Year of the Pause

Not Quite Normal
Pause or Pivot?
Economic Watch List
Dallas and Writing…

“Every new beginning comes from some other beginning’s end.” — Seneca, the Elder

“Democracy is the theory that the common people know what they want and deserve to get it good and hard.”
— H.L. Mencken

Welcome to 2023. It’s Forecast Season on Wall Street, the time when everyone tells us what to expect for the new year. Do they really know? Of course not. Forecasters don’t know, investors know they don’t know, yet we all go through this exercise anyway. It’s a bit odd when you think about it. I think much of it is about confirmation bias. We want to find a forecast that matches what we’re already doing.

The same happens in sports. No one knows who will win the Super Bowl. People can have opinions. Experts can have informed opinions, knowing each team’s players, strategy, and so on. But so many random factors can intervene, they’re all just opinions. Yet these opinions have real-money value in Las Vegas, where the casinos set a “line” against which you can bet on the outcome. That line will change as bettors/gamblers make their choices. Sportsbooks, like Wall Street, adjust to make sure they make money.

That’s the real point. We don’t need certainty so much as we need a baseline, a reference point to guide our decisions. Investing is about risk. How much risk should we take and in what direction is a continuum, not a yes/no decision.

In other words, forecasts can be useful even if they aren’t right. Rather than a long list, I’m going to give you a few specific predictions in which I have fairly high confidence and then review some other possibilities that flow from it.

So rather than a forecast, you can think of this as a kind of a watch list. I want you to go away knowing where to look… even if we don’t yet know what you’ll see.

Not Quite Normal

The key to this year’s economy is in Jerome Powell’s hands. That’s certainly not ideal, but it is reality. I would much rather market forces be the key to understanding the future, but Powell is, unfortunately, in that role. To understand why, let’s look back a bit.

Twelve months ago, we were starting 2022, fully expecting inflation would keep rising and become a big problem. Excessive stimulus programs, pandemic-related supply chain disruptions, and insufficient energy supplies had combined to finally deliver the 2% inflation rate top central banks had been trying (and failing) to produce. But then, like the Mencken quote, they got it good and hard. It was hard because they distorted the economy and markets with ultra-low rates for a decade. Then they compounded that major policy error with even bigger policy errors (“It’s transitory!”), and here we are.