Reviewing 2022 and Looking Ahead to this New Year!
It’s time for reflection of my 2022 predictions, and a contemplation of what to anticipate in the year ahead.
A recent tradition of mine is to spend some time at the end of each year reflecting on the year we are bidding farewell and setting my sights on what lies ahead. This endeavor includes preparing my own personal strategic plan, writing budgets, and reviewing as many year-in-review articles as I can get my hands on. About three years ago, I began putting my reflections and projections into print to spark conversation and thought within my network. The act is cathartic, and even wrong predictions stimulate the risk assessment mindset, strengthening the agility of any strategic plans you and your team are hoping to implement. I also find that by first reviewing my prior year assessments, I can better adjust for my own biases and surprises. So, without further ado, let’s look at what I projected for 2022:
At the outset of 2022, I had three primary projections:
- "Build Back Better" would pass before the midterms in a diminished form that would benefit Corporations and lobbyists significantly more than the average citizen
- Midterms would be the big political story of the year and act as a clarion call for popular political sentiment
- That very little meaningful legislation would be passed
And how did I do: (close, but not entirely accurate)
- BBB was proposed as a $3.5 T bill which incorporated SALT, right to organize, clean energy, and immigration reform provisions
- In the end, Joe Manchin was able to block the passage of BBB in its entirety, and the Biden administration was forced to shift gears and ultimately passed the amended bill now known as the Inflation Reduction Act of 2022.
- This is a $738 Billion act of congress that includes reforms on prescription drug pricing, a 15% minimum corporate tax, an excise tax on stock buybacks and an extension for business loss benefits
- The bill does address (in a limited fashion) energy security and deficit reduction while extending the ACA and adding funding to the IRS
- We also got the $1.2 T Infrastructure Investment and Jobs Act which is aimed at the public infrastructure elements of the BBB
- This was an historic midterm cycle with among the closest margins of victory and a dramatic break from a more than 100 year history of the presidential party losing congress. Public sentiment was strongly in favor of more centrist candidates across the board.
- Very little legislation
- 264 pieces of legislation were passed in 2022 which is no small number. I’ll take the loss on this one.
- Of these, the most significant were the Omnibus spending act, the infrastructure investment and jobs act, the inflation reduction act, the CHIPS act, and the bipartisan safer communities act.
In the economy, I took a rather basic stance and projected a decline in real property markets, continuing labor volatility, growing inflationary issues globally, and a significant M&A year, especially at the margins.
So, how did I do: (on target, but honestly, I didn’t stretch too far)
- Real estate market pricing growth has slowed down significantly from more than 41% last year to around 14% this year. Foreclosures are up nearly 60%, and mortgage rates are up nearly threefold.
- The workforce has been a huge issue in the US throughout 2022 with demand outstripping supply by more than 5 million jobs in September.
- Global inflation averaged 8.8% in 2022 with the Eurozone averaging 10% and the US averaging 7%.
- 2022 was still a pretty active year for M&A, but down 15% in overall volume from the record setting 2021. Transaction value was down 36% as more deals closed on the low tail, while deals on the premium end of the spectrum hit hurdles with regulations and financing.
Here is an area that I missed the most on, but not because I predicted problems that never arose, but because I missed several MAJOR geopolitical disruptors, and because I was overly optimistic about remediation. In my 2022 forecast, I said that this was going to be the year that we finally faced the supply chain issues that have been festering for several years, and to that end, our reckoning did come. I also, however, cited resolution in the form of blockchain technologies, changing landscapes of supply side geographies, and policy and tech stepping up to the occasion.
How did I do: (overly optimistic, and missing on the geopolitics)
- For starters, I did not have any inkling in December of 2021 that Russia would invade Ukraine on Feb 20, 2022. This had huge ramifications in the supply chain from grain to oil and changed the entire supply chain conversation for the rest of the year.
- While goods coming from the Asiatic countries scrambled to match the huge demand for tech products, the Biden administration and congress did team up to incentivize significant investment in repatriating technological goods manufacturing. Unfortunately, it will be years before these initiatives can make a dent in our reliance on imported goods.
- Blockchain still appears to be years away from ushering in a sea change in digital supply chain management, but I remain confident that its day will come.
- We have seen companies begin to talk about the risks inherent in Lean management and start openly exploring vendor diversification with renewed interest.
When it comes to the sociological environment of 2022, I was pretty bleak in my prognostication. I cautioned about political and news talking heads continuing the divisive rhetoric and expressed sincere concern for what this would lead to, especially in a midterm election year.
And what became of these dire warnings: (things weren’t as bad as I feared, but still not good)
- Violence classified as “Hate Crimes” was up more than 30% in 2022 over the preceding year.
- While there were no January 6th style revolts, there was a major spike in targeted violence on political targets from the FBI to the families of congresspeople, judges, and pundits.
- There has been no significant softening of the us vs them talking points on major news networks, and politicians remain as polarized as ever in their rhetoric and legislation.
- The one bright spot is that Americans largely let their frustration with this behavior at the polls as they largely expressed favor for the more centrist of candidates where they could.
