Markets closed 2023 with the strongest rally in years for equities, bonds, gold, and cryptocurrencies. The level of complacency was obvious, registering an “extreme greed” level in the Greed and Fear Index. The year 2023 was also an unbelievably bad year for commodities, particularly oil and natural gas, something that very few would have predicted in the middle of two wars with relevant geopolitical impact and significant OPEC+ supply cuts.
It was also a poor year for Chinese equities, despite slower-than-expected but strong economic growth and robust earnings in the large components of the Hang Seng Index.
Markets rallied because of a combination of optimistic expectations for inflation and aggressive rate cuts from central banks. The question now is, what can investors expect in 2024?
The year of disinflation can come only from a recession. The market expectations of a massive reduction in inflation cannot come from what economists call a soft landing. The reason we didn’t see a recession in 2023 is that the global money supply didn’t fall below $103 trillion and ended almost at the record level of $107 trillion, according to Citi. Furthermore, governments in developed countries have continued to spend as if inflation and rate increases didn’t exist. Fiscal policy has been exceedingly aggressive, while monetary policy has been restrictive. As such, the decline in monetary aggregates and the effects of rate hikes have fallen onto the shoulders of the private sector.
Inflation declined in line with monetary aggregates, but we have not yet seen the true impact on the economy because of the lag effect. We are likely to see the full-scale impact of 2023’s monetary contraction in 2024. If the economy weakens and private-sector aggregate demand slumps, inflation will decline as expected. However, it is almost impossible to see the kind of goldilocks economy that many investors predict and achieve 2 percent inflation.
Central bank rate cuts will come only from a very weak economy. Central banks never act preemptively. If they end up cutting rates by, say, 150 basis points, it will be because the slowdown in the economy is severe. We cannot bet on one thing or the other. If you believe in a soft landing, you should not expect six rate cuts. Alternatively, if you believe central banks will cut rates five or six times, you should prepare your portfolio for a hard landing—a terribly bad one, in fact.
Commodities may bounce as geopolitical risk creates a floor and marginal demand from China picks up. Markets have ignored the strength of the Chinese economy, which will grow by at least 4.5 percent in 2023, because the stock market has not performed. However, an economy that grows at this pace despite the real estate sector’s immense challenges should not be ignored. It is probable that marginal demand in energy commodities picks up just as geopolitical risk maintains a floor on the price, leading to a bounce in the commodity complex thanks to China’s marginal demand and India’s rapid growth. This recovery in commodities may also be supported by a looser monetary policy, as more units of newly created currency go to relatively scarce assets.
Latin America and Europe will continue to disappoint, while Asia leads in growth. Markets have bought European stocks and bonds, supported by a relative bounce of the euro versus the U.S. dollar and expectations that the worst is over. The same is happening with Latin America’s risky assets. However, the problems are deeper and more complex.
The euro may bounce, but its position as a world reserve currency is weakening relative to the U.S. dollar and rising contenders such as the yuan. Europe’s lack of growth is not due to exogenous factors but, similar to most of Latin America, self-inflicted. The eurozone ended 2023 in recession despite low commodity prices and the EU Next Generation Fund. The problem in the eurozone and most Latin American countries is the constant implementation of policies that damage growth and bloat governments. Argentina, for example, will likely go through a detox year with aggressive measures to undo the nightmare created by collectivist interventionism.
Equity markets may continue to perform adequately because of the monetary destruction implemented by central banks. Although 2024 will probably not be the year of central bank digital currencies, they are in the pipeline, and this means even more monetary debasement. In this environment, Bitcoin and gold may continue to support the fight against the destruction of the purchasing power of currencies.
We can’t ignore bitcoin’s high volatility and risk, but we can’t forget that it has started to separate itself from other cryptocurrencies to be an asset class of its own.
As central banks prepare the way for digital currencies, which are the closest thing to surveillance disguised as money, reserves of value are more needed than ever before. Gold is likely to be a good de-correlated asset that protects against the debasement of sovereign bonds and domestic currencies.
In 2024, there likely will be a significant slowdown in the major economies considering the current trends in the private sector and a year of rising public debt, which governments will try to disguise with the destruction of the purchasing power of the currency. In that scenario, betting on the swift end of the inflation burst may be premature. If inflation drops as expected, it will come from a deteriorating economy bloated by excess debt and government spending. If debt and government deficits continue to rise, inflation may surprise on the negative side.
Either way, the key in 2024 will be to protect ourselves from currency destruction. Thus, investing is not simply important but crucial to survive in this gradual end of money as we know it.
