2024 Crystal Ball Report
Well, it’s that time of year again. Time to reflect on the year as it closes and to consider what the year ahead has in store for us.
While it feels like we haven’t found a “new normal” yet in the shadow of COVID, there are plenty of emerging trends that we should all consider if we collectively are going to take control of what we allow to become normal. The year 2023 has been a strange year, and one I do not believe many people will be sad to close the door on, which leaves the question “can we do better in 2024?” Let’s begin by reviewing my projections for the year and discussing what actually happened.
For 2023, I anticipated the beginnings of a recovery from the global inflationary crisis an increase in automation at front-line blue collar and service industry jobs and a continuation of employees upskilling to fill out mid-level roles. While technological replacement has not progressed to the point that I originally anticipated, there are certainly a growing number of self-service kiosks popping up to handle front-line service roles. I would anticipate to see more robotics employed in janitorial and high-risk roles in the years to come. Mid-tier roles have been growing at a rapid pace and this trend is likely to continue.
The US was among the least heavily impacted countries in the world during the inflationary crisis, and was among the top five countries with respect to how quickly we were able to reverse the trend and bring inflation back down. This is in large part to the success of federal initiatives including the bipartisan infrastructure plan and the CHIPS act. The average inflation for 2023 was 3.1% down from 6.5% in 2022 and 7.20% in 2021. All signs point towards a stabilization around 2.1% in 2024. While this combined with record results in employment and job growth, the years of credit spending that most citizens suffered during the COVID era mean that the average citizen is not yet feeling the recovery. We can look for that to come around in 2024.
At the beginning of the year, I commented that a protracted war will only serve to diminish Russia as an economic superpower, and cause its influence to wane on the global stage. Indeed, there are signs that their failure to find any meaningful success in the war effort coupled with continued sanctions are finally beginning to have a real impact on the country as a whole. Russia has suffered extraordinary losses in its effort to annex Ukraine, and the Ukranians have proven much more resilient (with tremendous financial and armament support from the EU & US) than anyone had anticipated. Going into the third year of this war, it is unlikely that there will be a decisive victor, and it is unclear how much attrition will be suffered on both sides before sincere peace negotiations are on the table.
I predicted that China would have another difficult year, and we did see GDP drop again. It is always a challenge to obtain defensible figures from this country, but there are signs of significant weaknesses in the financial infrastructure, and the heavy reliance on exports keeps the country in a tenuous position.
And finally, looking at how the economy will impact M&A markets, I suggested that there will be a decline in transactions with creative structures being the vehicle to get transactions closed, that there will be fewer “bargain buy” acquisitions, and that recapitalizations will become an enticing option. Indeed, we saw a 43% decline in M&A activity overall. We saw a major rise in deals where seller financing played a dominant role in overall structure, and a modest increase in recapitalizations.
Last year I anticipated a slow recovery for supply chains and predicted that mineral rights would be a big story in Q3 and Q4. Well, here I was wrong on both counts. The supply chain had already recovered to such a point by April of 2023 that manufacturing rates had surpassed those of 2009 for the first time. Furthermore, mineral discoveries like the massive lithium mine in Nevada continue to allow for continued growth in technological products without the stranglehold on mineral rights that I have been fearing that China would exhibit.
Unfortunately, industries like the aerospace industry and titanium heavy products (because of Russia’s massive titanium reserves) are still suffering from the impact of the Russia Ukraine war with nine more years before new production facilities can be constructed and approved. New materials and designs will likely come to the fore before these replacement facilities are operating at scale.
Looking ahead to 2023, I projected an under performing congress with a whole raft of investigations consuming the spotlight and issues at the speaker role. I had no idea at the time just how right I would be. The 118th congress only passes 36 laws, all of which were clerical in nature. By way of comparison, the 117th congress passed more than ten times that many, and their laws included some of the most impactful policies to support infrastructure and technological competitiveness since the New Deal. Meanwhile, 2023’s 118th congress is closing the year as the least productive congress in decades. The investigations that were center stage for the entire year have yet to produce any of the results promised by GOP committee leaders, and have served to further erode the average citizen’s faith in the system. On top of all of this, the turmoil surrounding the speaker of the house has been a major distraction from the work of policy development. It is yet to be seen whether Mike Johnson will be able to unify the majority party in the House to achieve any different outcomes in 2024.
For 2023, I suggested that politically motivated investigations, divisive rhetoric on television, radio, and social media would continue to escalate, and that it would permeate every aspect of American discourse. In fact, I think this is pretty close to the mark. I can say that with relative certainty some of you read the line “politically motivated investigations” and immediately thought of the 91 charges being litigated against former president Trump while others are thinking about Hunter and Joe Biden and the myriad investigations and the impeachment inquiry happening at the House of Representatives. No matter where you think the injustices lie, we must all recognize that this simply is not normal and is a symptom of a much deeper rot in our ability to come together as neighbors and hold constructive discourse. More on this as we look toward 2024.
Without Further Ado, let’s pull out the crystal ball and look at what 2024 has in store for us.
Let me be honest, I have been dreading this report all year. I covet my reputation as a silver lining guy, and I am having a hard time finding too many spots of silver on the clouds ahead. With that said, I will do my very best to be clear, objective, and as optimistic as possible.
Prosperity or crash?
This is a tricky one, let’s start with M&A Markets. With lingering high interest rates, deals are still seeing a lot of structure changes, and a heavy employment of seller paper. I anticipate that deal volume will begin to pick up as the dry powder still needs to be put to work. I do not see valuations climbing this year, and PEGs will still be looking at businesses on the tails rather than the average business. Venture markets are likely to remain skittish, and I expect that the majority of the VC deals will still be much later stage. Look for more rounds as entrepreneurs are forced to stay in F&F and Seed rounds longer before they can attract true VC capital.
