Predictions are a mug's game.
So instead of gazing into my crystal ball as tradition dictates at this time of year, I'm going to indulge in a bit of scenario planning. These aren't predictions. Instead, they're big things that might happen, and so they're worth thinking about.
If they do happen, I get bragging rights about flagging them up. If they don't happen, I say they were just "scenarios".
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You see how this works? Behold my cake, which I have also eaten.
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Anyway, today I'm going to start with four big risks for 2022. And then tomorrow, I'll look on the bright side with four big things that could go right.
But let's get you nice and gloomy first, with our "glass half-empty" ideas for 2022.
Half-empty No. 1: Covid just keeps coming back
As I said to Merryn in our final podcast of 2021, I'm not a great believer in pure psychology as an explanation for economic events. Psychology matters – I'm not saying it doesn't. But psychology is usually driven by "real" factors.
So for example, contrary to the impression economists sometimes give, recessions don't happen because people suddenly just stop spending money because they take a wild notion one day.
They stop spending money because they lose their job, or because bank lending dries up. That then feeds on itself. Psychology might well become negative, but there's a good reason for it – it's because people have no money.
So that means I've also been sceptical of the idea that Covid will leave massive psychological scars that will permanently change consumer behaviour. That has at least been proven true by the volume of consumer spending and investing this year. When people have money, it burns a hole in their pockets. Why else do you think so many Pelotons were sold during lockdown?
However, if people keep getting punched in the face every time they start to think that this Covid crisis is over, the risk is that it will have a long-term impact. Christmas 2020 was scrapped at the last minute, and for many people Christmas 2021 has been all-but scrapped.
If we keep having this stop-start re-opening, then the risk is that it persuades both individuals and businesses to back away from spending and investing in favour of hunkering down for the inevitable point at which governments no longer provide any support (ask your average restaurateur how they're feeling right now).
In terms of market impact, this would be painful. You'd probably have stubborn inflation (supply chains won't fix themselves if ports have to shut down every ten minutes), combined with weak growth (due to demand and supply dropping simultaneously), and increasing political instability due to voter anger. Even the promise of more central bank stimulus might not cheer markets sufficiently in this case.
Half-empty No. 2: The energy crisis eats up our excess savings
One of the biggest concerns for 2022 is energy prices. The basic story this year is that rising demand has combined with supply disruptions to give us exceptionally high energy prices, partly at the pump, but most obviously at the plug point.
Now, we're only just at the start of winter here in the UK (I know, it feels like it's been here a while, but the solstice was just the other day). If we're already seeing record-high prices for energy, what's going to happen over the next few months?
The risk is that every penny of those extra wages that workers have apparently been getting, ends up either in their petrol tanks or in their electricity meters. In effect, this is a massive tax which simultaneously acts as a short-term inflationary force, which in turn means central banks don't want to help out and governments are fearful of doing so because it puts the public finances under even more pressure.
So again, you've got something that weakens growth while also pushing up prices. Stagflation is one of the most investor-hostile economic backdrops out there. So let's hope it doesn't come to this.
Half-empty No. 3: China takes a chance
Putting it bluntly – and it's not something I like to say – Russia invading Ukraine (again) seems the most likely geopolitical hotspot right now. The grim reality on that one is that retaliation would be half-hearted and, as for markets, they would probably shrug it off after the usual initial panic blip.
(It's the brutal reality, borne out by countless analyst notes, that wars have often proved to be buying opportunities, as long as they are wars in far-off countries.)
However, the big geopolitical worry that everyone's had for a while is the idea that China might invade Taiwan. I have no idea how likely this is – if you want to go down the rabbit hole you could be on Google all week and you'd get hundreds of conflicting opinions from armchair generals.
But let's say it happened – that's terrifying. Either China and America would end up at war, or you'd have a scenario where the entire global order is left wondering: who's next? I find it hard to believe that a stockmarket crash wouldn't be inevitable in that situation.
Moreover, from a pure markets point of view, if you think the global chip shortage and supply-chain problems are bad now, you don't want to imagine what might happen if the world's top chip manufacturer is shut down by conflict. Clue: it's stagflationary.
Half-empty No. 4: Inflation really rips
No one is describing inflation as "transitory" any more, but central bankers still believe that it is. They reckon it's caused by short-term problems which will be ironed out just as soon as Covid goes away.
But as each of these gloomy scenarios points out, there is many a slip twixt cup and lip, and the idea that everything's just going to go back to normal any minute now is by no means guaranteed.
What if we start getting persistent inflation readings above 6% on both sides of the Atlantic? What if central banks can't do anything about it because they know that if rates go up beyond 2%, they'll bankrupt their nations? What if food prices stay high? What if raw materials prices don't come down?
What if workers get more and more fed up, and decide they want higher wages to compensate for the general instability around them? What if unions decide the time is ripe to make a new pitch for power?
Inflation and political instability feed off each other. It's not a comforting thought.
But please tune in tomorrow for the good news
So that's the gloomy take. I'm sure you can add your own thoughts, but the summary probably boils down to – stagflation and turmoil.
But don't worry – I have the "glass half-full" edition for you tomorrow, so put down that revolver and the whisky bottle (actually, you can hang on to the whisky bottle) and make sure you tune in at the same time tomorrow.
Happy 30th December!
