[Republished] 2022 Year-in-Review
Random Walk looks back to look forward . . . it turns out RW said some pretty smart things and some pretty stupid things, but also some pretty smart things.
Another trip to the way-back machine. This post originally aired on December 30, 2022.
Not gonna lie, but I think my grades were too harsh . . . those calls held up pretty good. I failed myself (or TBDs) on things that turned out to be correct, e.g. soft-landing, eurozone-recession, and e-commerce. I’m woefully under-followed.
Random Walk wishes everyone a belated Merry Christmas, happy holidays and a wonderful new year. Random Walk also offers special thanks to all the readers—the Random Walk community has grown quite a bit this year, and I cannot thank you enough for your attention and time.
Please also continue tell your friends how great Random Walk is because it’s pretty great.
Now, for the post-mortem Year-in-Review . . .
Things we think
It’s almost 2023, so Random Walk is going to take a stroll down memory lane . . . and see just how smart I was (or wasn’t). In general, Random Walk tries to make sense of the world, and while “what’s happening now” is an imperfect indicator of “what’s happening next” there ought to be some relationship between the two. So with the benefit of hindsight, this is an exercise in accountability and self-congratulation to some degree, but mostly a refresh on the long strange trip it’s been.
If there is one over-arching theme, which will continue to be the theme, it’s “do more with less, but everything will be fine-to-better [details TBD].” How exactly does that calculus work? Well, so far it hasn’t, but here’s to better luck next year.
With the caveat that these were mostly soft (non-numeric) “directional” predictions and observations, some of which may have been perfectly consensus (and some definitely not), here’s the quick and dirty tally:
Things I got right:
inflation - A+
people shortage - A
asset prices - A
crypto, metaverse (mostly) - A-
real estate (mostly) - B+
Things I got wrong:
commodity prices (mostly) - C
e-commerce - D
European recession - F
Too soon to tell:
soft landing - n/a
buy-now-someone-else-pay-later - n/a
Now for the less quick version . . . and please let me know what you think of RW’s self-grades (at the polls below)—don’t hold back, I can take it.
Inflation - A+
Nailed this one. On inflation, the thing I was most right about was to pay attention to inflations, rather than inflation. Whether and how long inflation would last (and what ought to be done to fix it) depended a lot on what(s) was causing the price increases. Money surpluses are different than people shortages which are different than energy shortages. It sounds anodyne, but somehow it’s not.
In the first instance, RW was pretty sure that “transient” wasn’t in the cards. While I certainly didn’t put all the pieces together at once, the things ‘ole Random Walk noticed were (a) missing people; (b) massive fiscal stimulus; and (c) a very long run of low interest rates.
Which is to say that inflation was a multivariate problem—a mix of short-term shocks and longer-term secular trends—and not something that would disappear when lockdowns ended and the mystical pandemic-driven “supply chain snagglepuss” un-snaggled. The then-prevailing “back to normal” hypothesis made no sense—it was literally, incoherent. From August 18, 2021, Inflation Nation:
RW continued to track those inflationary themes—and wrote about inflation a lot (a lot)—but the most succinct summary was the November 24, 2021 Inflation & The Little Coin That Could, which included pretty compelling evidence (from Bridgewater) of what I speculated all along: inflation took off when we went on a stimulus-driven shopping binge—and supply chains will “snaggle” when you suddenly buy more stuff than ever before—that ran headlong into festering shortages of energy and people, none of which was going anywhere anytime soon. The transient “supply chain snaggle-snarl”? That was but a myth:
Compare that to the New York Times’ lolz take from the same week:
The pandemic-related shortages pushing consumer prices higher are poised to last longer than economists and policymakers expected, Jerome H. Powell, the Federal Reserve chair, said on Friday — adding that while officials still expect the rate of inflation to moderate, the central bank is positioning itself to react if it does not.
Supply chain snarls that have slowed deliveries and swelled prices throughout 2021 are “likely to last longer than previously expected, likely well into next year,” Mr. Powell said . . . The same is true for upward pressure on wages, he said.
In recent months, the measure of inflation that the Fed focuses on has shown prices increasing 4 percent or more from a year earlier. The “most likely case” is still that inflation will move back down toward the central bank’s goal of 2 percent as supply chain kinks clear up and job gains improve, resolving short-term labor shortages and allowing employers to stop bidding up pay, Mr. Powell said.
