What to look for in 2023

Ad Astra previews the year ahead

Jan 03, 2023

Around the world, 2023 will be about the Rotten Tomatoes phenomenon, where critics and the public’s tastes have diverged spectacularly in recent years. It will be the public versus an entrenched elite whose already tenuous position has been made even less secure by economic upheaval. In China, a normally docile people are protesting against one-party CCP rule. In Iran, widespread demonstrations threaten the theocratic regime. The European middle class will be exposed to double-digit inflation and an energy crisis in an attempt to harm Russia. And in the US, uncomfortable facts are being revealed to the public via Twitter about their government. The global system built over the last forty years is under siege. What will happen? Nobody knows. Ad Astra will be here, helping you navigate a complex world.

Big Trends in 2023

This grouping is not exhaustive, but these are some big things Ad Astra will look for in 2023: 1) the US economy, 2) the New Cold War, 3) global energy and 4) the media transition.

US Economy

The outlook for the US economy is especially uncertain. The Wall Street Journal’s survey of economists gives a recession next year a 63% probability.

Figure 1: WSJ survey of economists[i]

Meanwhile, the investment bank Goldman Sachs thinks the US will narrowly avoid a recession, with the probability of a downturn being 35%.[ii]

Legendary investor Ray Dalio, founder of the most successful hedge fund in history, Bridgewater Associates, had this to say:

…a much bigger paradigm shift is under way than a simple rise in interest rates and inflation. He cites the risks of huge debts, populism within Western democracies and rising tensions between global powers. The first puts pressure on central banks to tolerate inflation and even monetise debt rather than raising rates. The second and the third could spur conflict both within and between states. Mr Dalio worries that the stage could be set for a period like that between 1910 and 1945, where in some regions “you have almost the complete destruction of wealth as we know it”.[iii]

The point of sharing these three predictions is to show that really smart people disagree on the prospects for the US economy in 2023. Anyone who says they know what’s going to happen is full of it. While Ad Astra thinks that the Dalio view of the world is probably right, he lays out a multidecade period and what happens in 2023 is unknowable.

However, Ad Astra thinks there are four key areas to watch in 2023 which will have complex but important effects on the US economy.

1. China

The Chinese economy is massive and it’s interconnected with the US economy. Therefore, its health is hugely important for the health of the US economy. China has been slowing recently thanks to its “zero-covid” policy, which it recently lifted (risking widespread COVID infections). It also faced widespread social unrest. China faces housing and demographic headwinds.

2. Europe

Like China, Europe’s economy is intertwined with the US’ and its fate can determine US prospects. Sanctions on Russia have created a European energy crisis. How this plays out will impact the USA.

3. US Inflation

The US is currently dealing with forty-year high inflation. It appears to have peaked and is subsiding but it’s still very high. The course of inflation, and the Federal Reserve’s response, will have major impacts on the US economy.

Figure 2: US inflation[iv]

4. Global energy markets

Finally, global oil prices are a good leading indicator of economic prospects. Oil is used in every aspect of the modern economy, so if investors foresee an economic slowdown the price of oil will fall. The price of oil has fallen considerably from summer highs. Whether or not it keeps falling will tell us a lot about 2023.

Figure 3: Benchmark oil prices[v]

One good thing that happened in 2022 and will accelerate in 2023 is the reshoring of American manufacturing. The last several years have made the need for this reshoring clear:

Shortages of essential personal protective equipment (PPE) and medicines during the Covid-19 pandemic endangered the lives of many Americans and medical personnel, while the inflation-stoking shortages that have followed pandemic-caused lockdowns have illustrated the dangers of disruptions to supply chains of many kinds. At the same time, the deepening military and strategic rivalry between the United States and China and the crisis that has followed Russia’s invasion of Ukraine have caused alarm over the extent of the dependence of U.S. military and civilian industries, as well as consumers, on China and Russia in particular.[vi]

The United States brought back 350,000 jobs from overseas in 2022 and will continue to do so in 2023[vii].

