My Predictions for 2022.

2022 is just around the corner, and I believe it'll be quite a ride...

What happens with inflation? Will there be a war? What will the biggest headline in science be? What happens with COVID-19?

Read on to get my thoughts on these topics - and please note that I reserve the right to change my mind about all of it!

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Inflation and the US Economy

We live in a world where high inflation is now an economic reality, and I expect it to be a factor in 2022 as well. But unless something untoward happens, probably only for the first little bit of it...

Federal Reserve Chairman, Jerome Powell, has had a tough year. Like most central bankers, he’s spent the better part of the past two years manning the printing machine to pump out more USD than anyone ever thought they’d see. Also like most central bankers, he’s recently been staring down the barrel of his absolute nightmare scenario: persistently higher inflation. For most of 2021, he’s held to the idea that higher inflation would be ‘transitory’, meaning it’s a surge which would quickly subside. He recently moved away from that language and shocked markets with a ‘hawkish’ pivot; meaning a faster taper of money printing and a change in tone potentially signaling more – and faster – rises in interest rates.  

I predict that inflation will still be mostly transitory – and will subside in the early part of 2022. I have a couple of good reasons to believe that this will be the case.

Reason 1: US Savings & Spending

Throughout 2020, US consumers built up the largest war chest of savings ever. As you can see in the chart below, this has mostly been gobbled up in a few big months of consumption – and while savings remain elevated, the amount is quickly returning to ‘normal’. The surge in spending associated with this drop in savings was bound to place extraordinary pressure on global supply chains, which were still faltering under COVID-19-related stresses. When so many dollars are chasing a wobbly supply of goods, prices are bound to shoot up.

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Reason 2: The Baltic Dry Index

The Baltic Dry Index is a poorly understood, but a really important number to watch. It measures the cost of shipping dry goods across 20 major global routes. In so doing, it shows us global physical demand for dry goods - and offers a glimpse of future economic activity. As you can see in the chart below, it’s already fallen to less than half of recent highs; lower demand equals lower prices, which usually translates into less inflationary pressure.

My final prediction here is that we could quickly swing from being concerned about inflation, to being concerned about economic growth. I’m confident that the Federal Reserve will still raise interest rates as expected, but this probably has a lot more to do with ‘refilling the tank’ (so they have room to cut rates later if needed) than anything else. It’s also possible that they might not get another shot at it for a very long time…

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A Time For War?

Russia vs. Ukraine: At the time of writing, there are around 70,000 Russian troops poised to enter Ukraine. The chance of this not becoming a war of some description – and soon - is almost zero. Will that move the needle at a global level? Probably not by much, but it’ll make for some tough times for the good people of Kiev. If Ukraine becomes Russian-occupied, it will also give Russia a border with Poland, Hungary, Romania and others; uncomfortably close to the heart of Europe (see below). I predict that Russia will invade Ukraine in the first half of 2022.

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China vs. Taiwan: Elsewhere in the world, we have the growing threat that China will decide to force it’s ‘reunification’ with Taiwan (see below). Taiwan is important, not simply because it’s one of the world’s more successful democracies and a staunch Western ally, but also because it’s home to TSMC, the world’s largest supplier of advanced microprocessors. Needless to say, that’s really important in a world which is increasingly reliant on this technology to do practically everything. The potential consequences of a Chinese invasion of Taiwan range from nothing terribly significant, through to all-out global thermonuclear war. It’s unclear how much the West would be willing to do to prevent this from happening, but I suspect not nearly as much as our Taiwanese friends would hope for…

I’m not explicitly predicting that China will invade Taiwan in 2022, but I will say that it’s in the West’s best interest for it to happen sooner rather than later if there is to be a large-scale military intervention – and that all the right ingredients are now in place for this to occur. Leave it for another decade and Western military might will likely be eclipsed by China’s. Even if they throw down now, it would probably be a closer thing than most would expect.

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Science & Technology

We could be in for a real treat when it comes to science and technology in 2022.

