administration remains in power, rather than face a return of President Trump, Xi’s government will conclude that they are not ready, militarily, politically, or otherwise, to invade Taiwan. Domestic issues, including a worsening economy and rising social unrest within mainland China, will mean that creating a row with the U.S. and other trading partners in the West remains untenable for the time being. While Russia might be able to make do without selling gas to Germany, there is no way the Chinese economy can survive if abruptly cut off from the U.S. and Western Europe.

Second half rebound in economy and markets. While I am not optimistic about the first half, I take great comfort in the breadth and resilience of the American economy. There is enormous unleashed latent potential in oil & gas, in manufacturing onshoring, in supply chain realignment, and in new technologies such as AI, quantum computing, blockchain and cold fusion.

More of the same.  What could derail a more V-shaped recovery are the same forces that helped bring the recession about … poor policy decisions that continue to damage our energy industry, keep our borders insecure, and fail to dismantle the out-of-control regulatory bureaucracy that is impeding innovation in energy, manufacturing, financial services, and technology. These are some of the largest sectors in the economy and those which have been most negatively impacted by the Biden administration’s foolish return to Obama-era economic policies.

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