Elon Musk’s takeover of Twitter foreshadows a broader tech reckoning in 2023. Consider what he found:

When Musk took over, he said, he found Twitter in disarray. Employees had unlimited vacation time and permanent work from home. The company had stopped doing performance reviews altogether, according to a long-time Twitter employee. “As long as Twitter could just keep its head above water and be roughly cash-flow break-even, then that’s all that they cared about,” Musk said. [viii]

What Musk found at Twitter is also true of many other tech companies, which have enjoyed an incredible run over the last decade (some would call it a bubble). Musk fired half of Twitter’s staff and the platform still works fine. The markets took notice and will enforce the same discipline across Silicon Valley. Other major tech firms have already announced layoffs. In a great irony, instead of unemployed coal miners “learning to code”, it will be laid off software engineers that need to “learn to mine”.

New Cold War

As discussed in the 2022 review newsletter, a New Cold War is brewing between the US and China. There will be three main theaters where proxy forces duke it out: 1) the China Wars, 2) Soviet Union Aftershocks, and 3) the post-American Mideast.[ix]

The China Wars

This conflict will be fought around the rim of China as it scrambles for resources, bullies its neighbors, and lashes out to distract its people from internal turmoil. Its possible that 2022 saw Peak China and that population decline and a number of other factors will prompt its decline over the coming decades. Its decline will be dangerous, with flashpoints you may be familiar with like Taiwan, North Korea, and the South China Sea. There may also be some you’re not familiar with like the Himalayas between India and China, Japan, and Myanmar. Notably, India is projected to overtake China in population, for good, in 2023. The US will provide its allies Taiwan and Japan weapons in 2023, making this an American proxy conflict in the global New Cold War.

Soviet Union Aftershocks

The Soviet Union collapsed in 1991, but on the timescale of nations that was like yesterday. The present-day Russian successor state to the Soviet Union is unstable and Moscow will try to stabilize it by restoring some aspects of the Soviet Union. The Russo-Ukraine War that broke out in 2022 is the direct result of issues left unsettled from the collapse of the Soviet Union. Other potential flashpoints include Eastern Europe and Central Asia. These conflicts are part of the New Cold War between the US and China. To compensate for some of its weaknesses, Russia has chosen to ally with China. The US will continue to fuel this conflict by proxy in 2023, sending money and arms to Ukraine. The Russo-Ukraine War will have significant domestic political ramifications in 2023, with the Democrats clearly “owning” the war and its outcome. Battlefield victories or an advantageous settlement will be positive to a domestic audience. The converse is also true. The war is also a drag on the global economy, making it a complex but important issue in US politics.

The Post-American Mideast

The final theater in the New Cold War is the Middle East. The US used to need oil from the region to fuel its economy, which led to its engagement (and several wars) from immediately after WW2 until very recently. But the US Shale Revolution and resultant energy independence provided the US with the luxury to disengage from the Middle East. China does not have that luxury, as it imports the majority of the oil it uses. The US will try to deny China that oil, which is where indirect US-China conflict will arise. The existing fault line to the conflict will be between Iran and Saudi Arabia, the two main regional powers. Look for the US and China to support various proxy forces already in the region.

Figure 4: Various Saudi Arabia vs Iran proxy conflicts[x]

Global Energy

The same thing will be at the center of conflicts in the 21st century as the in the 20th century: energy.

In 2023, there will be two stories in global energy. The first is the energy transition i.e. the adoption of green-tech like wind and solar. This story is overblown, but will be important at the margins. Countries may compete over green-tech supply chains and access to rare earth metals, lithium, and the other raw materials necessary for a decarbonized economy.

The other story will be of the out-of-fashion but essential fossil fuels that power the modern economy. To illustrate this point, we will use more oil in 2023 than we’ve ever used in human history.[xi]

The scramble to secure energy supplies will be central to the New Cold War. OPEC+, the cartel that controls global oil markets and includes Russia, will continue to be hostile to America in 2023. The US shale sector has been weaker than expected to respond to high prices and supply more oil. OPEC+ will pounce on this perceived weakness to reassert its market dominance.

