“The Great Normalization”

by | Dec 16, 2022

Normal is an underrated word. Normalcy is an underrated concept. In a world where “extreme” everything is a cultural and advertising icon; I’ve got some good news for you: We are returning to normal.

After nearly three years of catastrophic pandemic and all of the associated displacement, conflict and death, the US and much of the world are on track for a normalization that can potentially launch financial markets and the US economy to impressive new high levels that will at least have a chance for some sustainability, that is until the next wave of mass greed and recklessness invariably takes hold.

The colossal public health, social and financial shocks of the Covid pandemic of 2020 and the ensuing tidal wave of $7 Trillion+ of free money courtesy of the US Government has now passed. The knucklehead speculative financial-crypto-real estate gold rush of 2020 and 2021 is over and has been replaced with a long and grinding bear market that has squeezed much (but not all) of the excesses and speculation out of the financial system. The once lauded crypto wizards and meme stock hucksters promising infinite wealth are now mostly discredited, and “SBF”, the crypto kingpin of them all, looks to be headed for prison.

Remember when politicians could not stop repeating their manipulative mantra of “jobs! jobs! jobs!”?

Now there are too many jobs and not enough people to take them. Workers in several industry sectors are in high demand and are getting more pay, better benefits and more respect. If unemployment rises, the availability of workers will be higher and inflationary pressures would ease further. Admittedly, this particular factor is not normal, but I’ll take it.

A recession may indeed take hold in 2023,but with prevailing low unemployment, strong corporate balance sheets and high homeowner equity, it will likely be shallow and short, setting up for a new growth cycle.

The US economy is potentially in a better position for growth now than before the pandemic in 2019. We have learned a lot from the travails of the pandemic and are now more flexible and now understand how the interdependency of globalization can leave us vulnerable. Thus, we are already moving towards onshoring and “friend-shoring”, where vital goods and commodities can be sourced domestically or from more reliable sources. Europe is learning this same lesson the hard way. Sourcing vital commodities and goods from domestic and reliable sources is another return to normal and can lead to significant economic growth and full employment in the years ahead.

Inflation is still a big problem to be sure but is already moderating. Commodities prices are falling, Price levels are normalizing. Global supply chains that were clogged or stuck or downright empty a year ago have mostly normalized. The Federal Reserve has taken short term interest rates from the emergency level of zero to over 4.5%, a normal level, and will probably continue to raise rates to beyond 5% or more. The US Dollar, which was rising rapidly earlier this year and was causing considerable financial dislocation globally, peaked in October and is now headed downward. After more than a decade of life-support from Central Banks led by the US Fed, we are coming off zero interest rates and returning to a place where the economy can stand on its own, which is normal. It took the worst bout of inflation in 40 years to oblige the authorities to abandon deflation paranoia and return interest rates back to normal. Savers are now at last earning interest on their money, an end to financial repression, at least for now.

The bear market of the last year or so was a long time in coming and will end in due course. Asset prices may need to descend further before a final bottom is in. The adjustment back to realistic expectations and the dashing of countless millions of pipe dreams of instant wealth without work have given way to a more sober and realistic set of expectations, yet another return to normal.

And what does this Great Normalization mean for investors, many of whom have never seen a bear market or anything more than zero interest rates? It means a return to normal, where something like 8% annual returns can be expected and money won’t fall from the sky as it has been wont to do recently.

In a world where every form or image of extremism is used as some sort of aspirational ideal, we are returning to normal. You may like it better than you think.


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