The new reality.
Economic outlook for 2023.
Now that we’re facing the final stretch of a busy year... It's time to make predictions for the year to come. What will the economy bring us? No-one knows, but we have a few facts to get a snapshot of the new reality of 2023. We’ll have to adapt it as things pan out, but here we go:
Globally, and especially in the European Union, we think that economic policy is ever less dependent on the central banks and more in the hands of politics, which exerts pressure to maintain its capacity to subsidize its electoral policies. After the latest interest rate increases, we believe that there will be no short term market increase; at most, there will be some rebounds which, from our point of view, should be used to get ourselves out of the situation, given the clearly downward medium term trend. Interest rates are not going to lower in the short term either. There has never been such a rapid and pronounced increase in interest rates. Once the rates reach the top, they will probably stay at that high level for quite some time. This has never happened with a market that is in such debt. We’ll need to see what happens with profit and loss accounts once credits need to be renewed at higher rates over the coming year and whether this ends up affecting employment and spending, given that the ECB has decided to shift all its efforts from the adjustment to the private economy. If geopolitical tensions do not relent and the war in Ukraine continues, raw materials, especially fuels, will remain at a high price. For these reasons, it seems like a good idea to moderately increase investment exposure to tangible assets, taking greater care over real estate assets, which may be at the end of their upward cycle. At this juncture, it is most likely that the central banks will start to toy with the idea of increasing the balance point of inflation from 2% to 3-3.5%, given that inflation looks like it isn’t going down anytime soon, due to second-round effects, among other factors, and it seems like QE programs that generally re-increase liquidity aren’t coming back either. All of this will cause a transfer of wealth from savers to debtors, slimming down the middle class even further, and the governments (especially of the US and some European countries) might window dress their accounts when the debt/GDP ratio goes down. Therefore, we need to forget about zero percent interest rates and about the stock markets recovering their maximum level of 2021 prices for the time being. Our point of view is that it clearly hasn’t hit rock bottom yet. At the moment, advance indicators such as the increase of inventories foretell a general recession, but the crisis indicators aren’t in the red yet: high volatility, the opening of credit spreads, an upturn in unemployment and a real lowering of spending; when that happens, then yes, we'll be in a new crisis.
Specifically, in the Swiss oasis, we don’t expect large second-round effects which lead to salary and price spirals. If energy prices are stabilised and supply bottlenecks are improved, as it seems might happen, internal inflationary pressure might be contained. In turn, it’s probable that the Swiss franc will become stronger against the euro in the short term, and against the dollar in the medium term. The big difference in inflation between Switzerland (2021: 0.6% *2022: 2.9% *2023: 2.1%), the US and the Eurozone points to the significant possibility of appraisement in the Swiss franc.
As regards the crypto forecast, this month has been contradictory and marked by the bankruptcy of FTX, which has been on the cards since last summer when the FDIC (Federal Deposit Insurance Corporation) asked FTX to stop making false statements about the protection of its clients’ deposits. At the same time, however, one of the indicators we use, the Bitcoin Yardstick, hasn’t looked as good for a long time, and we are witnessing unprecedented valuations that haven’t been seen since Bitcoin was at 4-6k USD. Even so, the end of helicopter money and the crisis of confidence generated by this bankruptcy, in addition to precedents such as the Terra-Luna ecosystem and others, will take many investors out of this market for a while; it will lead others, the true believers, to the decentralized exchanges (DEX) of the DeFi ecosystem; and it will lead others, we think the majority, to seek regulated operators in front line countries while Bitcoin finds ground from where it can change the trend. Meanwhile, the market itself will likely play less serious trading schemes out of the picture, pending more regulation and a better financial culture around digital assets.. As Javier Callejo explains in his article from 13-09-22: “In the meantime, it all looks like that very short story by Monterroso: When crypto woke up, Bitcoin was still there. Just as decentralised as ever. Without having to depend on anyone specific.”
Article available in English and Deutsch.
The information contained in this post is provided to you solely for informational purposes only, and is not to be shared, distributed or otherwise used for any other purpose without direct reference to Zuger Partners AG or link back to this post.
This newsletter post is provided for education and discussion purposes only and does not constitute an offering. Opinions and projections included in this post are provided as of the date of publication, may prove to be inaccurate, and are subject to change without notice. Prospective investors should not treat these materials as advice regarding legal, tax, or investment matters. No recommendations are made to invest in Zuger Partners AG nor any other investment.