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Tom Luongo
\nGold Goats \u2018n Guns<\/p>\n
\u2014 R.E.M. \u2013 Losing My Religion<\/em><\/p>\n I probably should have codified these before the turn of the new year but I didn\u2019t even think of doing one of these lists until someone mentioned it on Twitter a few days ago.<\/p>\n So, here it goes.<\/p>\n My predictions for 2023 and all center around the big theme of 2023, the loss of confidence in the world we\u2019ve always known. In other words 2023 will embody the phrase we use down here in the South, \u201cLosing my Religion.\u201d<\/p>\n 1) \u00a0Inflation will return with a vengeance.\u00a0<\/strong><\/p>\n What we\u2019ve experienced so far came from the big commodity pump-and-dump post-COVID. \u00a0Commodities 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\u00a0resistance<\/em>\u00a0on the long-term price charts which has now become\u00a0support.<\/em><\/p>\n The next round of commodity-based\u00a0cost-push inflation\u00a0<\/em>will mix dangerously with the growing realization that we can\u2019t avoid things breaking. \u00a0There will be no \u2018soft landing.\u2019 The hard landing may not happen in 2023, but the set up for it will certainly take place.<\/p>\n Cost-push<\/em>\u00a0will mix with\u00a0Loss of Institutional Confidence<\/em>\u00a0to light the fire of real inflation versus tangible assets in a way we haven\u2019t seen since the late-1970\u2019s. \u00a0We should see a return to increasing YoY CPI levels beginning in Q2 after the baseline effects are past and China\u2019s reopening keeps a bid under commodities.<\/p>\n January will not set the tone for commodities in 2023, but more likely be a \u2018false move\u2019 overcorrecting against the primary trend, which is clearly higher.<\/p>\n 2)\u00a0The Fed\u2019s terminal rate is closer to 7% than the ~5% the markets are handicapping.<\/strong><\/p>\n The Fed hiked by 50 bps in Dec. \u00a0The markets are signaling 25 bps on Feb. 1st. \u00a0I think it will be another 50. \u00a0In fact, my base case now is four 50 bp hikes followed by four 25\u2019s by December for a terminal rate of 7% by this time next year. \u00a0<\/em><\/p>\n Even I was surprised by the violence of Powell\u2019s hawkishness in 2022. \u00a0He did what I wanted him to do, be aggressive and attack the source of\u00a0Davos\u2019\u00a0<\/em>power, the leveraged offshore dollar markets. \u00a0He 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.<\/p>\n Powell\u2019s 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 \u2018finish the job.\u2019<\/p>\n Today\u2019s job\u2019s 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\u2019m 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.<\/p>\n Rising inflation makes this prediction a slam dunk<\/p>\n 3)\u00a0The Euro will collapse to $0.80 or lower<\/strong><\/p>\n The ECB is trapped. \u00a0It can\u2019t accept higher rates but it can\u2019t afford for the euro to collapse either. \u00a0A falling euro means energy input costs skyrocket in real terms. \u00a0While a zombie banking system and Sovereigns in debt to someone else\u2019s eyeballs (e.g. $1.1+ trillion in TARGET2 liabilities) see budgets blow out with higher debt servicing costs.<\/p>\n ECB Chair Christine Lagarde bought herself some time in 2022 with the TPI \u2014 Transmission Protection Instrument \u2014 and some big moves to subvert the UK government, putting Brexit on the ropes. \u00a0She\u2019s behind the inflation curve worse than Powell is. \u00a0But she can\u2019t attract capital today without big rate moves, Powell\u2019s beat her to that punch.<\/p>\n Ultimately, Lagarde will protect credit spreads while letting the euro go.<\/p>\n 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 \u2018painting the tape\u2019 at $1.07. It\u2019s already given us a preview of the volatility we should expect in this first week of trading.<\/p>\n The Eurocrats in Brussels still believe in the EU\u2019s inevitability, not because it is true, because they have to. The EU is a religion to the political class of Europe and its\u00a0Davos<\/em>\u00a0paymasters. \u00a0They, like real communists, see this period as the end-state of capitalism and that the dialectic is true. \u00a0History was written, as it were.