Following an extremely difficult and exhausting year, it intends to write about 2023 by accounting for the previous year prior to the start of a new venture with the same discipline. Imagine the great focus on 2023 prospects without a magical orb in front of me. By the way, I can confidently state that each year appears to be worse than the previous one.
We’ve been dragged after uncertainty
As you can appreciate, we’ve been dragged after uncertainty in recent years. Covid has plagued us; at first, we had no idea what was going on. Then war broke out, and we still have no idea where it will go. Then came the ‘nationalism’ movement on the commodity front, followed by the supply crisis chain that we are all familiar with. In the post-Covid era, global central banks adopted ultra-loose monetary policy, rapidly resetting interest rates in order to keep people ‘long live’ and businesses’standing,’ and fully opened the (money) gates.
As you might noticed, when liquidity was channelled to capital markets rather than the real sector, global financial markets, which finished 2021 with great enthusiasm in parallel with the morphine intoxication, faced two different shocks in 2022 and nearly settled down. On the one hand, the inflation, which began with the principle that every drug has a side effect, began to hurt, in contrast to the positive pricing that will be brought about by the normalisation that is expected to begin with people’re’ taking to the streets after the ‘easy money’ period. We are faced a new era.
In addition to the price increases in energy products, which were the most affected by the strong winds, supply chain issues that could not be resolved under China’s (zero covid) zero-case policy, as well as the associated supply-side cost inflation, shaped the main theme of 2022. Following that, despite the fact that it was too late for demand-driven inflation, central banks abruptly turned off the music and ended the party mood of 2021, while interest rates rose to a 40-year high in many parts of the world, and stocks and cryptocurrencies were nearly destroyed under the leadership of technology that rose in the era of abundant money. It caused losses in a significant portion of asset groups, excluding energy, with a more accurate approach during the period of high inflation.
The side effect of tight monetary policy caused by rapidly rising interest rates this time paved the way for a sharp slowing of economic activity. Given that the worst of the inflationary period is over in 2022, we are concerned that the main theme of 2023 will be recession concerns (not growing). I’d like to point out that this scenario, namely the aircraft’s hard landing, is ranked last in the markets’ preference order.
We will closely monitor the results of the world’s leading central banks in terms of inflation and growth, as well as during this difficult period. In addition to the continuation of the tight financial conditions, the recession to be experienced due to the interruption of economic growth and the subsequent recession of 2022, the cost of living will continue despite the inflation that will decrease almost everywhere in the world due to the erosion of the purchasing power of incomes that do not increase as much as inflation, and the associated base effect. We’ll be watching with interest to see how much ‘balance’ the layoffs that began in the second half of the year will carry over to 2023.
It may come to the fore that the FED, which takes small steps in interest rate increases, will quickly withdraw from the positions it has won due to a possible debt crisis. In this case, we will watch with interest whether the FED will give back more than what the markets want. As you know, whenever we say “this FED is another FED”, we are faced with the familiar “printing FED” again at some point. I hope 2023 will not be a debt crisis triggered by the black swan layoffs and revolted by the recession.
Super cycle of the dollar
After fighting an invisible enemy in 2020 and 2021, humanity was met with a ‘black swan’ at the start of 2022. With Russia’s invasion of Ukraine, the deck of cards has been reshuffled in the global arena. In addition to the prevailing panic, the markets quickly entered the risk-off mode and took refuge in the safe haven, as the FED took drastic steps to regain its credibility, which it lost by saying “inflation is temporary”.
The FED put aside printing money, which is the only recipe it knows for every problem that arises, and in March 2022, breaking its silence for nearly two years, it increased the policy rate from 0.125 percent to 4,375% by increasing it seven times in a row. Subsequently, the FED, which flooded the markets with money and more than doubled (quantitatively) loosened its balance sheet in almost 2 years (QE) to the edge of 9 trillion dollars, started to tighten (QT – quantitative tigtening) liquidity gradually in the second half of 2022, albeit with baby steps.
