2022 Year in Review – 13 Years of Economic Largesse Come Home to Roost

Remember at the end of 2020 we thought it couldn’t get any worse nor ‘unprecedented’ (ironically 2020’s word of the year), and then by the end of 2021 it had!? It would be fair to say that 2022 marked the year the hens came home to roost on all the economic and political largesse unleashed in the years prior to ‘fix’ it.  Let’s do our annual year in review…

Whilst unprecedented was the word de jeur for 2020 and (irony not lost) again in 2021, it at least had to compete with the word transitory for top billing in 2021 amongst commentators and analysts. The pesky but ‘absolutely transitory’ US inflation of 2021 finished the year at around 7% (from just 1.4% in Jan 21). The problem was it just plain wasn’t, and likely plain isn’t transitory.  It peaked at 9.1% in June and is still stubbornly just above 7%.

2022 will be remembered as the year we had the combined tectonic ‘events’ of Russia invading Ukraine and the effects of over a decade of (sorry, has to be said) unprecedented loose monetary policy by central banks printing trillions of dollars and holding interest rates to near zero.  What resulted was that aforementioned 40 year high inflation and the biggest, quickest reversal of monetary policy ever. The so called ‘Everything Bubble’ appeared over..

The impacts of the Russian invasion on supply chains already broken from the pandemic and with 2 of the world’s biggest food and energy producers was and remains massive.  We also saw the US government unilaterally weaponise the world’s reserve currency with the inevitable effect of pushing more to move away from using or relying on it.  This crystallised the resolve of the BRICS nations, together a massive collective of global population and GDP, to formally move away from the US dollar for key trade agreements. That unprecedented change in US Fed policy also saw the (unintended?) consequence of exporting the US’s inflation to the world and putting crippling pressure on emerging and developed economies alike carrying USD debt and their currencies. It should be no surprise nor coincidence that 2022 also marked a year of huge flows of gold from west to east.

Our own RBA were both critically late to respond (one of the last central banks to tighten) and then one of the first to lose their nerve and scale back the pace of tightening as it grappled with the impacts of rising rates on our being the unenviable title holder of world’s highest private debt holders. To be fair this was the same RBA that told us rates would be zero well in to 2024 and saw ‘us’ all pile into an already over inflated property market. Talk about a ‘rug pull’…

Indeed central banks featured very heavily in 2022.  Whilst the investment mantra was “its ALL about the Fed” we saw the ECB shift heavily off their negative interest rates, the BoE had to effectively oust an errant ‘lets throw money at an inflation problem’ 3 minute Prime Minister, and as we wrote this week, the BoJ threw a proverbial match on the whole fuel pile with yet to be fully realised consequences.  And what do the collective central banks that are overseeing this whole mess quietly do in the background? Buy an all time record amount of gold.

Whilst inflation was the hot topic on everyone’s lips the smarter money were fixated on one nuance that we hadn’t seen since the 70’s and that was stagflation.  High inflation amid weak growth.  As the year progressed, what started as a supposition became reality and in 2023 we will almost certainly see it in its very worst form with a full blown recession but with inflation stubbornly sticky well above their target 2%.  The Bank of Japan almost locked that in this week.

That of course all played pretty heavily on financial markets that became addicted to cheap and plentiful liquidity for over a decade. Literally nothing was spared outside of the USD and precious metals. 2022 marked the year of the biggest losses in bonds and the ‘fool proof’ 60/40 portfolio ever.   The following provide a summary of what that all looked like up to 22 December 2022.

Our trademark is ‘Balance your wealth in an unbalanced world’ and we preach asset diversification in the truest sense of the work in terms of uncorrelated assets.  The table above clearly illustrates how normally uncorrelated assets like shares and bonds can break the mould.  Without gold and silver this year you were likely in the red across your entire portfolio.  And remember that is BEFORE the almost consensus call on a global recession next year!  Let’s remind ourselves too of where the world’s largest sharemarket index, the S&P500 sits now compared to 2008…

Finally, we want to say a huge thank you to all our new and existing customers for your business this year.  It was great to see everyone in more normal times, without masks or onerous rules, to see your smiling faces and the comradery we share with so many. We particularly thank all those supporting the new office in Melbourne and your recommendations to friends and family who have done likewise.

On behalf of all the team at Ainslie, we wish you and yours a wonderful Christmas and holiday season, hope you stay safe and healthy, and look forward to seeing you all in the new year.