<\/p>\n They are wrong. \u00a0And the beginning of the end of the European Union starts in 2023 with another 20% to 25% collapse of the euro.<\/p>\n 4)\u00a0The War in Ukraine Will Continue Dangerously<\/strong><\/p>\n The West is suffering under many illusions about what\u2019s going on in Russia and, by extension, its war in Ukraine. \u00a0The UK\/US neocons believe, like the EU, that history is already written about Russia\u2019s future \u2013balkanization and collapse.<\/p>\n All pressure that the West places on Russia only exacerbates their demographic time bomb. \u00a0China\u2019s as well. \u00a0And in that sense this is the race they are running. \u00a0Can 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.<\/p>\n For this reason neither the UK\/US Neocons nor\u00a0Davos<\/em>\u00a0believe having a reverse gear vis a vis Russia is the right play. \u00a0This is their strategic vision, regardless of the costs to the West itself.<\/p>\n For Russia there is no other play for them but to continue increasing the costs on the West. \u00a0The longer the war goes on the deeper divisions within the EU get. \u00a0Those divisions then drive even more animosity within the Eurocracy towards the Brits and the Yanks, who some feel are taking advantage of the situation.<\/p>\n 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.<\/p>\n Even though I\u2019ve argued strenuously that the EU leadership walked into Ukraine with its eyes open, the 2nd tier of the Eurocracy did not. \u00a0And those are the ones having cold feet now and who the Russians are hoping will drive a pivot from\u00a0Davos\u00a0<\/em>off Ukraine.<\/p>\n At the same time, expect Putin to keep opening up new fronts for the US\/UK to deal with, see my next point.<\/p>\n The UK\/US Neocons\u2019 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.<\/p>\n The other option is assassinating Putin in the hopes that Russia goes mad, nukes someone and that justifies the unthinkable.<\/p>\n Either way we\u2019re inching way too close to midnight for my tastes.<\/p>\n 5)\u00a0The US Will Leave Syria in 2023<\/strong><\/p>\n The recent meeting between Russian, Syrian and Turkish Defense Ministers paves the way for a similar upcoming meeting between the three countries\u2019 Foreign Ministers.<\/p>\n Once that happens, Syrian President Assad and Turkish President Erdogan will presumably sit down with Russian President Putin and end Turkiye\u2019s involvement in Syria. \u00a0This will hang their pet jihadists in Idlib out to dry and leave the US forces there heavily exposed.<\/p>\n We\u2019re already seeing them come under rocket fire though you\u2019d never hear about this in the Western press. \u00a0I went over this in grave detail\u00a0in a recent post.<\/a><\/p>\n By making the deals with Erdogan over becoming the new \u201cGas Hub\u201d into Europe, Putin has effectively done to the US and UK what they always try to do to Russia, open up another front to distract it from the main problem, i.e. Ukraine.<\/p>\n Now Syria becomes the 2nd battleground for the US to decide if it will defend or will it suffer another ignominious retreat like Afghanistan?<\/p>\n 6)\u00a0De-Dollarization Will Accelerate \/ USDX Will Rise.<\/strong><\/p>\n Along with the collapse of the euro, the US dollar will lose more ground in the global payment system for international commodities and trade.<\/p>\n These two dynamics will create a very weird moment where the USDX \u2014 the US Dollar Index \u2014 will rise but the US dollar will be under sincere pressure vs. gold, commodities, and other rising emerging\/developed market currencies.<\/p>\n The USDX is heavily weighted towards the euro and the British pound but the Chinese yuan is not represented at all. \u00a0So, from one perspective the US dollar could be in a bull market but from another be in a bear market.<\/p>\n The one thing holding gold back has been its lack of bull market versus the dollar. It\u2019s not a \u2018secular\u2019 bull market in gold until it\u2019s rising versus all currencies. Even if the USDX does nothing but hold its ground in 2023 versus the rest of its fiat competition, a rally in gold will still be fed by people the world over \u2018losing their religion\u2019 with respect to the dollar.