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Good Friday Morning! I hope everyone is doing well after the vicious cold snap this past week. I got to experience myself here in Tennessee, where we watched the thermometer drop 30+ degrees in less than two hours. It was 43 degrees one minute, and it was below freezing and snowing in less than an hour. Astonishing to watch and also shocking as we’ve watched the death toll climbing places like Buffalo, NY. My thoughts and prayers are with everyone impacted.
It’s the last newsletter of 2022! In this issue, I will write about some of the significant events I think will impact 2023 and what to watch as we move into the new year – links to follow.
Where you can find me this week
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[12/26/2022] Biden allows Ukraine to drive US policy – Conservative Institute
[12/30/2022] Pete Buttigieg: the Empty-Suit Consultant – Conservative Institute
2023: Recession and War to kick off the new year.
This is the last newsletter I will write for 2022. The next time you get this, it will be 2023, and a new year will be upon us. I’m always divided on what to do at the end of the year. Sometimes I like looking back at the year over things I’ve written. In other years, I prefer looking forward. For this issue, I’m looking forward.
The primary reason I have for that is there’s one story that will overshadow everything: a global recession. My inaugural 2022 newsletter speculated that the economy could overshadow this past year:
Inflation continues to be a drag on the US economy. The recent Federal Reserve statement indicated a much more hawkish stance on interest rate hikes in 2022 — which led immediately to a bloodbath in tech stocks and crypto. James Bullard, president of the Federal Reserve Bank of St. Louis, said the Fed’s institutional credibility is at stake in attacking inflation.
If the Fed gets skittish and attacks inflation faster than anticipated (credibility isn’t an economic equation — it’s political), that will cause ripple effects throughout the economy as investors shift money to different stocks and areas that are safer than tech/crypto. That’s already starting to get priced in now. These kinds of moves raise the specter of recession in the United States.
At the time, we’d had zero interest rate hikes, and the Federal Reserve had just started issuing “hawkish” rhetoric in November.
Since that first 2022 newsletter, America has experienced one of the quickest interest rate hikes in US history. The crypto industry, which was all over the ads for the Super Bowl, is now a deep winter. Bitcoin is likely the only thing that survives this downturn. The housing market has been in a recession since June.
What does 2023 hold? We witness an official declaration of a recession at some point. A recession will be the overarching story for the year and likely 2024. Along with that, how does the Federal Reserve respond to a recession? After a slow start to 2022, they started raising rates rapidly.
We already have a recession in the tech sector (active layoffs) and housing. Big Tech’s layoffs have been more publicized. You can follow the numbers at LayoffsTracker.com. Housing has followed. Logan Mohtashami at Housing Wire is the best analyst in this space and called the housing recession over the summer. He has a new piece comparing this housing downturn with 2008, but helpfully shows where things are now:
First, we must define what we mean by recession. Our general economy is not yet in a recession, but housing has been in one since the summer. For me, it’s straightforward: it’s when we see these four things happen in any sector of our economy:
1. Sales fall. Housing demand has fallen noticeably this year.
2. Production falls. Housing permits and starts are falling now, even with the backlog of homes in the system.
3. Jobs are being lost. The housing sector — especially real estate and mortgage — has seen significant layoffs, while the general economy will create more than 4 million jobs in 2022.
4. Incomes go down. With less transaction volume, general incomes in the housing sector are falling.A few months ago, I was asked to go on CNBC and talk about why I call this a housing recession and why this year reminds me a lot of 2018, but much worse on the four items above.
It is crazy to think we are seeing these four things happen in the housing market considering that even in March of this year we were seeing bidding wars accelerate before mortgage rates rose. That is how fast things changed — a by-product of a sector where the prices of homes were getting out of control after 2020.
Everything will likely remain the same for the housing market in the near future. Mohtashami is correct to say the general economy hasn’t seen job losses that indicate a broader downturn. But we do know that’s what the Federal Reserve is seeking.
A WSJ report this week found that those tech employees getting laid off were finding employment again, relatively quickly: “About 79% of workers recently hired after a tech-company layoff or termination landed their new job within three months of starting their search, according to a ZipRecruiter survey of new hires.” Salaries at the new jobs were pretty close to old ones.
That’s excellent news for those people. It’s terrible for the Federal Reserve. Recall the Fed wants unemployment to go up: “In plain English, that means unemployment. The Fed forecasts the unemployment rate to rise to 4.4% next year, from 3.7% today — a number that implies an additional 1.2 million people losing their jobs.”
The Fed has even raised its unemployment target to incorporate more job losses. The fear is that wages continue going up, which drives inflation to remain elevated – the wage/inflation spiral. I’m not saying the Fed is right in this view, just that they view inflation through this prism. You can watch CNBC any day and watch people argue the Fed is wrong.
Two other critical components of 2023 will impact a recession and the economy: China and the war between Russia and Ukraine.
First, China’s reopening.
There are two things with China’s reopening. First, China’s reopening will boost demand in China and abroad. That could impact supply chains and commodities like oil, providing upward pressure on inflation. Second, China is desperately trying to get out of a recession to jump-start its economy. That reality is leading them to engage in economic stimulus. That matters because stimulus counteracts the Federal Reserve trying to slow down economic growth.
One of the vast policies China is pushing, aside from the usual stimulus measures like tax cuts, is pumping cash into their real estate sector. Long-time readers know that I covered the Evergrande meltdown in China last year. Their property sector melting down brought the Chinese economy to its knees, with lockdowns compounding that further. China is trying to reverse that damage. Economic stimulus is the tool China is relying on to accomplish that task.
On a similar note, countries like Spain are also engaging in stimulus. They’re framing it under the guise of inflation relief, but the impact is stimulus. If other countries join in this mindset for 2023, it will juice demand globally at the wrong time for the Federal Reserve.
