Bad Omens From Wall Street for 2023

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In my daily program on Americano Media, El Mercado y Mas, we have been monitoring the performance of financial markets during 2022.  We do this because what happens on “Wall Street” usually has an impact on the real economy, commonly referred to as “Main Street”.  Wall Street has had a rough year in 2022.  The Dow Jones Industrial Average, an index comprised of thirty of America’s best-known corporations, is down almost 10% as we finish the year.  The broader S&P 500 Index, representing the five hundred largest corporations in America, is down 20% year-to-date.  Finally, the NASDAQ Index, representing mostly technology companies, is down 33% since the beginning of 2022.

None of this bodes well for the US economy in 2023.  The poor performance of the stock market during this past year will likely result in companies having to restructure their operations in the coming year.  That usually results in layoffs and decreased business growth and economic activity.

You might not be a direct investor in stocks and bonds but what happens on Wall Street also affects you.  If you contribute to any form of retirement savings plan, whether an IRA or 401K plan, you’re invested in the stock and bond markets.  Even if you don’t invest, the direction of market forces has an impact on your life.  It affects what you pay for goods and services and the interest you pay on credit cards, for car loans and on rent or the mortgage on a home.

The inflationary spiral we have witnessed this past year has not only affected the wallets of ordinary citizens.  It has also affected the profitability of American businesses as companies have to pay more for the raw materials and labor costs of manufacturing products or providing services.  Governments also must pay more to vendors and employees to provide their essential services, meaning that eventually taxes must also rise.

Why are we in this environment of rising prices, declining economic growth, and increasing debt loads for families, companies and even the federal government?  I lay the blame squarely on the Biden administration and the Federal Reserve Bank.  Let’s go through a chronology of how we got to where we are today:

Biden’s war on the fossil fuel industry: On the day he was inaugurated, Biden canceled the Keystone XL pipeline and initiated several executive actions designed to penalize America’s oil industry and placate the environmental activists that played an outsized role in his electoral campaign.  At the end of 2020, gas prices in America averaged $2.19 a gallon.  Just six months after Biden took office, prices were at $3.17 a gallon, 45% higher.  Higher gas prices began fueling the inflationary spiral as everything in America moves by trains, planes, trucks, and automobiles.  All of them depend on fossil fuels.

Continued and unnecessary fiscal spending:  Despite the fact that the pandemic had essentially ended, Democrats could not resist the temptation to go on a massive spending spree now that they controlled both Congress and the White House.   Over the course of 2021, they spent over $3.8 TRILLION dollars including the American Rescue Plan ($1.9 trillion), the so-called Infrastructure Spending Plan ($1.2 trillion), and other spending bills.  Freed from confinement at home, Americans were already re-activating their small businesses, returning to work, and spending money like crazy.  Biden’s irresponsible spending added even more liquidity to a financial system that was already awash with money.  As a result, demand for products and services quickly overwhelmed supply.  This forced prices even higher and caused shortages at retail stores.  All this as supply chains were struggling to return to normal, adding even more inflationary fuel to the fire.

A Federal Reserve Bank whose head was buried in the sand:  Despite an obvious and worrisome increase in retail prices during the summer of 2021, the Biden administration, and the Federal Reserve both assured us that the inflationary pressures we were seeing were simply “transitory” and would soon dissipate.  It wasn’t until November 30, 2021, when Chairman Powell admitted to the Senate banking Committee that inflation was no longer “transitory”.  To the surprise of many economists, instead of moving quickly to raise interest rates, the Fed deferred the interest rate increases until 2022.  This allowed the corrosive effects of inflation to spread even further throughout the US economy as 2021 ended.

An entirely avoidable war on the European continent:  Biden’s shameful surrender to the Taliban in August of 2021 no doubt emboldened Putin to invade Ukraine in February of 2022.  Biden even told the Russian leader that US forces would not intervene in Ukraine.  Oil futures began rising even before the invasion and after Russian troops and tanks crossed Ukraine’s border, the price of crude oil shot up over $120/barrel.  Natural gas prices also climbed and gasoline prices in America reached $5/gallon by the summer of 2022.  These price shocks further exacerbated the upward spike in inflation.

As we finish this tumultuous year, inflation is finally beginning to moderate.  The Fed’s interest rate tightening has begun its desired effect of cooling the economy, starting with the real estate market that has gotten crushed.  Mortgage rates are double what they were in 2021.  Oil prices finally declined after Biden decided to raid America’s strategic oil reserves to improve his political party’s chances during the midterm election.  The strategy worked but America’s oil reserves are at its lowest level since 1984, exposing our country to potential danger in the event of war or natural disaster. 

A global recession is increasingly certain.  Europeans face a long, cold winter with incredibly high energy prices and a war on their continent.  China, the world’s second-largest economy, continues to struggle with COVID infections and a real-estate market that has collapsed and seriously eroded the wealth of homeowners.  Emerging countries are under enormous strain as their dollar-denominated debt grows increasingly more expensive-- along with dollar-denominated oil and natural gas prices.  The world is now encumbered with $290 TRILLION dollars in debt owed by households, businesses, and governments up more than one-third from a decade ago.  The US federal debt is responsible for $32 TRILLION of that, roughly 11%.

In short, 2023 is looking to be a difficult year for the US and the global economy. Many market observers, including myself, are skeptical that the Federal Reserve Bank will be able to achieve its “soft landing”, halting inflation without creating a steep rise in unemployment. History is also not on the Fed’s side.  But hope springs eternal for Fed officials and the Biden administration.

We will see what happens soon enough.  Listen to “El Mercado y Mas” every day at 4 PM on AmericanoMedia.com and we will help you navigate through the treacherous economic waters ahead.