<\/p>\n That said, that fall in faith will likely not outpace the fall in faith of the \u201cFed Put.\u201d I expect the \u2018religion\u2019 of the Fed Put is still stronger than the dollar itself which should put upward pressure on the US dollar overall. Because, let\u2019s not forget that overseas US dollar synthetic short positions, known as US dollar-denominated debt, are still pretty biblical in size, keeping a strong bid under the dollar globally even as its position as a reserve and trade settlement currency erodes.<\/p>\n Because of all of these competing forces \u2014 inflation, de-dollarization, war, etc. \u2014 the last US dollar bull market for the foreseeable future should be on tap in 2023. \u00a0For how long? It\u2019s a good question, I can\u2019t answer.<\/p>\n But I do know that it\u2019s tied to #7 and to the Fed\u2019s need to keep raising rates\u2026<\/p>\n 7)\u00a0Saudi Arabia will de-peg the Riyal\u00a0<\/strong><\/p>\n In fact, I also expect the Hong Kong Dollar peg to fall, but maybe not in 2023. \u00a0It depends on the strength and rate of internationalization of the Chinese yuan this year.<\/p>\n Oil prices are going higher once China\u2019s economy is past the Omicron 2.0 wave crashing over it right now. The Saudis have been tendered the offer by China\u2019s Xi to begin weaning itself off the US dollar. \u00a0Crown Prince Mohammed bin Salman seems agreeable to this.<\/p>\n When (not if) the Saudis put their first oil tender up for bid in Shanghai, that will signal the end of the currency peg that created the\u00a0petrodollar.<\/em>\u00a0\u00a0It will be a subtle thing that will gain steam over time, just like Russia and China diversifying their holdings into each other\u2019s debt and currencies has taken years to develop.<\/p>\n So, the\u00a0petrodollar<\/em>\u00a0will continue to die by a thousand cuts. \u00a0The Saudis will lead OPEC+ out of the US dollar arena, validating both China\u2019s onshore futures markets while also moving a significant amount of the gold trade away from London to Hong Kong.<\/p>\n By hedging their oil profits in gold on China\u2019s international exchange they strengthen both the onshore (CNY) and offshore (CNH) yuan markets and laying the foundation for a much different financial future, including one where the Hong Kong dollar either floats or re-pegs itself to the yuan, likely the former.<\/p>\n 8)\u00a0Oil will Open 2023 Near the Yearly Low<\/strong><\/p>\n The fundamentals for oil are truly bullish. \u00a0China ending Zero-COVID just after the EU put its idiotic price cap on seaborne Russian oil was a strategic move to subvert \u201cBiden\u2019s\u201d wish to refill the now nearly depleted US Strategic Petroleum Reserve at or below $70 per barrel.<\/p>\n He may get that from domestic producers for a while. \u00a0But Brent ended 2022 at $86 and a little downside momentum may be in place with early US dollar strength, but then fundamentals easily overcome this.<\/p>\n \u201cBiden\u201d will not refill the SPR at $70 per barrel now that China just blew up the entire \u201cdeflation through higher rates\u201d narrative. \u00a0The US economy has held up better to the Fed than expected. \u00a0Even Q3 GDP wasn\u2019t uniquely terrible. The jobs report and low unemployment rate, while possibly artifacts of a changing labor market, still give us signals that the US economy isn\u2019t as bad as many want it to be at 4.5% Fed Funds Rate to validate their place in the commentariat.<\/p>\n Europe is getting a small reprieve with the extremely mild winter so far, pushing energy prices down, especially natural gas, for now.<\/p>\n The global recession talk is vastly overblown until something fundamentally breaks. Anyone looking at the end of the year book squaring in things like the Reverse Repo balance (+$300b in one week) is overthinking the problem. The banks are allowed to tailor their reserves to present whatever quarterly numbers they want. It\u2019s been going on since the Bernanke Era.<\/p>\n As such, I see a kind of perfect storm for oil here. \u00a0Russia will pull production off the market and shift exports from St. Petersburg (Urals grade) to Kosmino, near Vladivostok (ESPO grade), nabbing higher prices in the long run.