Globally, tension is developing between the United States’s attempts to cool inflation versus others pushing stimulus. It’s too early to know how this impacts the Fed’s decision-making, but it seems impossible to ignore for now.
Second, the war in Ukraine.
Reporting suggests that Russia is preparing a second major offensive in Ukraine:
Moscow is preparing for a major offensive next year that it hopes will push Ukrainian forces out of Donetsk, Kherson, Luhansk, and Zaporizhzhia – the regions that Russia originally took control of before the invasion. Ukrainian Minister of Foreign Affairs Dmytro Kuleba, thinks that Russia may be preparing for a large counter-attack that would take place in late January or in February to re-take major amounts of territory that Ukraine now holds.
Another analyst said, “Russia is preparing for a long-term war, and there are no signs of a political solution and peace.”
A long-term war is a problem for the United States. We must push for a solution to get Russia out and end hostilities. Russia continuing the war as a recession likely sets in will weaken the United States and lessen the political will to push resources to Ukraine.
As I noted in a recent CI column, my issue with Zelenskyy coming to the US is less with him than with the Biden administration. We’re pumping more aid over there with no plan to end the conflict. I understand the impulse to continue degrading Russia militarily through this conflict, but the costs are mounting.
But the economic impacts are mounting too. If the goal is a complete victory for Ukraine, we need to push a way to get there faster. If the goal is getting Russia to withdraw and accept a stalemate, accelerating the path to that should be a priority. Currently, we’re lazily rolling with a lackadaisical posture, letting Russia and Ukraine determine the timeline. Setting clear goals and objectives and finding a way to achieve them should be priority number one for this White House – and I’m not seeing it.
Finally, that leaves the most significant thing for 2023: the unknown.
UK Prime Minister Harold Macmillan got asked about what was the most significant challenge for political leaders; he answered: “Events, dear boy, events.” Every year some events happen that surprise everyone. In the UK alone, there have been three different Prime Ministers this past year, and the Queen passed away. No one predicted that.
In the United States, we know Republicans have a slim majority. Kevin McCarthy is trying to force the Freedom Caucus to realize that it’s either him as Speaker of the House or a Democrat. We’ll find out whether the Freedom Caucus crowd understands that political math. Trying to force concessions at this stage weakens Republicans before the new Congress even sits.
If a recession hits, a new Prime Minister in the UK and a divided US Congress will get forced to respond. What happens, and how does everyone navigate this? It’s a mystery. Of course, other events will also occur throughout the year, which will drive things forward. Uncertainty is always high this time of the year.
One final issue to keep an eye on: COVID-19. Specifically, China’s reopening concerning the pandemic. China’s vaccines are useless, they refuse to use American-made vaccines, and we know COVID spreads like wildfire there. It’s so bad that the US and other countries are instituting COVID testing requirements for travelers from China.
China’s incapacity to handle the pandemic provides COVID-19 with a large playground to mutate and strengthen again. In the US, new strains of COVID-19 got weaker – see the omicron variant, which became equivalent to a flu variant between vaccines and treatment. In China, we have a reverse situation: COVID-19 with a big, unvaccinated playground, and it’s easy to spread. That could allow the virus to strengthen and spread again.
It’s too early to tell the results of China’s reopening. But we know China will obfuscate and lie about it, as they’ve done everything else. That makes their reopening dangerous as the pandemic wanes everywhere else.
My overarching concern heading into 2023 is a recession. A recession or the threat of one will dictate a lot of policies in the United States. I know that will also be the top concern for the White House and Congress, even if they won’t say it.
All that said, thank you for being a reader this year! Thank you to everyone who continues to share and grow this newsletter. I hope you continue to find it valuable and worth reading in 2023. I hope you have a grand New Years’ celebration with friends and family!
Links of the week
Pete Buttigieg, Air Traffic Controller: The Southwest Airlines mess has politicians angling to rule the skies. – WSJ Editorial Board
Was Buttigieg Asleep at the Switch for Southwest Airlines’ Holiday Implosion? – Jim Geraghty, National Review
Pete Buttigieg Repeatedly Ignored Warnings of a Holiday Travel Crisis – Sarah Arnold, Townhall
Between the stock market and crypto, we’ve lost more than $12 trillion of wealth in about twelve months’ time – Kelly Evans, The Exchange Newsletter
George Santos takes the cake, but why does Joe Biden get a pass for his lies? – Douglas Murray, NYPost
House Judiciary Republicans Call Out White House, POLITICO for Working Together on Story Leak – Rebecca Downs, Townhall
Banner day for Ukraine hero Zelensky in DC – John Podhoretz, NYPost
Twilight of the Tech Gods – James B. Meigs, Commentary Magazine
GOPocalypse Now? – John Podhoretz, Commentary Magazine
Twitter Thread(s) of the week
Throwback: Three years ago, an urgent notice went out in Wuhan, China about an unknown virus.
A guy wakes up from a five month coma to find out his FTX crypto was wiped out.
Satire of the week
Pride At Using Big Word Causes Man To Completely Lose Train Of Thought – Onion
Thousands Of Spirit Airlines Passengers Disappointed Their Flights Weren’t Canceled – Babylon Bee
Airports Forced To Hire Extra Security To Guard Thousands Of Stranded Bags From Sam Brinton – Babylon Bee
CIA reveals Santa was killed in Cambodian airspace in 1971: Recently declassified documents detail the top secret operation – Duffel Blog
How the Men’s World Cup Has Inspired Me to Try Falling Down and Writhing on the Ground for Attention – Reductress
Fantastic Beasts & Other Nicknames Man Calls His In-Laws – Waterford Whispers News
Thanks for reading!