The global financial markets, which have been addicted to morphine (cheap money) for years, have left a wreck in their wake, this time out of the stock and crypto money markets they attacked, out of the magic of the vast liquidity that entered the system during the pandemic period and the near-zero interest rates. With the abrupt discontinuation of dosage, stocks ended an unusually pessimistic year filled with fears of inflation, war, and later recession.
The US Nasdaq index, where technology stocks are traded, lost a third of its value in 2022. Tesla witnessed irrational price behavior with plenty of money in 1 calendar year (in 2020 and 2021), and after gaining 700% (seven hundred) and 50%, respectively, it decreased by 70% in 2022. Tesla’s market capitalization fell rapidly from $1.1 trillion in January 2022 to $0.4 trillion!
The British pound hit an all-time low (1.03) against the dollar under Prime Minister Truss, who resigned amid a financial and political crisis after only 50 days in office. Following the UK’s return to orthodox monetary policy, GBPUSD normalised.
The EUR, Europe’s common currency, was caught between the energy crisis after Putin shut off the gas valve and the dollar’s super cycle, falling below the 1.0 level and tested 0.95. That was the weakest level of last 20 years.
Whilst all of logical economies took measures with interest rate hikes, Japan did the opposite. Thus, Yen fell to the most worthless level in the last 32 years against the dollar. Nevertheless, as the expectation that the FED will take its foot off the gas pedal after inflation, which shows signs of cooling in the USA, finally the Bank of Japan, which took the step of normalization in the last days of the year as setting the ceiling target for 10-year bonds from 0.25% to 0.50%. update. Hence, this step brought some relief to the crawling Yen.
The 10-year bond yields of the USA, which saw the lowest level in 150 years (0.5%) during the pandemic period, returned to the level of 2008 (4.3%), which was the year of the global crisis, in 2022.
Bitcoin, the coin of the resistance, which witnessed the frenzy of the crowds in 2017 and 2021, erased 80% of its value in a one-year time frame with the FED showing its teeth.
In April 2020, when everyone went home and the need for oil decreased or the supply was greater than the demand, after falling to (minus) $ 40 in WTI oil futures contracts, it rose to the peak of the last 14 years with the outbreak of the Ukraine crisis.
If we speak in the language of numbers, the price of Brent per barrel of north sea oil has reached the level of $ 140 with the outbreak of war in March 2022, after the price of the barrel stretched to $ 16 during the covid period. When Europe’s growth engine, Germany’s dependence on Russian gas, was 65%, Europe’s benchmark gas prices (TTF) took up a significant place in our bulletins for most of the year, with Putin using his energy card and closing the valve.
Following Russia’s invasion of Ukraine, the bushel price of wheat reached an all-time high of 1,425 cents. The ounce price of gold, which is inversely related to the return on the dollar, once again tested the all-time high of $ 2,070 before March 2022, when the FED pulled the trigger, and after spending the majority of the year with its investors, it normalised and finished the year by recovering to the level of $ 1,800, just like other investment instruments. Silver’s ounce price, which is more sensitive to risk appetite, finished the year at its starting point with no significant change. In the coming year, we will keep a close eye on coffee, which finished 2022 at the bottom of the yield league.
The world is out of balance
Just sit back and think about what kind of year we spent…
Of course, we cannot claim that the global economic order is trouble-free, but we are well aware that the frequency of crises is getting more and more frequent. I think that the main reason behind this is the imbalances in production, consumption, trade and distribution.
For example, to give an example from sharing, we know that the wealth of almost a handful of people in the world is equal to the wealth of about half of the world’s population. On the other hand, are you aware that in the USA, the Gini coefficient deteriorated further in 2011, based on the 0.50 level (the closer the Gini coefficient to 0 indicates equality in income distribution, the closer to 1 it indicates the deterioration in income distribution)?
In Turkey, for example, the consumption is always very active, but the current account deficit is always on the agenda because of the insufficient production. In Japan, on the other hand, production is very strong, but consumption remains weak due to the elderly population, resulting in the problem of failure to grow.
As a footnote; yhe share of 65 years and older in the world population, which was 10% in 2022, is expected to increase to 16% in 2050. Imagine the negative impact of this change will have on health systems of countries.