As the economic indicators have been all over the place since 2020. I hear a lot of people confusing the recovery from the extraordinary inflation of 2021 and 2022 with a drop in prices. When we talk about inflation coming back down to 3.1% from its peak of 9.1% in June of 2022, we are still talking about inflation. The purchasing power parity is still going down, just at a significantly slower rate. This means that you will still feel the impact of the spike in inflation when you go out to purchase consumer goods. However, as the GDP continues to catch up with this new normal, and unemployment continues to stay low, individuals will have the opportunity to catch back up to a cost of living equilibrium. I do not see the average US citizen recovering from all of the credit spending they incurred during COVID and after, but I do see cause for optimism that the burden of that debt load will begin to ease. The Fed is almost certain to begin easing interest rates in the first three quarters of 2024 which will bolster the dramatic increase in consumer confidence and open up credit and investment markets that went into stasis in 2022-2023.
That is the optimistic outlook. On the nervous side of my prognostication, we must again remember that this is an election year. The fourth quarter of any presidential election year is stark in the investment and finance markets as investors and institutions hold their communal breath to see where the wind will be blowing for the next four years. To revisit my thoughts in the policy section, I anticipate that the slow down that markets will experience this particular election cycle will be profound. The final bit of threatening news is that the stock markets have been overheated for a very long time now. There are too many businesses on the myriad exchanges whose core operations cannot justify the valuations and the value growth they have been enjoying. While the infrastructure bill, CHIPS act, and other successful governmental initiatives aimed at stabilizing the economy has done a great job of putting our citizens to work, and addressing our crumbling infrastructure, I have no confidence that the public markets are as stable and robust as many pundits would like for us to believe. Remember that many of the same people who are singing the praises of a record high Dow and S&P 500 are the ones who claimed that there was no reasonable end in sight to the “new era of prosperity” ushered in by the invention of mortgage backed securities in 2008.
Your ship is in!
Here is an area where there is legitimate cause for optimism. It looks like many of the most dire supply chain disruptions brought about by COVID shutdowns and the beached vessel blocking the Suez Canal (remember that one?) have been overcome. Furthermore, these catastrophic disruptions have caused companies to take stock of their reliance on single-source supply chains and 100% JIT inventory management to finally begin to diversify. The CHIPS act is also showing promise in bringing certain critical elements of the technological infrastructure back to the continental US. We will need to keep an eye on this over the coming years, but initial indications are positive. The aerospace industry was singularly impacted by the Russia Ukraine war as Russia has the only facilities capable of manufacturing critical struts for wide body aircraft landing gear. The industry has really come together to establish a solution, and I believe that this dependence on Russian manufacturing for critical components will have been positively addressed before that conflict is resolved. This holds great promise for major aircraft manufacturers, and is likely another long-term economic blow to Russia that will carry ramifications long into the future.
I believe that 2024 will be a strong year for the supply chain, and we will see much more agile and robust product manufacturing practices come out of this mess.
Going for the record?
I will be absolutely shocked if the second half of the 118th congress’s term is much different from the first half. Not a single one of the myriad investigations being prioritized by congress over legislation have come close to closure, and the impeachment inquiry is sure to run right up to November. It looks like the GOP is feeling confident about its chances to take control of the Senate, so I would expect much of the campaign funds to be directed toward maintaining a majority in the house.
I don’t think you need a crystal ball to recognize that the presidential race promises to be the most emotionally charged and divisive elections in history. I hate to say it, but I do not see how we get through November and December without a major uptick in violence and divisive rhetoric no matter who is declared the president elect. All of this will be exacerbated by the tension that is building and being stoked throughout a year of trials and judgments that will consume major blocks of the GOP frontrunner’s time. With digital media and news outlets reporting these stories in entirely different ways depending on the political leanings of the content creators, and algorithmic recommendation engines continuing to procure the content each one of us sees based on the ideologies we gravitate toward, it is hard to imagine that the people of our nation will be entering the ballot booths with radically different pictures of what the facts driving our government and the issues relevant to their individual ability to achieve prosperity, safety, and happiness. This is a recipe for trouble, no matter what your vision of prosperity, safety, and happiness is. I implore each and every one of you to do your very best this year to go beyond headlines and talking heads and seek source documentation wherever you possibly can. This is our only chance to find our way back to a society of discourse, productive disagreement and a realignment to the norms, character, and collaboration that is necessary for our country to truly become exceptional.
Can’t we all just get along?
For those of you who have been reading this report for years, you will know that I fervently believe that the only way to get back to a sociological environment of prosperity and durable growth is to find our way back to productive disagreement and community centric policy. The pendulum has swung so far away from this ideal in recent years that I fear it will take an epic catastrophe and likely widespread violence the likes of which we haven’t experienced in generations before we can reset our expectations and behaviors. This is certainly an area where I would be profoundly happy to be wrong. As individuals, we each have the power to demand better of ourselves and the people within our community. We absolutely cannot count on those with political power or power over the dissemination of media to lead this change. There is simply too much money in the tactics and behaviors they are currently employing. As disgusting as it is, the reality is that there is presently no meaningful incentive for the media or the political class to behave better. What is working for them is destroying us as a country. I implore you all to challenge yourself to be a force for better change. Take the time to look at objective facts, source material, and the root ideals behind the fear and hate mongering rhetoric that is driving so many of the headlines and hashtags today.
Knowing what headwinds we are likely to face in 2024 offers us the best possible opportunity to proactively work to achieve better.
I wish you all a safe, prosperous, and joyful 2024. Together we can make that happen one interaction at a time.