<\/p>\n Arab OPEC can\u2019t hit its production quotas as it is and China\u2019s reopening its entire economy.<\/p>\n The\u00a0Davos<\/em>\u00a0demanded ESG investment protocols have the oil industry anywhere from $600b to $1trillion underinvested in exploration and production and that number is rising.<\/p>\n Increased demand, tight supply, low replenishment investment and WAR. \u00a0Even a moron or Joe Biden can see that $70 per barrel Brent is out of the question for any significant period of time.<\/p>\n 9)\u00a0Dow Jones 40,000+<\/strong><\/p>\n As we enter 2023 the Dow Jones Industrials sit right around 33,000. \u00a0It was a tumultuous 2022. After hitting a new all-time high a year ago at 36952.53 it was all downhill for most equity indices.<\/p>\n The stronger USD fueled a lot of capital reorganization, interest rates were finally forced higher by the Fed and incessant talk of recession kept everyone selling first and asking questions later.<\/p>\n But in this \u2018pivot-obsessed,\u2019 low pain environment, relief rally after relief rally was snuffed out until finally in Q4 the Dow made everyone stand up and take a little notice as to what was happening\u2026 flight to quality into tangible assets with deep liquidity pools.<\/p>\n The Dow lost 8.7% in 2022. \u00a0The S&P 500? \u00a015.8%. \u00a0The NASDAQ? \u00a027.7%<\/p>\n For all of the bitching gold bugs did in 2022, gold was up 1.6%<\/p>\n If we begin to move into the next stage of stagflation (#1) then the Dow will continue to outperform the broader US equity markets as well as major foreign equity markets.<\/p>\n 2022 Foreign Performance:<\/p>\n German DAX in 2022: -9.2% Are those indexes sustainable given the economic outlook for Europe and the ECB following the Fed up the rate curve lest everyone \u2018lose their religion\u2019 in it? Or will the still weakly expanding US economy look more tasty to global investors and the hopeless Brits look insanely overvalued?<\/p>\n If we have another year like we did in 2022 where high inflation outpacing nominal growth drives tangible asset investment we should see an outperformance from the US vs. Europe as the currencies collapse and the ECB\u2019s tools prove inadequate. Emerging Markets, depending on their proximity to China and the US may have banner years, especially those that underperformed in 2022.<\/p>\n 10)\u00a0Biden is Impeached<\/strong><\/p>\n This looks like the long-shot of 2023, but I think we are very close to the moment where Sen. Joe Manchin (D-WV) goes one step further than Kyrsten Sinema (I-AZ) and not only leaves the Democrats but flips to the GOP, giving them the outright majority in the Senate (50-49-1)<\/p>\n Even though Kevin McCarthy didn\u2019t lose his bid for re-election as House Speaker, which has turned CSPAN into\u00a0must-see TV<\/em>\u00a0these past few days, the fight itself is indicative of serious change coming to Capitol Hill.<\/p>\n This is the essence of the\u00a0\u2018counter-revolution\u2019 in the US I wrote about a few weeks ago.<\/a><\/p>\n The soft underbelly for Biden at this point is FTX and divulsions of the US Gov\u2019t\u2019s censorship activities on Twitter. \u00a0All of these things, along with corruption in Ukraine, can easily be tied back to Biden.<\/p>\n The majority of people are so black-pilled at this point that they believe nothing will ever change on Capitol Hill. \u00a0But the first rule of good investing is remembering that the majority is almost always wrong.<\/p>\n And it is the sudden realization of their real power by a critical mass of people that alter the landscape literally overnight. So, while it looks like Matt Gaetz (R-FL) and Lauren Boebert (R-CO) tilted at windmills against a terminally corrupt Uniparty, they are simply fanning the smoldering embers of long-thought-dead principles on Capitol Hill.<\/p>\n This was the subject of my latest podcast with Bill Fawell, the state of the revolution in the US.\u00a0{N.B. Bill and I discussed his\u00a0Cycle of Revolutions in Episode #110<\/a>\u00a0last summer}<\/strong><\/p>\n
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\nEuro Stoxxx 50: -7.2%
\nFTSE 100: 1.2%<\/p>\n