Looking at 2023
All in all, it looks like I was relatively close to the mark on most predictions for last year, although I was wrong on some pretty consequential items. Also, I can’t be too proud of myself, I mean “the midterm elections are going to be a big story this year” isn’t really Nostradamus level forecasting. Let’s see if I can build on what worked from last year and stretch a little bit on taking educated risks for the 2023 report.
I don’t think that anyone will be surprised to hear me say that 2023 is going to be a uniquely fraught year for legislation. With the GOP poised to take control of the House, and a whole slate of investigations they are looking to conduct, it will be interesting to see if they bring any significant bills to the floor. Meanwhile, with a feud brewing over Senate GOP members voting in favor of the omnibus spending package, there have been threats that anything that comes from the Senate to the House will not be called to the floor for a vote. All of this is dependent on who wins the nomination for Speaker of the House, which is not a lock for McCarthy.
With all of that said, the Biden administration has recently taken some unprecedented executive measures to limit Chinese technological development and regain US competitive supremacy in technology sectors. The “protect agenda” goes way beyond tariffs and trade wars, and will significantly impact US – Chinese relations for years to come. I anticipate this is only the beginning of this administration’s use of executive orders. If Congress grinds to a partisan gridlock, look for much of the legislative work in 2023 to be performed at the Oval Office.
I am looking for the latter portion of 2023 to see the beginnings of a full-fledged recovery. I expect that automation is going to continue to drive obsolescence in the menial jobs that are the most hard hit by labor shortages. I also expect that continued access to online and on the job training will upskill our workforce such that mid-tier workforce demand will begin to level off. These two shifts, provided they are embraced at scale can improve overall productivity and begin to increase GDP while softening cost to produce. In tandem, these measures have much greater potential to impact inflation than further interest rate hikes.
The longer Russia remains embroiled in war, the more certain it is that major industries such as aerospace and energy will establish alternative supply options. If major industries within the EU and US are able to become independent of Russian goods while sanctions are in place, they will likely not return when the war comes to an end. This could prove catastrophic for Russia, and bring about some significant changes in global power economics. Furthermore, the Ukraine will require trillions of dollars to continue to defend itself, and to rebuild in the aftermath. This will become a major well of outside capital when the time for rebuilding is upon us.
I anticipate that China is going to see another difficult economic year, and it is likely that we are witnessing the end of the country’s meteoric rise. If history of is any indicator of this country’s future, I would say it is looking very much like a repeat of the USSR story.
Since I deal in M&A markets, I would be remiss if I didn’t touch on what to look for there. We are far enough past the shutdowns of 2020 to see small businesses getting their footing back, so there will not be as many bargain buys for investors to consolidate. Furthermore, with interest rates continuing to rise and banks continuing to be on high alert for risk, I would expect the slow-down in transaction activity to continue. I also expect that deal structure will be key to getting deals closed at values acceptable to sellers. This will be a year where recapitalizations are a strong option for any owners looking to take some chips off the table, but with enough gas in the tank to stay on for another 3 to 5 years. This may also be a great year to consider selling to an ESOP, if your business can support it as it is unlikely that PE firms will be shelling out premium bids. There is still a ton of dry powder in the PE ecosystem, so deals will be getting closed. It will just be critical to have a strong deal team and a willingness to get creative in negotiations to close deals that are a win for all parties.
Supply chains will continue to be an issue with product shortages, and production delays to play a prominent role for at least the first three quarters of the year. While new channels are being developed, and new production infrastructure is in development, all of these things take time. Furthermore, I am still concerned that our efforts are not going back far enough in the chain. I believe that a big story in the second half of 2023 will be mineral and resource contracts. If you have read many of my articles in the past, you may recall that I have long been concerned with the fact that China has been quietly acquiring long term resource rights contracts across the globe. It is very likely that 2023 is the year that the world is forced to pay attention to this fact. If the US and other countries are looking to reclaim more links in the production supply chain, they may find themselves returning to China for access to the raw materials they need.
With all of that said, I still believe that some serious technological innovation – likely including blockchain configurations – is going to be essential to driving supply chain diversification at a global scale. Look for changes in the way we manage freight, logistics, warehousing, and the final mile. I anticipate more automation, and a new role for the employment of big data.
While I would love to say that 2023 is going to be the year that we all remember to disagree productively, respect our neighbors, and return our focus on the positive potential of community engagement, I do not see any chance of that happening. I expect that 2023 will bring about a continuation of the increase in violence, especially as motivated by ideological differences. There will continue to be partisan investigations and divisive rhetoric. Politicians and pundits at ideological extremes will continue to push the envelope of what they can assert without any factual basis to stir up their audiences, and every day people will continue to be frustrated by the inequities and injustices they are forced to contend with on a daily basis. Until we get to a point where we can come together as a society and address the root causes for the anger, resentment, and frustration that make polarizing rhetoric so appealing, we are doomed to follow this path. I hope with all my heart that we come to our senses soon, and that the people who are incentivized to stir up this vitriol are knocked off their platforms and replaced by leaders who actually care about our society and the ideals that make our nation great.
So that’s my report for 2023. I hope that you enjoyed reading it, and that you are inspired in some way to engage the year with a different perspective. I would love to engage in conversation with you, if you have any considerations or suggestions to share. May you have a happy, healthy, and prosperous new year.