Nuclear Fusion: We may finally achieve the Holy Grail of energy breakthroughs; nuclear fusion. MIT spinout, Commonwealth Fusion Systems, has made a number of significant advances over the past 3 years – and has recently secured an additional $1.8 billion in funding. They might just have cracked it already. The technology won’t be commercialized in 2022, but the combination of elements which ultimately make it work may be very close to being in place. This comes alongside announcements of major progress in Europe and China. We’re close.

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‘Level 3’ Autonomous Vehicles: 2022 will be the year in which the world’s first genuinely autonomous car goes on sale – and it will be a Mercedes-Benz S-Class. The self-driving feature, known as ‘Drive Pilot’, has just received technical approval from the German Federal Motor Transit Authority. This will not be full autonomy, but so-called ‘Level 3’ autonomy, which means it’s completely eyes-off for the driver. The driver still needs to be present and alert, but the vehicle makes all the situational decisions for itself. Tesla has so far only managed to reach ‘Level 2’ autonomy because the driver must always be ready to take the wheel.

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Artificial Intelligence: I’m already using AI on a daily basis. If you're using Google search, Facebook, or any of thousands of other AI-driven services, you're already using it every day too.

Most of the intellectual work done by humans consists of pattern recognition and extrapolation. AI is already better at both of these in many respects - and I predict that it’s about to get a lot better.

Take the world’s most prolific AI, GPT-3, for example. GPT-3, short for Generative Pre-trained Transformer 3, is really useful. It can be used to write ads, blog content, and computer code. Some people are even using it to write novels. It’s also capable of a rudimentary form of that uniquely human ability, creativity. Long story short, it’s very impressive – and it’s about to be rendered completely obsolete.

GPT-4, set to drop some time in the next 12 months, will be around 500 times more powerful than GPT-3. This will be a gamechanger! It’s said that even the team developing it aren’t entirely sure what it will be capable of. GPT-4 is something we know about...but I predict that there will be other developments we can't currently foresee. This is because AI development has now gone exponential. It's also become a global arms race, but I'll dive into that another day.

Here’s what AI had to say about itself when I prompted it (seriously):

"Artificial Intelligence is set to shake up our world in ways we can barely imagine. It will bring about widespread automation, self-driving cars, the commercialization of space exploration and so much more. Yet it’s not just what AI will do for us that should inspire awe and wonder; it’s also what AI will do for our planet.

We’ve come a long way from the days when people would go around predicting the end of civilization every other week. Today we know that we can work alongside machine intelligence and we can look forward to all the amazing advances it will bring."

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Endemic SARS CoV-2

The endgame for SARS CoV-2 (the virus responsible for COVID-19) is not to disappear, as many have been hoping. The endgame is that it will enter the endemic phase.  The endemic phase means that it occurs at a relatively low and predictable rate (even with seasonal variations, like the flu) – and is not causing widespread hospitalizations and deaths. The recently identified Omicron variant may have been a very important step, perhaps even the penultimate step, towards endemic SARS CoV-2. First reported to the WHO in South Africa in November, the new variant has quickly become the dominant variant in the United States and United Kingdom. While apparently much more contagious than the Delta variant it’s displacing, early data are strongly supportive of the idea that it results in far fewer hospitalizations and is much less lethal. This alone would appear to be very good news.

Regardless of how dangerous the Omicron variant proves to be, this virus is likely to keep bouncing around the world and mutating until vaccine equality improves and social/policy responses firm-up around medical guidance. You can’t just fix the problem in rich countries and leave everyone else to fend for themselves. It doesn’t/can’t/won’t ever work that way.

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Conclusion

So… we could be back to lower inflation and, probably, lower economic growth. Russia will almost certainly invade Ukraine. China might make a move on Taiwan. We may finally get nuclear fusion. The first mass-produced Level-3 autonomous vehicles will hit the road (and hopefully nothing else). We will definitely get more impressive and capable AI.

These are just some of the things I’m thinking about for the year ahead. There’s a lot more, but these are the big ticket items. I maintain that forecasting is fool’s errand and nobody has a crystal ball. Still, for better and for worse, some of this seems pretty well baked-in at this stage.  

Regardless of what happens, the team and I at Afinitiv LLC will be working hard to make the most of any investment opportunities for our clients.

What do you think will happen in 2022?

Let me know at richard@afinitiv.com

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