No, inflation did not move back down to 2 percent when supply chains got less kinky (snaggled or snarled) and/or when hibernating workers emerged from their hidey-holes to punch the clock, same as it ever was.
It turns out the stimulus created a $1.7 trillion savings surplus (that continues to buoy consumers until today), labor markets did not snap back to normal because missing workers weren’t just hibernating—some people retired, some people changed jobs, everyone got older, social capital is complicated and something strange is going on with young men—and neither supply chains nor workers have anything to do the energy shortage that would soon takeover the inflation story.
Random Walk - 1
Powell, “Economists and Policymakers” - 0
People Shortage - A
I already touched on this one, but RW was hip to the people shortage for the get go, both that it was real, persistent and important, and but also that it was not monocausal. We have a longer term secular trend of low birth rates, combined with an aging population, a pandemic pull-forward of retirement and shock to social capital, as well as a general cultural malaise that prefers to work fewer hours, take more sick days, and consume more Netflix . . . and again, something strange with men in particular.
The Feb. 4, 2022 This Town’s a Ghost Town sums it up:
Second to energy, the wage premiums to tighter labor markets is the inflation that may be our undoing in the near term. Over the longer term, too-few people doing too-much work (and paying too-many taxes) is . . . concerning.
There’s still some time for me to be somewhat wrong in the sense that people have not (yet) physically disappeared—they are still there, and worsening economic conditions could draw people back into the workforce, even on terms they wouldn’t previously have accepted.
Asset Prices - A
Another part of the inflation story that Random Walk nailed was that inflation had actually been here for a while—it was just reflected in the price of assets, like stocks (as opposed to the price of goods). Low rates and a huge chunk of fresh money supply went straight to the old 401(k) because cheap money makes risk less risky (and therefore risk assets more “expensive”). If rates were to go up (as one might expect if inflation was not in fact transient), then public equities, private equities, and really any investment asset (like crypto and houses), would have to come down.
From September 17, 2021, Reflation Nation:
To be fair, that was a low conviction prediction at the time, but it was definitely prescient. On October 19, 2021, I made the point more clearly. Shortly thereafter, in December 2021, markets peaked, and by May, 2022, the sell-off was a fait-accompli. From the May 12, 2022, Your Tired, Your Poor, Your Growth Stocks:
If you read Random Walk, then you might have saved some money. Just saying.
Crypto - A-
With respect to crypto, Random Walk was even more explicit, particularly about the relationship of monetary policy and the riskiest risk asset of them all.
In November, crypto prices had started to wobble off record highs, but plenty of optimism still abounded.1 On December 8, 2021 (with BTC still a robust ~$49K a pop), Funny Money and Fake Land told you to run2 (without telling you, because RW is not in the business of investment advice) because there was something fishy in the price of crypto, and it had everything to do with the amount of money sloshing around, both in the real economy and the crypto economy:
Once again with feeling, crypto was a free money phenomenon: on December 23, 2021, How Can You Have Any Pudding, If You Don’t Eat Your Meat:
There again, RW made it clear that monetary policy was a prime mover in the crypto bonanza (and monetary policy would be a prime mover in the crypto collapse). To be fair, I tried to make the bull case as well—because RW always tries to be fair—but, as it turns out, that was pretty stupid:
I still happen to think there is a future for decentralized, cryptographic ledgering—we spend a lot of time and money on keeping track of things—but protocol bets (or bets on specific coins) seem harder to make for now (and were definitely hard to make then, given all the funny money).
Energy, etc. - C
This one is a bit complicated, but on the whole, I’ll take the L for now. Energy prices have not (yet) gone to the moon, nor has there been a chronic shortage of other critical nature-stuff, like metals or minerals, or food. While energy and food prices are definitely up—and energy in the Northeast for example is upper than most—inflation is, as of now, trending in the right direction (without a soul-crushing recession).