Meanwhile, China will cozy up to Saudi Arabia and OPEC+ to secure supplies. The US will watch (and potentially encourage) the protests in Iran. If the current government of Iran fell, which is presently heavily sanctioned, a significant amount of additional oil would hit the market and be up for grabs.

Xi Jinping reportedly favors Saudi Arabia over Iran: Report

Figure 5: Chinese President Xi Jinping with Saudi Crown Prince and Prime Minister Mohammed bin Salman in 2022

The war in Ukraine will continue to reroute global energy flows. Look for a European ban of Russian diesel in February 2023 and the potential withholding of Russian oil exports to global markets to further complicate matters.

Media Transition

Polls have shown a massive decrease in trust in media in the past years and this concern is justified. The rise of information monopiles (Google, Facebook, etc). broke the business model of traditional journalism, which was to sell ads in newspapers and on TV. Now it is far more efficient to sell targeted ads on big technology platforms and traditional media has switched to a demographic subscriber model. Now media only shares info its customers want to hear (i.e. Republican-friendly news for Republicans and Democrat-friendly news for Democrats). The result is two alternate information realities.

Figure 6: Trust in media survey[xii]

More and more people have caught onto this, fueling the growth of podcasts and independent journalism on places like Substack. This trend will continue in 2023 and accelerate with the release of the Twitter Files, which show that the US Government conspired with the big technology companies to shape public opinion.

Consider this perspective from the independent journalist Matt Taibbi:

Twitter’s Silicon Valley colleagues: Apple, Facebook, Microsoft, LinkedIn, even Wikipedia. It turns out these are the new principal intelligence outposts of the American empire.
Sometime in the last decade, many people — I was one — began to feel robbed of their sense of normalcy by something we couldn’t define. Increasingly glued to our phones, we saw that the version of the world that was spat out at us from them seemed distorted. The public’s reactions to various news events seemed off-kilter, being either way too intense, not intense enough, or simply unbelievable. You’d read that seemingly everyone in the world was in agreement that a certain thing was true, except it seemed ridiculous to you, which put you in an awkward place with friends, family, others. Should you say something? Are you the crazy one?
I can’t have been the only person to have struggled psychologically during this time. This is why these Twitter files have been such a balm. This is the reality they stole from us! It’s repulsive, horrifying, and dystopian, a gruesome history of a world run by anti-people, but I’ll take it any day over the vile and insulting facsimile of truth they’ve been selling. Personally, once I saw that these lurid files could be used as a road map back to something like reality — I wasn’t sure until this week — I relaxed for the first time in probably seven or eight years. Something tells me the coming year is going to be a better one.[xiii]

The Twitter Files are being minimized by some as a right-wing conspiracy theory. They are not. This is not a Republican or Democratic issue, it’s an American issue and something everyone should understand if they want to continue living in a free country. Expect Ad Astra to cover this topic in more depth in 2023.

Unknown Shock?

Something completely out of the blue could upend all these trends and be the dominant issue of 2023. The collapse of the Soviet Union, 9/11, and COVID-19 all came out of nowhere to reshape history. A Rumsfeldian “unknown unknown” could happen again in 2023. Regardless, I hope you keep reading Ad Astra and have a great 2023.

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[i] https://www.wsj.com/articles/economists-now-expect-a-recession-job-losses-by-next-year-11665859869?st=q8m9t7okd8zdlik&reflink=share_mobilewebshare

[ii] https://www.goldmansachs.com/insights/pages/gs-research/macro-outlook-2023-this-cycle-is-different/report.pdf

[iii]https://www.economist.com/briefing/2022/12/08/rising-interest-rates-and-inflation-have-upended-investing

[iv] WSJ

[v] WSJ

[vi] American Affairs, Winter 2022, ppg 53-67, “Leveraging Federal Procurement Policy to Secure America’s Supply Chains”. Lind et al.

[vii] https://reader.foreignaffairs.com/2022/12/20/the-new-industrial-age/content.html

[viii]