IS 2023 FINANCIAL CRASH TIME?
FROM THE FINANCIAL DESK.
THANKS TO R. IN TEJAS FOR THE REPORT!
2023 Financial thoughts from an old guy that has lived through some stuff.
It seems our modern news is consistently late to the party and has an interest in selling positive news. As late as June 2021 “they” were denying the impact of know inflation caused by injecting trillions into the economy calling it transitory in nature. At that time, I told anyone that would listen, inflation is slow to show itself and even slower to go away. Pumping that much cash into the economy has had a huge effect on asset values such as precious metals, housing, and stock values. Look at the S & P 500 in February 2020 with an index of 3327 compared to December 2021 (less than 2 years) at a high of 4725 representing a 42% gain in the index in less than 22 months during a pandemic. Folks, we had negative 3.4% GDP in 2020!! The federal government spending (cash injection/surplus) drove up asset prices including stocks. The market values are ahead of the news and the 2022 19% decline in the S & P 500 is part of the correction. As of today, the S & P 500 at 3830 is still up 15% from the February 2020 starting point almost three years ago. The S & P 500 is still valued at approximately 19 times PE compared to a historical number of 16. What does this mean?
I believe that we still have some overvaluation to contend with. Labor/wage increases lag the asset value increases and we will see continued inflation through the first half of 2023 as employers are forced to pay higher wages. The first spike in inflation was asset valuations caused by increased prices at the grocery store, raw materials, homes, cars, you name it. Employers will be forced to pay people more to contend with higher prices to maintain some standard of living and retain talent driving up prices more. UNLESS! The fed comes in and slows the economy they overheated by pulling cash out of the economy and putting downward pressure on prices and wages. How would they do that? Well, draconian interest rate hikes would cool the economy and even put us into a recession. Why would they do that? To slow inflation down and increase the unemployment rate. The unemployment rate is at 3.7%. If you raise the unemployment rate to 5% that is just over 2.1 million more people unemployed. Interest rates were .5% in March 2020 and are now at 3.78%. The fed has targeted 5.1% to slow the economy and fight inflation. What will higher interest rate do? Slow down consumption, tighten money supply in the economy, create higher unemployment holding down wage increases squeezing the middle class. In short, the fed is creating a recession to correct the overheating of the economy and somewhat control an imminent economic slowdown and recession. We are in a controlled decent. Can the fed really control it?
This is where it gets a little scary, can the fed really control the downward economic spiral they are unleashing. I’m not sure, and neither are they. What if we have underestimated the ability of people to sell off stocks looking for safe returns on money, hoard cash for emergency based on lack of confidence and drastically cut back spending to make it through this tough time. Then the controlled recession combined with zero or negative growth GDP could be a significantly prolonged recession or out of control recession. Popular thoughts like buy the dip will not apply. We will suffer longer than anticipated and our standard of living decreased further. As mentioned earlier, it seems our modern news is consistently late to the party and has an interest in selling positive news. The positive news they are selling today is that the economy and inflation will be under control in 2023 and we will end 2023 with the S & P 500 about the same as we started the year in the 3850 to 4000 range. So, I ask you, do you think the S & P 500 trading at about 19 times PE will end the year at 19 times PE or does the index have more room to fall to a historical average of approximately 16 times PE? 16 times PE equates to another 16% fall in value of your 401K over the next year? We will see a recession; the question really is how long and deep it will be, not will we see a recession. Buckle up.