Much of the Random Walk energy story though has been basically correct (and in may be more correct in time), particularly as it fits into the broader inflation story and its ongoing aftermath:
energy (and food) have been the primary drivers of stuff/services inflation (i.e. the inflation the Fed cares about)—the stimmy binge definitely helped get things started and has continued to play a role, but energy was in the driver’s seat by early 2021;
energy prices were high not because of a gas-guzzling bonanza (and here), but because energy was in short-supply—we stopped making the stuff like we used to (and sent lots of signals that making the stuff like we used to would be frowned upon);
raising interest rates (i.e. a short-supply of money)—the Fed’s price-fighting tool of choice—would do nothing to alleviate an energy shortage, in any way that’s good. (Higher rates also wouldn’t do much to un-stimulate the stimmies—those would simply have to run their course, hopefully without any additional free money). Sharply higher rates would cause a slowdown and possibly a recession (and therefore “destroy demand” for energy)—which is bad and pointless—but then the moment we tried to recover, energy prices would shoot right back up again. In fact, energy is less tethered to growth than its ever been, and there’s a distinct possibility that we could have a recession and high energy prices at the same time (“stagflation”).
In all events we cannot have both a healthy economy and a healthy inflation rate by fiddling with interest rates—either we learn to live with higher energy prices or we create more energy (or we muck about in purgatory as the Fed threads the needle between too much and too little demand). A money shortage can’t solve an energy shortage.
Nearly all that was foretold has come to be—the consumer buying binge slowed as stimmies frittered and wasted. The Fed also happened to cause asset prices to collapse—and something close to or at a recession—but the relationship between the asset prices and the buying binge seems fairly attenuated, as the latter presumably would have tapered regardless.
As it currently stands, as a result of the Fed’s money-shortage-to-solve-an-energy-shortage, we are “mucking about” in a not-so-good, not-so-bad push-me-pull-me climate that shows little signs of substantial improvement, but plenty of risk to the downside. If I wanted to be very hard on myself, I could say I underestimated the price-impact of wages/services, relative to energy . . . but RW already took the W for the People Shortage, so that’s that.
But!
The main thing that has not come to be is that energy prices themselves—particularly oil—took an unexpected tumble, even without a massive recession:
Why? Could be the plundering of the strategic reserve. Could be anticipation of a recession. Could be China slowdown. Could be anticipation of EVs. Could be traders cashing in their winnings. Could be all or none of the above. Either way, it’s not what Random Walk predicted and therefore RW will take that L . . . for now, but look out for the China re-opening.
Eurozone Recession - F
This is another L (for now) that relates back to energy. Energy prices have caused a good deal of pain in Europe, but things are still chugging along.
Real Estate - B+
This one is easier, and I’ll keep it brief. Random Walk said that the end of free money would bring real estate sales (and to some lesser extent prices) crumbling down, but that there would be no “collapse” ala 2007-08. The Housing Hold Steady would mean that existing homeowners and landlords would continue to enjoy the exceedingly low rates that they used to buy their properties, and that defaults would stay low. Everyone else—would-be buyers, sellers and/or builders of new real estate—would suffer. Buyers would shift to renters, home equity loans would dry up, and the industry would contract, but not collapse.
This one has been mostly right, although the market cooled even more quickly than I expected, and of course there is still time for more bad news. The other demerit would be less market differentiation between “winners” and “losers” (e.g. LOW 0.00%↑ or HD 0.00%↑ ) than I expected, but the market moves in mysterious ways (and as per always, there is still time).
E-Commerce - D
Random Walk took the over on whether e-commerce would continue to gobble up its share of commerce and extend its runway. Yes, the pandemic “pulled forward” demand that would surely taper, but I did not expect e-commerce would give up those gains entirely and essentially return to trend. RW takes the L on that one (for now).
Soft-Landing - TBD
It’s too soon to tell, but Random Walk thinks we’re going to squeak through by the hairs of our chinny-chin-chins without any epic pain. The forecast is middling—and middling for a while—all the risk is to the downside, but absent widespread job losses (and it’s unclear what would cause such a thing, but RW has speculated before), there’s no reason to expect something truly terrible. Hopefully energy prices and wage gains don’t push the Fed to push us over the edge (assuming it hasn’t already). And no more shocks. We’ve had enough of those for the time being.
Buy-now-someone-else-pay-later - TBD
This one isn’t fair, since it’s a general doomcast with no particular time or numeric constraints on it, so while it’s “too soon to tell” it’s unclear when it will be soon enough.
