Dear Partners and Friends,
How nice life could be? After two Christmas parties in a row spoiled by Covid, health officials around the World have declared Covid to be history and all preventive measures obsolete. The Christmas turkey is roasting like never before despite sky-high gas prices. The Russian army seems to be running out of steam, losing not only more and more of the lands they grabbed after the brutal 24 February invasion of Ukraine but also at an increased economic and political cost. And the private bankers are already calling the end of a global stock market decline. Even winter feels more normal this year with cold snaps all over the Northern hemisphere. But who is interested in climate change anyway in times when fossil fuels are scarce goods and coal is celebrating a new renaissance? Luckily, it is also too cold for doomsayers to glue themselves onto roads or to famous artifacts. All around the World political clowns have been thrown out of office. Human rights movements have easily been turned into a running joke during the world cup in Qatar in an impressive win of big money. So, is the crisis of that not-so-easy year 2022 already over?? We tend to believe the contrary: that we are only at the beginning of a larger wave-shaped downturn with intense disruption to our societies, economies, and lifestyles. Global fault lines are breaking up, erupting violently, and raining down on us in a global shitshow before humanity can depart to a brighter future. Outcome unclear. Maybe a protracted crisis until 2025- 2026. Where things will get much worse, before they get better, where established ways of thinking and incumbent business need to go down with a new global equilibrium on the horizon before we will see the dawn of a new, better age arriving.
From baby boomers to baby busters.
The famous baby boomers have abused their time in power since the end of the Cold War by concentrating solely on their own economic well-being. More buster than boomer, they have led our World in the last thirty years to enormous political and military threats, unprecedented environmental emergency, dangerous financial instability, and a loss of values and beliefs. There is an urgent need to exchange these leaders for a new generation willing to change their countries and the World for the better. Shying away from any value-based discussion both in the political and economic arena, the meaningless compromise of hurting nobody and turning the back on any disruption, led to twenty years of covering any political crisis with endless multinational talks leading to nowhere and covering any financial crisis with more public and more central bank money. Both bubbles have started to burst simultaneously in 2022, with the worst not over, but yet to materialize in 2023.
Political Bubble: Appeasement at any price
For nearly three decades, we have lulled ourselves into a bubble of appeasement against the ugly truth of land grabs, human rights abuses on an industrial scale, utilization of banned weapons, and the use of energy supplies for blackmail. Caesar’s rule of preparing for war to preserve peace had been abolished, we saved on defense and gave the leadership of our defense to the most unsuited. The price that we pay today and in the future for this negligence is high. Ukraine is paying for this with the lives of its citizens and soldiers and the massive destruction of its civil infrastructure. The World is paying for this with energy markets in total turmoil, the UN being driven into insignificance, an unacceptable increase and banalization of the nuclear option, and of course national resources (your tax money) being hectically and unsystematically used for armament and energy bills instead of infrastructure and education.
Economic Bubble: The Globalization Scam and the Whatever It Takes Safeguard
With the rise of China and the fall of the Soviet Union, the total globalization of products and production lines arrived. Value chains were moved to China, greater Asia, and Eastern Europe. Global production prices declined and with strong competition between global employment markets, wages and product price inflation saw modest increases if at all. Next to strong deflationary tendencies, we experienced a massive enrichment of global elites through the inflation of stock prices, real estate, and the values of other luxury goods. All this is on the back of the American and European workers and employees. Despite increasing national wealth, their access to house ownership, in-time and state-of-the-art medical services, and other advanced social services deteriorated enormously over the last thirty years. As a result, we have experienced the most massive shift of global wealth in living memory. An outrageous globalization scam. Whenever there was a risk of an economic downturn or asset deflation, central banks together with governments shielded global elites with ever cheaper money and infinite liquidity injections into the financial markets. Governments, corporations, banks, and investors became addicted to the sweet drug of a perpetual mobile of rising markets and comfortable safety nets. Global corporations and the most wealthy effectively stopped paying taxes to any country that provided infrastructure and resources to them. Everybody was aware that this did not provide a stable and productive growth model. It generated a heavy burden on future generations and taxpayers once the party would come to an end. And voila, here we stand today. Welcome to this end.
The turbo dissolution of the prevailing business models of the past decades, the de-globalization, the re-inflation, the new competitiveness of labor and the re-orientation of global alliances will keep us all busy for the coming years. Hopes for a rapid recovery in 2023 to business-as-usual and to markets-as-usual, to presumed political stability, will prove to be costly bulls’ traps. Self-deception is powerful booze, and like cheap vodka, it gets sweeter the higher your intake.
