As another turbulent year, 2023, comes to a close, it is timely to do some crystal gazing at what the headlines in 2024 might look like.
Before journeying into the future, let’s reflect on what market watchers will remember the year for.
Investors have had a lot moving on their radar in 2023, from generational high inflation, fear of ever-rising interest rates on global demand, loan defaults and deteriorating geopolitics.
But 2023 will be known for the great US treasury bond crash, the worst treasury bear market in history that wiped trillions of dollars off the value of treasury bond portfolios.
Fallacy of a safe haven asset came home to roost in 2023.
The reality is that all assets have a price, and if investors overpay for that asset, irrespective of whether it is a high-risk or a safe haven asset, they will lose money. Bond investors underestimated the maturity risk of holding long-maturity treasury bonds where inflation erodes the bond’s market value.
Treasury notes and bills with shorter maturity dates are the least impacted by inflation.
“Fallacy of a safe haven asset came home to roost in 2023”
Let’s move to Headlines in 2024 with turbulent elections everywhere
The US presidential elections scheduled for November 2024 could conclude with neither side accepting they lost, claiming that elections are fake.
The UK general election is scheduled for 2024 and must happen no later than January 2025. Labour will most likely win, bearing in mind the current Conservative administration is alien to the crisis of the everyday citizen. Poverty rates in the UK are approaching the Victorian era, with 11.7 million British officially living in poverty in 2023. Dickensian diseases like tuberculosis and rickets are resurging as one in 10 county councils in England is facing effective bankruptcy.
So a Labour UK government in 2024 is a virtual certainty.
However, a left-leaning government is likely to result in more public spending and a worsening public deficit which would further depreciate the currency.
A 1976 sterling crisis could play out in 2024, forcing the UK to go cap in hand to the IMF for a bailout.
“a Labour UK government in 2024 is a virtual certainty”
A Russian Presidential election is scheduled for March 2024.
An anti-war candidate has been barred from running in the elections.
It is difficult to gauge public reaction to the two-year-long war in Ukraine, bearing in mind anti-war protests are illegal.
The Russian Ruble remains under pressure as Western sanctions squeeze its oil and gas exports.
Russia has its share of problems, currency depreciation, inflation, stagnation and war.
Nevertheless, Putin, running for reelection, is expected to win another six-year term, with 80% of the populace approving his performance, according to pollster Levada Center.
EU Presidency elections are scheduled for June 2024, with far-right alliance parties expected to make gains.
“More bank financial institution failures could hit the headlines in 2024” – Win Investing
Deteriorating economic fundamentals everywhere could make headlines in 2024 Q1
Maximum fallout from central banks tightening in 2023 hits the economies in the first few months of 2024.
Monetary policy time lag ranges from 6 to 12 months.
Aggressive Fed tightening, not seen in decades in 2023, burst the treasury bond bubble, triggering a banking liquidity crisis and a credit squeeze, which toppled five banks in 2023.
The maximum fallout from the Fed’s restrictive monetary policy could occur in the first quarter of 2024. As we witnessed in early 2023 the first in line to be impacted by monetary tightening are financial markets, then businesses and households as the recession bites with rising unemployment.
More bank financial institution failures could hit the headlines in 2024
Despite the recent bond rally, billions of dollars of book losses on treasury bond portfolios, in 2023, will be brought forward in 2024.
Those losses are realized when bond investors and banks sell to raise liquidity to meet obligations.
So if the yields on treasury bills, shorted-dated government security with a maturity of less than one year, continue to rise above interest on cash deposits in 2024, capital flights from cash deposits into treasury bills will continue. The above dynamic is the crux of the 2023 bank liquidity crisis.
When savers, risk-averse investors, act rationally, they will seek the highest returns for the lowest risks.
One of the negative consequences of the Fed’s 2023 inflation-fighting tightening policy was that it wreaked havoc on the treasury bond market, threatening to blow off the collateral chains of the global banking system. Commercial banks lend to each other by pledging treasury bonds as collateral. So, if treasury bond prices continue falling because of inflation fears, creditor banks will likely demand more collateral, thereby adding to a liquidity crisis.
“To stem off a tsunami of household loan defaults and a dire bank liquidity crisis, the Fed makes its first rate cut, marking the beginning of its new loosening cycle” – Win Investing
Bonds continue to rally as central banks declare victory on inflation
By the central bank’s preferred measurement, the inflation rate will fall in 2024.
Bond yields are likely to remain suppressed in 2024.
Central Bank rate cuts make the headlines in 2024
To stem off a tsunami of household loan defaults and a dire bank liquidity crisis, the Fed makes its first rate cut, marking the beginning of its new loosening cycle. The bond market recovery continues as yields drop below 4%.
The cyclical bull market in stocks and risk assets continues, with stocks making new highs making headlines in 2024
Bad news is good news narrative plays out again, as it becomes apparent that the bank liquidity crisis worsens in Q1, 2024, and central banks step in to provide liquidity to the markets. The tighter the current credit squeeze, the greater the eventual pump.
We could see yield suppression with central banks buying bonds, a familiar programme known as quantitative easing along with rate cuts.
Risk assets, stocks, and cryptos could all benefit from the benign liquidity conditions.
The piece, Headlines in 2024, will be continued.