Control Panel: Happy New Year 2023!

I find 2023 a disturbing number since it doesn’t fit neatly into my sense of mathematical order. I asked DH if 2023 is a prime number. DH told me that 17 squared X 7 = 2023 so now I feel better because 2023 isn’t prime and I like 7. But 17 is a strange prime number so I’m still a little uneasy about it. (Sorry for being meshuggena.)

I think it’s justified to start 2023 feeling uneasy about the investment scenario since the Federal Reserve has predicted a fed funds rate of 5% for 1Q23 and also mentioned that they have raised their “dot plot” scenario at every meeting since 1Q22.

I probably don’t have to remind METARs that all assets (stocks, bonds, real estate, crypto, etc.) have fallen since 1Q22. And all the markets are still dramatically overvalued on a historical basis. (I will post all data below to avoid breaking up my Control Panel.)

Russia is still attacking Ukraine. A study of Russian history shows that Putin, like past Russian autocrats, will not stop until he has conquered Ukraine, regardless of destruction and loss of life. Defending Ukraine is a long-haul commitment. Abandoning Ukraine would lead to attacks on other parts of the former USSR and Russian empire, including the Baltic countries, Poland, Moldova, etc. Potentially leading to use of nuclear weapons and even World War 3.

China is building up a formidable military force for land and sea. It’s possible that China will try to take over Taiwan in 2023. Probability calculation is way above my pay grade. But this could also lead to a cataclysmic war which the U.S. could lose.

The U.S. federal debt is already over 120% of GDP. The latest omnibus budget for fiscal year 2023 will increase the debt by $4.8 Trillion over the next 10 years. If 2024’s budget is similar to 2023, it will add a similar amount of debt. In addition to the entitlements that are already locked in, such as rapidly growing government transfer payments.

3Q22 GDP was $25.7 Trillion. But REAL GDP (inflation adjusted based on 2012 dollars) was $20 Trillion.

Government expenditures are fiscal stimulus that goes directly to individuals as transfer payments or as wages to provide government goods and services.

Inflation is caused by growth in consumer demand that is faster than the growth of supply of goods and services. Productivity is not growing. Goods may be imported (worsening the trade deficit) but services must be provided by workers in the U.S. This is the reason for the wage inflation which concerns the Federal Reserve.

I think that this setup is inherently inflationary and will be for the foreseeable future. Fiscal stimulus (from Congress) is battling monetary restriction (from the Federal Reserve). The Fed can only control the fed funds rate and long-term interest rates by QE or QT (increasing or reducing its gigantic book of long-term bonds).

Treasury will need to sell an immense amount of debt to finance the expenditures already approved by Congress. (Watch out for a politically-driven battle over the debt ceiling in 2023 which could damage the AAA rating of Treasury debt. Utterly stupid since all the expenditures were already voted on and approved by Congress.)

The Federal Reserve has been suppressing the long-term Treasury yields by buying up to 40% of some auctions. Beware of the central bank buying much of the government debt – this has led to hyperinflation in different countries in the past. (cf. “This Time is Different,” “The Price of Time,” “Secular Cycles.”) The Fed has begun to reduce its Treasury debt holdings but it could turn on a dime and start buying again. They are not likely to do this in an ordinary recession. They would in the event of a major credit freeze – keep an eye on the Financial Stress chart. (Which is currently neutral, up from ultra-loose.)

The Fed has stopped buying and in fact is (very gradually) rolling off its Treasury and mortgage bond holdings. China and Japan are also reducing their Treasury holdings. Foreign holdings of U.S. Treasury debt declined 6% over the past year. Who will absorb new Treasury debt issuance if the Fed, China and Japan are all shedding, rather than buying, Treasury debt? This points toward higher interest rates in the future.

As I said in early 2022, rising interest rates will hurt high-flying “growth” stocks of companies with low (or negative) current earnings, high debt and an exciting pie-in-the-sky story of future growth. “When money is basically free…you’re willing to place a high value on future earnings, particularly of growth stocks,” said Erik Knutzen, chief investment officer of multiasset strategies at Neuberger Berman. “That all changes when rates rise.”

Although the mainstream financial press is ignoring the problem of zombie companies, rising interest rates will gradually crush them as their debt matures over the next few years. The Fed-induced approaching recession will reduce their top line cash flow which can barely cover their expenses, including interest. Between 2015 and 2019, the Fed’s filters select roughly 10 percent of public firms and five percent of private firms as zombies. That was published on July 30, 2021 before the Fed started to raise the fed funds rate in earnest. As of last week, junk-rated debt is yielding over 15%. These zombies are embedded into the indexes.

Throughout 2022, the SPX has followed a pattern of lower highs and lower lows. The highs came when the market (erroneously) believed that the Fed would not raise interest rates as it announced. The lows came after Fed Chair Jerome Powell reiterated that the Fed would hang tough until PCE inflation maintained its target of 2% for an “extended period of time.”

Powell is painfully aware of the 1970s when inflation resurged after the Fed cut interest rates. He doesn’t want to see a repeat of 2022.

The Control Panel is showing this pattern as we end 2022. The trade is neutral, not risk-on or risk-off. The Fear & Greed Index is in Fear.

The USD is falling. Gold, silver and copper are rising. The “mungofitch index” of copper to gold is stable. Oil is in a rising trend. Natgas is in a falling trend.

