by Tom Luongo, Tom Luongo:
Consider this, Consider this the hint of the century
Consider this, the slip, that dropped me to my knees, failed.
What if all these fantasies come flailing around?
And now, I’ve said…. too much
— R.E.M. – Losing My Religion
I probably should have codified these before the turn of the new year but I didn’t even think of doing one of these lists until someone mentioned it on Twitter a few days ago.
So, here it goes.
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My predictions for 2023 and all center around the big theme of 2023, the loss of confidence in the world we’ve always known. In other words 2023 will embody the phrase we use down here in the South, “Losing my Religion.”
1) Inflation will return with a vengeance.
What we’ve experienced so far came from the big commodity pump-and-dump post-COVID. Commodities went through a massive run as more money chased broken supply chains in 2020-21. Then in 2022 the inevitable bust happened, but left us with commodity prices across the board at levels which used to be resistance on the long-term price charts which has now become support.
The next round of commodity-based cost-push inflation will mix dangerously with the growing realization that we can’t avoid things breaking. There will be no ‘soft landing.’ The hard landing may not happen in 2023, but the set up for it will certainly take place.
Cost-push will mix with Loss of Institutional Confidence to light the fire of real inflation versus tangible assets in a way we haven’t seen since the late-1970’s. We should see a return to increasing YoY CPI levels beginning in Q2 after the baseline effects are past and China’s reopening keeps a bid under commodities.
January will not set the tone for commodities in 2023, but more likely be a ‘false move’ overcorrecting against the primary trend, which is clearly higher.
2) The Fed’s terminal rate is closer to 7% than the ~5% the markets are handicapping.
The Fed hiked by 50 bps in Dec. The markets are signaling 25 bps on Feb. 1st. I think it will be another 50. In fact, my base case now is four 50 bp hikes followed by four 25’s by December for a terminal rate of 7% by this time next year.
Even I was surprised by the violence of Powell’s hawkishness in 2022. He did what I wanted him to do, be aggressive and attack the source of Davos’ power, the leveraged offshore dollar markets. He forced out into the open the unsustainability of a weaker dollar based on the clown show on Capitol Hill being worse than the real collapsing governments across Europe.
Powell’s plan has worked so far, forcing everyone to climb the wall of worry that The Fed Put is dead. That so many refuse to accept this is why markets this January, like last January, are completely mispriced. Until this is accepted, Powell will use every excuse to keep raising rates as fast as he can to ‘finish the job.’
Today’s job’s number and unemployment rate support this. Revised Q3 2022 GDP at +2.6% is another. The market keeps wanting to believe in a 5.25% to 5.50% terminal rate for this move. But if I’m right about #1 and structural inflation returns in Q2, the Fed will not slow down until we reach near parity with, of all people, the Bank of Russia.
Rising inflation makes this prediction a slam dunk
3) The Euro will collapse to $0.80 or lower
The ECB is trapped. It can’t accept higher rates but it can’t afford for the euro to collapse either. A falling euro means energy input costs skyrocket in real terms. While a zombie banking system and Sovereigns in debt to someone else’s eyeballs (e.g. $1.1+ trillion in TARGET2 liabilities) see budgets blow out with higher debt servicing costs.
ECB Chair Christine Lagarde bought herself some time in 2022 with the TPI — Transmission Protection Instrument — and some big moves to subvert the UK government, putting Brexit on the ropes. She’s behind the inflation curve worse than Powell is. But she can’t attract capital today without big rate moves, Powell’s beat her to that punch.
Ultimately, Lagarde will protect credit spreads while letting the euro go.
The EU still believes it can bolt on more problems like the UK and now Croatia (#20 in the euro-zone) to stave off the collapse of the euro by expanding its reach. We ended 2022 with the euro ‘painting the tape’ at $1.07. It’s already given us a preview of the volatility we should expect in this first week of trading.
The Eurocrats in Brussels still believe in the EU’s inevitability, not because it is true, because they have to. The EU is a religion to the political class of Europe and its Davos paymasters. They, like real communists, see this period as the end-state of capitalism and that the dialectic is true. History was written, as it were.
They are wrong. And the beginning of the end of the European Union starts in 2023 with another 20% to 25% collapse of the euro.
4) The War in Ukraine Will Continue Dangerously
The West is suffering under many illusions about what’s going on in Russia and, by extension, its war in Ukraine. The UK/US neocons believe, like the EU, that history is already written about Russia’s future –balkanization and collapse.
All pressure that the West places on Russia only exacerbates their demographic time bomb. China’s as well. And in that sense this is the race they are running. Can they grind up enough Russians to ensure that even if Russia wins the war in Ukraine the West wins because the long-sought breakup of the USSR/Tsarist Empire will be achieved.
For this reason neither the UK/US Neocons nor Davos believe having a reverse gear vis a vis Russia is the right play. This is their strategic vision, regardless of the costs to the West itself.
For Russia there is no other play for them but to continue increasing the costs on the West. The longer the war goes on the deeper divisions within the EU get. Those divisions then drive even more animosity within the Eurocracy towards the Brits and the Yanks, who some feel are taking advantage of the situation.
When as ardent an Eurocrat as Guy Ver Hofstadt is now frothing at the mouth about the costs of sanctions, you know the Mafiosi in Brussels are getting nervous. They are beginning to crack under the strain of this war of financial and political attrition Russia is so good at playing against its European partners.
Even though I’ve argued strenuously that the EU leadership walked into Ukraine with its eyes open, the 2nd tier of the Eurocracy did not. And those are the ones having cold feet now and who the Russians are hoping will drive a pivot from Davos off Ukraine.
At the same time, expect Putin to keep opening up new fronts for the US/UK to deal with, see my next point.
The UK/US Neocons’ only play, then, on the battlefield then is further escalation to the brink of a nuclear exchange, which these insane people think they can win.
The other option is assassinating Putin in the hopes that Russia goes mad, nukes someone and that justifies the unthinkable.
Either way we’re inching way too close to midnight for my tastes.
5) The US Will Leave Syria in 2023
The recent meeting between Russian, Syrian and Turkish Defense Ministers paves the way for a similar upcoming meeting between the three countries’ Foreign Ministers.
Once that happens, Syrian President Assad and Turkish President Erdogan will presumably sit down with Russian President Putin and end Turkiye’s involvement in Syria. This will hang their pet jihadists in Idlib out to dry and leave the US forces there heavily exposed.