The basic idea though (laid out in Charging it Forward, Depopulation Nation and Your Tired, Your Poor, Your Growth Stocks) is that we’ve borrowed an awful lot of money, some of which we’ve spent (wisely or otherwise), and some that we promised to spend . . . while the people expected to repay that debt are an increasingly small share of the population. And that’s just the principal—the interest grows and grows, especially when we raise interest rates . . . to make up for the fact we borrowed too much money:
Eventually something has to give . . . the cost of borrowing is going to be too much to bear and it’s not like we can just borrow more money to dig ourselves out (or maybe we can)?3 When this all goes down, I couldn't tell you, but seems like a thing worth considering.
Things we read
2023 Prediction Contest: Each winter, I make predictions about the year to come. . . This year I’m making it official, with a 50-question 2023 Prediction Benchmark Question Set. I hope that this can be used as a common standard to compare different forecasters and forecasting site (Manifold and Metaculus have already agreed to use it, and I’m hoping to get others). Also, I’d like to do an ACX Survey later this month, and this will let me try to correlate personality traits with forecasting accuracy. So let’s make this a contest.
Here’s what employees most want heading into 2023: It’s been a tumultuous year for U.S. workers between record inflation, general economic uncertainty, the great return-to-office debate and more. Heading into 2023, most workers want the same thing from their employers: Clear communication, empathy and stability
2022 Gas Prices: A Year In Review (And What to Expect for 2023): The highs and lows of gas prices in 2022 were like no other year seen before. From a $3 per gallon national average in early January to a new record-high of over $5 per gallon in June, and then back again, this year was unpredictable for drivers across the country.
(Sub)stacked: Top Writers Review ‘22 & Predict ‘23: For this special edition newsletter, we figured we’d extend outside our comfort zone: we reached out to successful finance (or finance tangent) publishers who are, like us, publishing on the Substack platform to get their view of ‘22, their take on ‘23, and their thoughts about being independent publishers in a media atmosphere that is, to say the least, fraught.
Meta and Alphabet lose dominance of US digital ads market: The share of US ad revenues held by Facebook’s parent Meta and Google owner Alphabet is projected to fall by 2.5 percentage points to 48.4 per cent this year, the first time the two groups will not hold a majority share of the market since 2014 . . . This will mark the fifth consecutive annual decline for the duopoly, whose share of the market has fallen from a peak of 54.7 per cent in 2017 and is forecast to decline to 43.9 per cent by 2024. Worldwide, Meta and Alphabet’s share declined 1 percentage point to 49.5 per cent this year. See also End of an advertising duopoly.
The Information’s Best Stories of 2022: Cash stopped flowing, sobriety replaced frenzy and crypto fell off a cliff. Startups buoyed by the record funding boom came apart at the seams, from e-commerce startup Fast to crypto exchange FTX. In between, Elon Musk ruled the internet and even took over our dreams . . . Below is a semi-objective ranking of the exclusives and scoops our subscribers read the most during this topsy-turvy year. We also threw in a few of our own favorites.
How Americans Spend Their Money, By Generation: Overall in 2021, Gen X (anyone born from 1965 to 1980) spent the most money of any U.S. generation, with an average annual expenditure of $83,357 . . . Gen X has been nicknamed the “sandwich generation” because many members of this age group are financially supporting both their aging parents as well as children of their own.
The Cheapest (and Most Expensive) Places to Buy a Home Near a National Park: So where’s the cheapest—and by contrast, the most expensive—place you can buy a home near a national park? Although my wife isn’t letting me call the movers quite yet, I did look into what it might cost to relocate to one of these spots. This list, based on Zillow.com data, uses average home prices for counties contiguous to the national parks. (Basically, within a relatively short bike ride to the park.)
While Random Walk poked more than a little fun at the NFT and metaverse ecosystems, even I tried my hand at some cautious optimism (which may be right in the long run, but for now, looks far too generous):
Some part of that is probably true, but it turns out that “tolerance” for the subpar experience was more a function of get-rich-quick, than the technology.
Incidentally, Random Walk still thinks this account of the metaverse is pretty funny:
Or maybe we’re actually really good investors?