On the trade front, customs barriers began to appear in parallel with China’s strengthening in every ‘area’, and global trade began to slow down. This inevitably led to the emergence of other well-known issues: The world’s current debt is more than $300 trillion, or simply 3.5 times the world’s total annual production! How will this debt be paid? There is only one answer to that these days. That’s inflation. I believe that the central banks, especially the FED, have been successful to a certain extent in their fight against inflation and we think that we are nearing the end of interest rate hikes. The brake will be pressed first, and soon it will come to a stop. We think that the risk of inflation has decreased. As we tried to explain above, commodity prices go down rapidly, while freight costs decrease. Although it is misleading, it should not be underestimated that the base effect is also in favor.
The appreciation of the dollar will gradually fall behind, the level of 1.10 in EURUSD. Also I foresee a stronger Sterling and presume 1.28 levels in GBPUSD. Meanwhile I expect the precious metals asset group, which has been adversely affected by interest rate hikes, to be at the forefront in 2023. For this reason, it should be noted that it will definitely be included in my portfolio preferences. We expect energy prices, especially natural gas, to decline. We think that base metals will follow a relatively flat course in the first half of the year. We will include fixed income securities on the basis of foreign currency (still corporate / bank bonds with yields in the 6-8% band) in defensive portfolios. Technology stocks, which have witnessed huge losses in the last 1 year, will also be included in our portfolio, but it is worth noting that the risk is higher here.
In the last corner of the year, the face of the global financial markets was positively affected in parallel with the Chinese authorities, who quickly moved away from the strict zero covid (zero case) application and took the step of relaxation. Of course, the reason behind this should be read as the increase in demand and the acceleration of global growth in parallel. Considering that China is the largest importer in the ore and metal market by itself, representing 1/3 of the world, the rapid reduction of covid measures should be read as positive news for the metal market.
While the increase in risk appetite means that ships leave the safe harbor, of course, we should not forget the other side of the coin: In this context, although we raise our hats to growth hopes, we should not ignore the risk of growth creating inflation at the same time.
On the other hand, with Russia’s decision not to sell oil to countries that apply ceiling prices, the barrel of Brent crude oil rose to $85 by moving upwards again in the last days of the year. We find it useful to underline that the dynamics of the energy market may follow a very different course throughout the year, with the adverse effects of extreme cold weather on life in the USA. We will closely monitor the barrel price of Brent oil, which we had the opportunity to trade within the year, in the band of 63-77 dollars.
When it comes to gold, silver, oil, bitcoin and dollar, it is necessary not to ignore the big picture that changes. We think that new production centers (with the principle of sustainability) will start to rise instead of China, with the supply crisis chain that the world experienced during the Covid period and the USA’s loss of position against China as a global superpower. It should not be overlooked that we are moving towards a more divided world after the Ukraine war, with the world’s polarization between the USA and the EU against China and Russia. Increase in geopolitical risks must not be underestimated.
And of course, the climate crisis. We think that we will face the biggest disaster that awaits mankind in the coming years. We are worried that melting glaciers and rising sea waters will threaten coastal cities, drinking water and even agricultural areas, and that the food and water crisis will come within radar range. We will give more space to the agriculture sector and the stocks on this side in the new year. We think that the issue of green energy and ‘electrification’ will enter our lives more and more every day. In this context, electric vehicles (EV) and the EV sector will be within our radar range.
The world’s crises do not always manifest themselves in the stock markets. The “Great Resignation” was a major crisis in recent history. One of the most significant barriers to growth and development is the difficulty in finding qualified workers. According to surveys, 25% of people are resigning in the United States because they are seeking a better work/life balance.
These are hard times, but…
Hard times are times of revolution. Hard times are the moment to molt. Hard times make us stronger. Let’s appreciate the hard times. If there is no problem, let’s never forget that there is a bigger problem. Let’s be resilient, agile and flexible. Let’s not forget that flexible structures remain standing in an earthquake. Try and fail. Try again, get better wrong, but never give up. Remember that the greatest successes come from the luxury of making mistakes. You are an extraordinary asset with incredible opportunities for self-discovery. Don’t waste your time, use your time to rise. Don’t be afraid to make mistakes either!