The Anti-Davos Trade
I’ve been catching up on the 2023 World Economic Forum meeting at Davos.
It’s depressing. Very fucking depressing. Here’s what they’ve covered:
The end of private car ownership
Joe Manchin and Kyrsten Sinema literally high-fived over the filibustering Joe Biden’s $2 trillion “Build Back Better” package aimed at tackling climate change and social welfare.
And, the WEF discussed the four most pressing long-term risks over the coming decade: 1) Failure to mitigate climate change 2) Failure to adapt to climate change 3) extreme weather events 4) Threat of biodiversity collapse.
To summarize, the four dangers listed are: climate change, climate change, climate change, and depression… over climate change.
Moreover, the WEF has no hope for the economy. “Total economic destruction,” they say. Recession. Breadlines. Writers fleeing to Paris. The thing is… the WEF is wrong. There’s a building case for no recession. You read that right.
NO RECESSION.
A soft landing.
People always forget how quickly the narrative and sentiment can change; if markets were slow and logical everyone would be a millionaire.
The upshot is —and this is a mouthful—in the coming months’ Fed Chair Jerome Powell is going to pivot by pausing rates; inflation will go down and everyone who got laid off last week is gonna get hired next week; and China is going to re-open and Russia is going to pull out of Ukraine and the US will raise the debt ceiling and there will be a recession, but only a slight recession just enough to cool off for the next rally then everyone start buying stuff again.
Got it?
… no?
Here’s what I mean:
Are we entering a long, dark 2023?
All the gains we’ve made in stocks, crypto and other assets since the pandemic has vanished. We’re back to square one.
The whole thing has been unwound. Everyone’s portfolio from Warren Buffett to Joe Schmo down the street has taken a massive fucking haircut.
Despite all that, the case for a “mild recession” is growing.
What creates a strong recession is the price of oil. The 1990 recession began at the onset of the Gulf War when oil prices doubled. In 2008 oil prices were the penultimate death blow to consumers. This time? It’s way different. Oil is under $100 USD, and as long as it stays that way there is zero chance of the apocalypse and the recession narrative will be a nothing burger by summer 2023.
That said, China will make energy prices rise by opening up and this is why everybody is waiting for something to happen in the Red Dragon.
So far everybody agrees it remains uncertain.
But there won’t be the economic collapse (for now) that the WEF is warning about.
They can’t let the economy fail. That’s it.
There is always a safety net underneath stocks and commodities—always remember that. The economy is quite literally too big to fail. Every bank, hedge fund, and insurance company is too interconnected.
Not only are these institutions invested in the stock market, but they are also overleveraged in the market, meaning their exposure to risk is much higher than their actual capital. In other words, if the market were to go down, we’d lose our pension funds, insurance, and jobs. The entire system would implode.
“Our current economic system is so levered that the Federal Reserve can barely raise interest rates without everything falling apart.” — Raoul Pal in a Podcast with Bankless
Right now the markets are spooked because they believe the Fed has left them like a parent leaving their kid at college. They’re on their own. The reality is the Federal Reserve has to bail out their kiddo eventually.
In other words, investing isn’t just educated gambling, it’s educated gambling with a giant safety net. And that safety net is the Federal Reserve.
More stimulus is coming
Wait, what?
Stimmy checks during the highest inflation in 40 years?
Yup.
CPI inflation— the index that tracks the rising costs of everyday items—is a lagging indicator. It takes time for prices to adjust. This means inflation might have already hit a brick wall, and we haven’t seen it yet.
Think about it. Overall economic consumer demand is slowing. People are losing their jobs. Equities, bonds, and crypto are all at junk prices and still, no one is buying. Lumber prices are down. Gold is down. Even the OnlyFans bubble popped and creators are complaining that the recession is the cause.
The recession happened. It’s over. You went through it already. The definition was changed. That means the government will eventually have to do something to stabilize the economy and stave off a worse recession. That will come in the form of further stimulus checks or debt forgiveness — it could even be the student-debt forgiveness that the Biden administration keeps pussyfooting around.
What makes these stimulus checks different from last time is that Americans won’t be able to pour all of it into Robinhood and crypto; this time many of us will need this to pay the bills.
(hopefully the govt. reigns it in and doesn’t overstimulate the economy like in 2020)
Just Hold for The Next 3 Years
The bears are wrong. The WEF is wrong. They’ve been wrong for a while now. They’ve called for the S&P500 as low as 2800-3200 bp. Never happened. What did happen is that we’ve been in recession for the last twelve months.
And now the market is showing a lot of resilience and we’re getting out.
The markets can only experience so much pain before the Fed steps in and saves the day. It’s like using bubble gum to patch a hole in your canoe. It won’t be pretty, but it’ll work for now.
So, the story's moral is: For now, make long-term investments. Amazon, Apple, and yes, Bitcoin and Ethereum will come roaring back. Nobody has a timetable for exactly when, but know that things always come back around.
So, sit on your hands for the next three years. We’ll be OK.
Ever since I was a child it has been my dream to become a financial advisor. Unfortunately, it never came true. Therefore I am not a financial advisor and you should do your own research and not just listen to random people on the internet. Nothing contained in this publication should be construed as investment advice.