Here come the main developments that we are expecting for 2023:
- Military confrontation and escalation: The world has moved scaringly close to a large-scale global conflict. Russia as a permanent member of the UN security council is threatening the World with nuclear attacks. Hostilities between North and South Korea and between China and Taiwan are getting hotter, and the Iran talks are history since its active armament of Russia with drones and ballistic missiles, while the accumulation of nuclear material in Iran is breaking all records. The current Western military doctrine of keeping NATO out of direct confrontation and instead arming Ukraine but only to a level where it can defend itself against escalating aggressions from Russia and not more will lead to a multi-year ugly conflict. But the margin of error of this strategy is very narrow. Any battlefield mistake, false flag, or rogue operation risks an immediate escalation. For now, an escalation even with a limited nuclear event is not likely, but for the first time, it can also not be excluded. Combine this with potential military intentions of a new ultra-conservative government in Israel and a Chinese leader being weakened by a COVID disaster at home. At least in Europe, both citizens and governments remain shockingly unprepared for any escalation.
- Energy volatility: Energy prices will show further violent swings. European oil and gas markets are in full restructuring and the full impact of this situation and physical energy shortage will only be felt from summer 2023 onwards. Sanctions and hectic price regulations on the market together with European regulations might add further to this volatility and increase market turmoil.
- Financial market recalibration: Go with the Fed. As long as main interest rates are way lower than inflation rates, the main central banks will stay hawkish. As we expect inflation to stay high if not very high in the foreseeable future (re: wage developments, de-globalization of value chains, energy volatility), we see further massive increases in interest rates and in parallel a reduction of surplus liquidity/tapering. A complete reverse gear to 2009/2010 and the following. Next to bearish equity markets, a bloodbath in certain real estate markets and segments can be expected, where investors and developers are confronted with the double whammy of exploding credit cost (bear in mind this is one of the most leveraged industries) and fewer buyers who will be able to afford the current price levels in the new financing reality.
- Looming wealth distribution battles: The last year has confronted workers and employees with the biggest net income loss for decades. As energy bills and mortgage payments are biting, the cost-of-living crisis is hitting hard. Many families will be forced to make hard choices in 2023, from holidays to cars, to other exceptional items, consumers will reduce their spending to make ends meet and to prepare for potentially worse to come. The UK is already confronted with strike waves in critical sectors. A just distribution of national wealth and welfare will be high on the political agenda in most countries with new attacks on wealth, property, and global tax evasion models. Modern social democrats who understand the work and life reality of generations Y and Z and get rid of industrialization-age mental models could see an upswing in their political fortunes.
- Covid reloaded: The outbreak is back where it started. Surrendering to the reality on the ground, the Chinese government has opened the floodgates to a total endemic contamination of its population. What a humiliating disaster and a public showcase of total failure. First, everybody was locked and blocked, even if healthy, now even the seriously sick show up for work. It will be interesting to watch how long the Chinese government can withstand the pressure of rapidly rising fatalities and overcrowded hospitals. You do not need to be a WHO expert to see enormous risks of new and potentially worse virus variants that could develop once this infection wave will hit the more rural and distant areas of China with its low hygiene standards and wild animal markets.
- Rapid Deglobalization: The reverse globalization mode is gaining traction. Governments around the World are realizing that not only gas and oil, but also antibiotics, semiconductors, special machinery, and software products can and will be used in situations of international confrontations. Major countries intend to bring back critical products and critical production to their countries. At the same time jammed supply chains and a new euphoria for duties and customs force global corporations to rethink their production, warehousing, and sourcing strategies. In combination with higher energy and transportation costs, and consumers who exercise climate and social shaming on producers, the case for a large Going Local drive is striking. This will also be a long-term endemic driver to keep inflation up.
- Lack of leadership: Unfortunately, the current global landscape is not spoiled with great political leaders or political leadership. Both in the US and Europe, the political class has failed to find responses to the profound changes in military threats (Russia, China), societal changes (new life and work models), climate change, and health dangers and driven the World into a situation of financial instability and bigger confrontations on the horizon. Still stuck in mental models of the past, we observe a mere containment of problems and avoidance of true and honest societal discourse. Three unrelated but typical newsflashes from the past weeks: (1) Already up to November 2022, in the US there was more Fentanyl seized than is necessary to kill every American with an overdose (and that after the opioid crisis), (2) In Germany, at a high-level armed forces event, 18 out of 18 latest generation BTR PUMA proved to be not ready for operation (not mind that there is a war raging at the front door, or that this BTR should be a showcase for German arms technology), (3) in Korea, the reproduction rate fell to a new historical low of 0.8 (while at the same time the import ban on sex dolls was lifted). Are all these governments vastly asleep? Systematically unimportant media nonsense and pseudo-discussions on negligible topics are dumped on us, while our governments are administrating the status quo. There is no guarantee, that the political system of Western democracies will survive in that working mode. Currently, our hope rests on young leaders and democracies, from the Baltic states to Scandinavia to demonstrate that bold and brave decisions can and will be taken and consistently executed.
The next twelve months will be most turbulent, dynamic, and interesting. These are the times when new businesses, political systems, leaders and are born. Everything new is based on the demolition of the past. The countries that will find their way into the new realities the fastest, will be the winners in the global race for political and economic clout.
With these thoughts, we want to wish you an excellent start to a sparkling, turbulent, and most-interesting year 2023 with lots of success.
Stay safe and healthy.
Marc and the whole Smartcom Team