Economic Outlook April 2023

Remonetization Leads to ‘Great Reset’

Ten years ago in the April 2013 Economic Outlook I wrote: “The big news over the last few weeks has been the confiscation of depositor money on the island nation of Cyprus to make up for capital lost on bad loans made by banks. Be assured that the capital adequacy at Bell State Bank & Trust is fine.”

I also wrote: “The money-printing announcements continue – first by the U.S. Federal Reserve, then by Mario Draghi at the European Central Bank announcing he will do ‘whatever it takes.’ The most recent country to announce its money-printing intent is Japan. It looks like the world is working through a remonetization process. If the past is an indication, this process goes on for about 20 years. That leaves 15 years of the process remaining.”

The remonetization process is complete five years earlier than expected a decade ago, and now we are moving into what I will be calling the “Great Reset.” Cheap money, energy and labor are gone. Interest rates likely will settle in at levels above the underlying inflation rate. Stock market returns look like they will be closer to longer-term averages of 8% to 10%, with bond yields closer to longer-term historical averages of 3% to 5%.

It would not come as a surprise if inflation settled in around 3%, which is 1% above the Federal Reserve’s target of 2%. We also expect that quest to attain a 2% inflation rate is one of the catalysts that will lead the Fed to keep interest rates too high for too long.

Tighter credit conditions that result from higher interest rates and the current banking scare should be worth about one or two Fed rate hikes – meaning the Fed might be done or close to done raising short-term interest rates.

Our assessment remains the same:

• Stock market earnings come under pressure at some point.
• Consumers become more cautious.
• Confidence declines.
• The economy experiences a mild recession in the last half of this year or perhaps the beginning of next year.

Our assessment is not a recipe suggesting investors should get out of the market. It is usually best to have realistic expectations about potential future developments, which include the prospect that any attempt to predict the future could be completely wrong. Research shows it is best to remain focused on long-term goals while avoiding portfolio adjustments in reaction to day-to-day events covered by the media.