I will once again split my Thanksgiving holiday between the east and west coast with my immediate family, which now includes one amazing wife, two incredible daughters, two beautiful grandchildren…and two fairly tolerable sons-in-law. Given their varied interests, political views, professional avocations and life experiences, I am expecting a particularly lively and spirited set of conversations that I feel compelled to prepare for.
So, here is my “cheat sheet” for this year to help you navigate your own extended dinner conversations. I have once again leaned heavily upon the expertise and insights from both our CIO and Public Policy teams for much of what I have to share. But I’ve also taken the liberty this year of including several suggested readings on each subject—think of this as "literary discretion." Some are intended to be analytical, while others are merely meant to entertain. But hopefully you will find them all of some interest.
Will the Fed be able to materially lower inflation and successfully navigate a “soft landing?”
There is a perception in some quarters that monetary policy is some sort of surgical instrument wielded with great precision by highly trained professionals, making objective decisions by utilizing the very latest technology and cutting-edge diagnostic tools. But in reality, monetary policy is a blunt instrument wielded with brute force by a collection of political appointees of differing levels of intellect and expertise, who must rely instead upon imperfect and biased data to make subjective policy decisions. What complicates the Fed’s job even further is the fact that every business cycle is unique, with different sets of catalysts and impediments to economic growth. This means that the impact of rate moves are hardly uniform from cycle to cycle, and that the lag time between a policy move and its impact upon the economy also varies widely.
That said, there is a mix of good news and bad news here. The good news is that evidence suggests inflation has already peaked and is now finally moderating. The bad news is that this may not be happening broadly or rapidly enough to mollify the Fed. As the FOMC continues raising rates in order to convincingly bend the curve on inflation, it gets harder and harder to “stick” the soft landing. How hard? Think a triple backflip dismount from the balance beam. It’s possible, but the degree of difficulty is already pretty high—and gets higher as the Fed continues to raise rates.
Some of the best topical reading on monetary policy is the work being done by our own CIO team as well as the folks over at Bridgewater Associates. While they take very different approaches toward assessing policy paths — and come to somewhat differing conclusions with regard to the implications — both are insightful and well worth the read. Two books I would recommend for those interested in the history of central banking are “Lords of Finance: The Bankers who Broke the World” by Liaquat Ahamed (the title kind of gives the punchline away in this one) and "A Monetary History of the United States, 1867-1960” by Milton Friedman and Anna Schwartz.
How will the results of the mid-term elections impact the real economy and financial markets?
The short answer here, is that we really just don’t know. Conventional wisdom holds that divided government is met with more enthusiasm by market participants than single party control. But the empirical evidence here is actually fairly mixed. What we can say is that while gridlock can at times be constructive, dysfunction is not. Divided government can prevent policymakers from enacting potentially harmful legislation that can weigh upon markets. Yet there are still things that we need our elected officials to do, including passing budgets and raising the debt ceiling. Some may recall the political brinksmanship of 2011 that nearly triggered a technical default on our Treasury debt and prompted to first-ever downgrade of the United States’ sovereign debt rating. So, for financial markets, a lot will depend on whether we get divided government or dysfunctional government.
The Washington Weekly by the Office of Public Policy is simply a “must read” for me. John Savercool and team do a masterful job of dissecting the most critical legislative and regulatory issues and places them in a context that is both insightful and accessible to the reader. While there are also countless books you can read to better understanding the workings (and at times “non-workings”) of Washington, the most entertaining by far is “Parliament of Whores” by the late PJ O’Rourke. It is a witty, irreverent but also enlightening look at how our elected officials make the critical decisions that determine the future course of our republic. More to the point, it is one of the funniest books I have ever read.
How will the current unsettled geopolitical dynamics impact financial markets?
Most have been surprised by both the resilience of Ukrainian defense forces and the dismal performance of the Russian military during Russia’s invasion of Ukraine. The conflict, that was assumed by experts to last a matter of days or perhaps weeks, is now entering its tenth month and shows no signs of ending anytime soon. While the direct effects of the conflict on the global economy is limited (Ukraine and Russia collectively represent less than 2% of global GDP), the longer the conflict lasts the greater the impact from higher energy prices, disruptions to trade and the imposition of economic sanctions. More concerning would be either a broadening (intentional incursion into a NATO country) or deepening (use of tactical battlefield nuclear weapons) of the conflict.
Although tensions between the United States and China over Taiwan appear to have eased now that political posturing ahead of the mid-term elections has ceased, this represents the most significant long-term threat to geopolitical stability. American and Chinese interest increasingly diverged as China looks to raise its profile and project its power internationally and the United States seeks to preserve its status as global hegemon. Increased friction is evident in a whole host of areas including global trade, technology, environmental cooperation, freedom of navigation, national defense, pandemic policies and human rights. As a result of this growing rivalry and unsettled geopolitical backdrop, investors must once again actively incorporate geopolitical risk premiums into their investment decision-making process.
In terms of recommended reading, I have found that Foreign Affairs magazine provides one of the broadest and most comprehensive assessments of both near-term and longer-term geopolitical implications. Two recent articles I have been citing to shed some light on the current global dynamics include “The Consequences of Conquest” by Brendan Rittenhouse Green and Caitlin Talmadge in the July/August issue and “The World Putin Wants” by Fiona Hill and Angela Stent in the September/October issue. Three books that I would recommend to gain a firmer grasp on what might lie ahead include, “Destined for War” by Graham Allison, “The Third Revolution” by Linda Economy and “The End of American World Order” by Amitav Acharya. Sobering takes, yet insightful reads as well.
What is the future of crypto in the wake of the collapse of FTX?
An awful lot of ink has already been spilled covering this catastrophic governance failure, and I must confess that I have precious little to add here. I did note last year at this time that the technology that underpins crypto assets is powerful and that its applications will only broaden and deepen in the years ahead. But I also pointed out that there is no empirical evidence to determine with any level of confidence how crypto assets will perform through different business, policy and market cycles. The use of crypto therefore requires something of a leap of faith on the part of investors and—for now at least—that faith has been shattered. It’s too early to tell what will emerge from the ashes, but I suspect whatever the future of crypto entails it will include both a greater focus on governance and increased levels of regulatory oversight.
The best (and most prescient) work on crypto assets that I have come across has been done by our own Chief Economist, Paul Donovan. Paul has bravely and generously shared his views through a series of blog posts and podcasts. I strongly recommend that the reader hunt through the archives to find Paul’s collected insights—they will be well worth the effort.
What is the economic and financial market outlook for 2023?
This is arguably both the most important, as well as the most difficult, questions to address during this year’s holiday gathering. While I have certainly seen more threatening economic, geopolitical, policy, social and environmental backdrops in my lifetime, rarely have I seen all of these variables come into play at the same time. While none appears to represent an existential threat, neither have they been resolved. Fortunately, we get to rely on the expertise of our CIO team to provide both clarity to this muddled outlook and prudent guidance for how we should be positioned for the challenging course that lies ahead. Therefore, the final recommendation for my holiday reading is this year’s “Year Ahead” report by our CIO team.
What are you thankful for?
I am thankful for being blessed with yet another grandchild that I will get the opportunity to spoil and then send home to their parents. I am thankful that I still live in a country where, despite our stark differences and bitter disagreements, we can all take a day out to reflect and be grateful for all of our blessings.
Happy Thanksgiving to all!
Mike Ryan, Vice Chairman, UBS Financial Services Inc.
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