One of the traditions I like to observe at the start of the year, is to see what the surprises in store for RMH could be to try and navigate. Earlier in the year, Blackstone’s Vice Chairman Byron Wien and Chief Investment Strategist Private Wealth, Joe Zidle issued their list of Ten Surprises of 2023. Byron has done this for 38 years, and he defines a surprise as an event an average investor would think has less than 1/3 chance of taking place, but which he believes is probable and has a greater than 50% likelihood of happening.
Just to be clear the black font is Blackstone, and the blue font is RMH.
Byron and Joe’s Ten Surprises of 2023 are as follows:
Multiple candidates on both sides of the aisle organize campaigns to secure their party’s presidential nomination. There are new headliner names on the respective tickets for 2024. We agree with this.
The Federal Reserve remains in a tug-of-war with inflation, so it puts the word “pivot” on the shelf alongside the word “transitory.” The fed funds rate moves above the Personal Consumption Expenditures price index and real interest rates turn positive, a rare phenomenon relative to the last decade. We agree with this
While the Fed is successful in dampening inflation, it over-stays its time in restrictive territory. Margins are squeezed in a mild recession. We agree with this.
Despite Fed tightening, the market reaches a bottom by mid-year and begins a recovery comparable to 2009. We hope so, if not sooner.
Every significant correction in the market has in the past been accompanied by a financial “accident.” Cryptocurrencies had a major correction and that proved not to be a systemic event. This time, Modern Monetary Theory is fully discredited because deficits have proven to be inflationary. We agree with this.
The Fed remains more hawkish than other central banks, and the US dollar stays strong against major currency pairs, including the yen and euro. This creates a generational opportunity for dollar-based investors to invest in Japanese and European assets. We agree with this.
China edges toward its growth objective of 5.5% and works aggressively to re-establish strong trade relationships with the West, with positive implications for real assets and commodities. We disagree, we will see what happens after covid runs it’s course.
The US becomes not only the largest producer of oil, but also the friendliest supplier. The price of oil drops primarily as a result of a global recession, but also because of increased hydraulic fracking and greater production from the Middle East and Venezuela. The price of West Texas Intermediate crude touches $50 this year, but there’s a $100 tick out there sometime beyond 2023 as the world recovers. We disagree.
The bombardment, destruction and casualties in Ukraine continue for the first half of 2023. In the second half, the combination of suffering and cost on both sides necessitates a ceasefire and negotiations on a territorial split begin. We hope so.
In spite of the reluctance of advertisers to continue to support the site and the skepticism of creditors about the quality of the firm’s debt, Elon Musk gets Twitter back on the path to recovery by the end of the year. We agree.
The "Also Rans" of 2023
Because of medical breakthroughs across the board, many people decide on a cryogenic burial, expecting to be defrosted when a cure for the disease that caused their demise is discovered. Funeral homes across the country advertise that “It’s Nice to Be On Ice.”
A technology breakthrough in reducing the carbon emissions of coal-fired plants takes the edge off the climate / global warming scare. This lowers the political pressure on emerging markets to make a rapid transition to renewable energy sources.
India begins to compete seriously to win/retain the manufacturing base that started looking for a new home after becoming increasingly uneasy with the uncertainty that has continuously surrounded US–China policies. The country initiates a campaign to attract global multinationals, focusing on its young population, relatively low income and growing consumer market, and prioritizing policies that incentivize investment in the auto, energy, pharma and tech sectors. Apple and Samsung are a proof of concept after successfully producing their respective flagship phones for global markets.
What would 2023 predictions be without looking back on the 2022 predictions of Blackstone?
For our first Surprise, we said the market would be volatile and make no progress during the year, ending where it started. This was significantly more pessimistic than the consensus view. Directionally, we got this one right, though it turns out we weren’t quite negative enough.
The second Surprise is another example where we were directionally right, but didn’t go far enough. We said that inflation was not “transitory” and that the Consumer Price Index would rise by 4.5% in 2022—when the consensus view was that inflation would be closer to 3%.
Because inflation proved to be persistent, we expected the bond market to react and the 10-year Treasury note to rise to 2.75%. This was the Third Surprise, and one of the most out-of-consensus. We thought the Fed would raise rates four times in 2022, which was hawkish relative to consensus at the time the Surprises went to print. Because inflation went even higher than our bullish expectations, so too did the 10-year and the federal funds rate, both of which surged past 4%.
Surprise Four was about “return to normal.” We recognized that omicron and other COVID strains would be with us and that booster shots would be required, but we expected that conventions and other meetings, cultural institutions and sports arenas would see attendance come back to 2019 levels. Also in the fourth surprise, we thought that the return to office would accelerate. While office attendance has improved, commercial real estate experts tell us that occupancy is generally below 70% on most days in the US, with Fridays being the weakest.
For the fifth surprise we expected China to address problems in their property market, which had been the primary option for the population to invest excess savings and had become dangerously speculative.. What we really missed was China's rigorous adherence to a zero-COVID policy, slowing its economy and limiting its engagement with the West.
In Surprise Six, we speculated that gold would rise 20%. Part of this was our belief that cryptocurrencies would run into serious trouble during the year, which we were right about, and the spot price of gold surged 14% in the first few months of the year.
For the Seventh Surprise, we focused on oil. We expected the price to rise to the point where hydraulic fracturing became profitable and it did, reaching over $100 in the spring before its recent decline to $80.
For Surprise Eight, we looked at the possibility that nuclear energy would come back into favor. Our reasoning was that safety measures had become more effective, and the risks of nuclear power generation had been reduced substantially. The political hurdles to this shift are still formidable and little progress was made in 2022, but the opportunity is still there.
For the Ninth Surprise, we believed the environmental, social and governance factors would become part of the mainstream and business philosophy, at least in the United States.
For the Tenth Surprise we were worried that the supply of lithium, cobalt, nickel and other materials used in the production of electric vehicles would fall into critical short supply. So far this has not happened, but the lithium supply challenge received continued attention last year.
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On a personal note, RMH is now in the position to bring on new clients so please be sure to share this informational letter with whomever you wish. RMH’s focus is on the customizable investment needs of individuals, families, and foundations. We enjoy working with our clients to better understand their goals, values, and passions for what is important in their lives. In expanding our client base, we look forward to working with people who share these same desires
Richard Mundinger, CFA
Ashlyn Brooke Tucker
Blackstone – The 10 Surprises of 2023, 01/06/2022