One of the recurring themes of this report over the last few months was that the world was in recession and that the great asset inflation period, which began in 1981 when interest rates around the world topped out, was coming to an end. Obviously, the majority of investors disagree with this recessionary scenario and the negative return in real terms projections for financial assets over the next few years because these views are not good for the business of the financial sector. Therefore, it should not be surprising that professional investors instead of acknowledging that we are currently in recession prefer to forecast that a recession is likely to occur in the future.
The question we should ask ourselves is this: Given current economic, social, and financial conditions, considering the low quality and self-serving interests of our western governments and of the bureaucracy, and in view of already highly inflated asset markets, how likely are further gains in real wealth around the world?
Another relevant question would be to ask: what is likely to reduce real wealth more, renewed money printing by central banks, which would lift asset prices in nominal terms but likely diminish their value in real terms (through accelerating inflation), or additional tight monetary conditions, which would continue to decimate nominal asset values but possibly lower real values less than under the first option mentioned above?
My regular readers will remember that in my opinion, the major US stock indices including the Dow Jones Industrial Average have already made a major high in real terms and that a secular decline in real terms will follow - just as between 1966 and 1982. I concede that the forthcoming decline in real terms could occur while the Dow Jones moves up in nominal terms. [Between 1966 and 1982, the Dow Jones moved largely sidewards but because of accelerating inflation it lost 70% of its inflation-adjusted value.]
Some of the world's largest investors expect that stocks will see low double-digit gains in 2023 after global equities suffered in 2022 their worst loss since 2008.
In a Bloomberg News survey, 71% of respondents expected equities to rise, versus 19% forecasting declines. According to Bloomberg, “for those respondent seeing gains, the average response was a 10% return. The informal survey of 134 fund managers incorporates the views of major investors including BlackRock Inc., Goldman Sachs Asset Management and Amundi SA. It provides an insight into the big themes and hurdles they expect to be grappling with in 2023 after inflation, the war in Ukraine and hawkish central banks battered equity returns this year.”
In my view, the markets which have significant upside potential are to be found among emerging economies since emerging markets have underperformed the US since 2010.
My base case scenario is that central banks will ease again in the second half of 2023 (perhaps even earlier), that the dollar will weaken far more than is expected, and that precious metals will move up in price once investors realize that renewed money printing is on the table of our wise monetary guardians.
I maintain the view that we are in a vicious cycle of declining asset prices and that we need to look for assets that will decline the least in value. Investors will likely reduce their positions and then they will look at how to keep money in cash. Inevitably, they will stumble upon precious metals, which look relatively attractive compared to paper monies whose quantity will under the present global central bank regime increase over time – likely massively so. Consequently, I remain a happy holder of precious metals.
I wish you all a Happy, Peaceful, and Healthy New Year.
As the 2023 New Year gets underway, we investors should remember the words of Noam Chomsky who opined that, “If we choose, we can live in a world of comforting illusion,”but that, as Arthur Koestler stated, “Nothing is more sad than the death of an illusion”caused by severe bear markets in asset prices, I might add.
With kind regards
Yours sincerely
Marc Faber
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