The Treasury yield curve is beginning to flatten by rising yields at the longer maturities. This flattening after an inverted yield curve always happens before recessions start.

The 30 year mortgage rate is beginning to rise after a slight dip.

On the good side, inflation has been gradually declining on a month-to-month basis. So the Fed may raise once or twice more and then hold steady for several months.

In 2023, the squeeze will continue. China will suffer massive Covid losses which may significantly reduce their exports. Russia will continue to attack Ukraine. The Fed will continue to hold interest rates at a much higher level than the past few years.

The Fed is anticipating a recession and so should we as investors. I am planning to follow the “mungofitch 99-day rule” and buy stocks only after the stock market has made new highs for 99 trading days to avoid being fooled by volatility. I would carefully avoid any stock with “zombie” character, such as high debt-to-equity and GAAP low earnings-to-share despite healthy EBDITA.

Bond investors should buy short-term Treasuries and CDs. It’s hard to know whether the Fed will allow the longer-term yields to rise as the free market would have them do. I expect inflation to be inevitable in the future so I would only buy TIPS, not regular Treasuries. Any long-term TIPS yield of 2% or better is a buy for safe, inflation adjusted income.

Crypto investors would do better to buy tulips and plant them. At least they would get pretty flowers to enjoy. The government will be cracking down on crypto in 2023 so it will get even worse as an investment (speculative gamble).

The METAR for next week is cloudy. More of the same we have seen in December.




Nice interesting write up.

$480 billion per year in debt is probably a slow down in how fast we were wracking up debt.

The relationship of the debt to US productivity longer term is critical. This includes stoking consumer demand and consumer savings particularly in the middle class.

This chart was a forecast pre covid and while China was building up manufacturing power. These were the expectations with supply side economics regardless of which admin.

This forecast was from April 2020. Note 2023 was supposed to create a $1.3 trillion deficit.

Public spending can greatly add to private sector productivity. That of course has not been true since 1980. We have the miserably slow GDP growth of the 1981 to 2020 period to prove it.


But…S&P stocks are 20 percent cheaper on average than this time last year. Bonds 12 percent cheaper on average. Large growth stocks 30 percent cheaper on average. Savings paying interest again. There may be opportunity for bargains this year.


Retiring Boomers? Of course, in ten years or so, Boomers will largely disappear from the scene–but by then the investors will be the Millennials. None of that will make up for China and Japan, but I suspect resurgent USA manufacturing will be stronger than anticipated and China will be weaker than anticipated by then

If China invades Taiwan or Russia resorts to Nukes, all bets are off. I don’t have any good ideas for the apocalypse.


I think 7 is a very lucky number in some cultures, so perhaps they believe that 7 x 17 x 17 is super lucky, and maybe they will be bullish all year long.


I think (but am not sure) boomers are already [too] heavy into bonds, so not sure if they will be buying more. Furthermore, boomers are already spending down savings, so they won’t be buying, they would be selling bonds and stocks. Finally boomers are dying regularly, so their heirs are often likely to sell the bonds and invest in other things.


We are only 3 months into FY2023. November alone had a deficit of about $250 billion. And with stocks and bonds down across the board, tax payments in March/April will probably be on the light side.

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And with bond yields up (espcially short -term bond yields) interest payments by the Treasury will also be higher than predicted only last year.

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One has to wonder, with government borrowing costs going up, will that finally slow the increase in the deficit? Surely another macro impact.

It may be just the opposite. Because not only do we borrow the excess spending each year, we also borrow ALL the new interest due each year.

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The average Boomer is only 71. But as they retire, they will downsize their homes and invest the proceeds to finance their retirement. Most of the people doing this won’t buy Equities or corporate bonds, they’ll buy CD’s and government bonds or park in cash.

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The budget total is $5.8 trillion for fiscal 2023, including $1.6 trillion in discretionary spending. The budget also projects a $1.2 trillion deficit in fiscal 2023 – a significant drop from the last two years.,from%20the%20last%20two%20years.

Taxes are going up on the top bracket and corporations and falling on the bottom brackets as the bottom brackets are adjusted for inflation.

In a new analysis, the Tax Policy Center finds the tax provisions of the Inflation Reduction Act (IRA) are highly progressive. Taxes would rise by $6,060 (0.3 percent of after-tax income) in 2023 for households in the top 1 percent—with incomes greater than about $1 million.Aug 11, 2022

The Inflation Reduction Act Primarily Impacts Top 1 Percent of Taxpayers | Tax Policy Center.

These tax moves strongly combat inflation while raising consumer demand in the economy. That is standard economic policy anyone can study anywhere.

Some are downsizing their homes, but most aren’t. “Retiring in place” is a big thing nowadays. Also, and quite surprisingly, many sell their single family home and buy a retirement place of nearly the same value. This was a surprise to me because I am used to cheap Florida retirement places, but they aren’t quite as cheap as I remember. So there isn’t all that much sudden cash that needs investing. And when they retire they generally start drawing down investments, not adding to them.

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I’m 71. I’ve been retired for six years. I’m still investing. I’m not rich, but I’m richer than I was 6 years ago. I’ll be investing much more conservatively next year, but that’s because I expect a bear market. I did not downsize my home, but that’s because my kids and I bought a larger house to live together. The seven of us did not fit in our old two-bedroom bungalow. Anyhow, I know I’m not typical, but that seems to be how things are going with all the relatives my age.