So there are basically two kinds of stories you can do to start a year – resolutions or predictions. And I think resolutions are a mental crutch, so predictions it is!
Note, I’m not promising a second set of predictions next year. I only said these are the first. Let’s jump in…
I’ll swing big out of the gates. I think Covid – as an everyday focus – goes away early this year. I’m not saying nobody will ever get covid anymore, but it will not be the biggest thing on everyone’s mind. The current upswing in cases will be the last big news cycle.
Why do I think that? One, because while frequency (i.e. case count) is up severity (i.e. hospitalization rates) appears to be coming down. Basically, the transition from delta to omicron is a net win for resuming normal life.
And no, the new normal won’t be the same as the old normal, but it will allow people to return to the office if they want to, to travel more frequently, etc.
The second reason is I’m willing to bet on the Pfizer pill working close to as promised. Third, more of the population will have received a third shot.
The combo of less deadly virus, more boosters, and effective rescue medicines will finally make covid more “flu like” than life threatening. With that, we will finally see the return to normal stocks fully lift off. And yes, I am aware of how bad I have been at calling the end of covid previously.
Even with the return to normal, growth seems likely to disappoint (though probably more so in the 2H than 1H) as fiscal and monetary stimulus will be going from tailwinds to slight headwinds and change of direction matters more than magnitude.
Additionally, for every sector that rebounds like travel, there will be other pandemic favorites that see demand collapse. Note, this doesn’t mean inflation goes away. Rather, it shifts like squeezing a balloon.
So perhaps food prices come down, but new areas of shortages emerge (dry cleaning chemicals? dry erase markers? hand drying machines? I sense a theme…) while we see industries that had shortages get stuck with excess inventory when demand collapses and have credit scares.
The whack a mole nature of supply and demand imbalances combined with a growth scare in the 2H means the Fed panics and only raises rates once, say in October. Yes, once again, the Fed will go into a year promising multiple rate hikes and end up chickening out. This seems like the easiest call of the year.
Note, this doesn’t mean inflation proves transitory. It means the Fed gets more scared about recession risk than inflation risk and decides to tolerate higher inflation over lower growth. In other words, real rates remain meaningfully negative. This leads the dollar to underperform foreign currencies.
So if the Fed is debasing the currency, you want to own Bitcoin, right? No, most definitely not. 2022 will be the end of the crypto bubble.
Crypto is not an inflation hedge. It’s a collectible. Collectibles thrive during easy money. Even with the Fed not raising as much as expected, easy money is still coming to an end. Once crypto buyers start to lose faith, it’s a long way down.
Remember, one rule of bear markets is when the bulls lose faith, they need to find the next group of investors to sell to. This isn’t Apple where the next group of buyers (i.e. those who don’t own it today, but could in the future) think it’s a little too expensive but like the business so would buy it 20% lower.
No, the next group of buyers for crypto are likely distressed investors. Their entry point is possibly 90% lower. If BTC goes down 50%, nobody who missed it on the way up is going to be eager to step in. It will be a bloodbath.
I think this will prove more complicated than people expect. If the midterms were held today, it would be a Republican landslide, but they’re still ten months away and narratives can change quickly.
There are three main issues that could swing sentiment. First, if I’m right and covid becomes background noise, Biden probably benefits from that.
Second, the Supreme Court seems likely to restrict abortion rights in some manner over the summer. In other words, the midterm – which tends to have lower turnout and is dominated by the motivated extremes of each party – will be less about covid or the economy and instead a referendum on abortion. To the extent, Democrat voters are motivated by an adverse SCOTUS ruling, they will likely turnout in droves.
Finally, there are foreign events to watch. It’s unlikely any of these will drive election results, but you never know. My quick odds are Putin won’t invade Ukraine (though he will obviously cause trouble and likely earn a diplomatic victory) and China won’t escalate Taiwan. However, we will get some surprise, probably out of an Iran or North Korea which will hurt Biden though probably not significantly.
Add those up and my guess is the abortion ruling leads to smaller than expected gains by Republicans and very narrow majorities in both houses of Congress. This leads to the political bliss called gridlock.
It’s too hard to predict markets but there are clear headwinds in the forecast. We have had three big up years in a row. It is rare to have four 15+% years. You have to go back to the mid 90s and that didn’t end well.
We are certainly due for a flattish or down year. More instructive is to predict how we get there. If I am right about bitcoin, that suggests speculative stocks in general are suffering.
This means a rotation out of pandemic winners and tech overall. A full blown value rotation probably requires a bear market, but a flattish market would still likely see heavy rotation out of pandemic winners and into speculative travel and retail names that have struggled.
If I believe the re-opening finally occurs, then that is bad for P&C loss trends. We get a return of frequency (e.g. miles driven, worker injuries, medical malpractice, etc.) and severity remains under pressure given inflation doesn’t disappear.
In addition, we get more lawsuits in front of juries which means more jackpot justice. We get more D&O claims when the high flying stocks come back to earth, especially since many of these companies have been D&O suits waiting to happen for years.
So it’s generally a difficult year for P&C companies, though I will go out on a limb and predict a below average cat year.
No, I’m not predicting an El Nino or any other scientific cause, but generally when sentiment trends too far in the “it’s a new paradigm of cat activity” we end up with a few light years.
As for life insurance, as usual, it will largely be a function of interest rates and credit experience. If the Fed gets behind the curve, long rates should start heading higher which is positive. On the other hand, the removal of easy money could pressure credit.
The baseball strike (sorry, “lockout”) will delay opening day into May. There will be some moderate changes to the financial structure but nothing that couldn’t have been agreed to in January if both parties were so motivated.
The Winter Olympics brings a giant covid outbreak to China. They finally have to relent and admit they can’t suppress covid forever. There is a real possibility the government handles this in a way that leads to episodic social unrest.
The Olympics themselves are a ratings dud though, with some favorites held out due to Covid, we see some surprising winners from small countries.
My Super Bowl prediction will come next week before the playoffs start, so you need to wait for that. One Super Bowl team will have to play without a star player due to a positive Covid test which will dominate the media narrative more than the game itself.
If we are repeating the 70s or even the Roaring 20s, that suggests people are looking for escapes from all the depressing things going on around them. I’m not sure we will have a return to disco, but there will be some new trend that is more expressive than sitting home and watching Netflix.
Note how in recent months, more “traditional” movies have flopped while the new Spiderman sold as many tickets as if Covid never happened. People are looking for action and excitement.
I can’t tell you exactly what that will produce, but people will move on from Netflix, Peloton, and day trading to more group social activities. We will probably all know it when we see it. I don’t think it’s the Metaverse though. In fact, it’s likely the exact opposite.
In truth, most of the predictions are a derivative of the first one: if Covid is near the end, then trends will break. Some of these will be obvious, but others less so. The momentum cycle is near an end.
The other theme is inflection points are messy. While the overarching theme of return to normalcy is a big win, there are negatives that come with it as seen above. Don’t get stuck in your ways or you’ll be late to adapt to the changing environment.
And finally, of course, most of these predictions will be wrong. Nobody predicts 100 year pandemics or world wars or terrorist events or, on the happier side, technological breakthroughs, but tail events happen all the time. We just don’t know which one is next. If I get more than half of the above right, I’ll consider it a success.