Those who come with warnings are rarely popular. Cassandra did herself no favors when she asked her fellow Trojans to beware of the Greeks and their wooden horse. But with financial markets facing unprecedented turmoil, it is important to take a closer look at the economic realities.
Analysts agree that markets are facing serious headwinds. The International Monetary Fund has Climate forecast That a third of the global economy will be in recession in 2023. Energy demand is high and supply is in short supply, prices are high and rising and emerging economies are emerging from the pandemic in precarious conditions.
Five fundamental – and interconnected – issues are throwing trouble for asset markets in 2023, with the understanding that in uncertain environments, there are no clear options for investors. Every decision requires trade-offs.
net power shortage
Without drastic changes in the geopolitical and economic landscape, the fossil fuel shortage is likely to persist through the coming winter.
Russian supplies were cut off due to war-related sanctions in Ukraine, while energy engineering in Europe suffered irreparable damage when an explosion destroyed part of the Nord Stream 1 pipeline beyond repair because new infrastructure takes time and money to build and ESG mandates make it difficult Energy companies should justify large-scale fossil fuel projects.
Meanwhile, the already strong demand will increase once China emerges from the COVID-19 slowdown. Record growth in renewables and electric cars helped. But there are limits. Renewable energy sources require hard-to-obtain elements such as lithium, cobalt, chromium, and aluminum. Nuclear power would ease the pressure, but new plants take years to get online and public support can be difficult to get.
The supply chain shocks caused by the pandemic and the Russian invasion of Ukraine have whetted the appetites of major economies to re-build production. While this may be a long-term boon for local growth, resettlement takes investment, time, and the availability of skilled labour.
In the short to medium term, job redistribution from low-cost offshore locations will fuel inflation in high-income countries, as it raises wages for skilled workers and lowers corporate profit margins.
Shift to commodity-driven economies
The same upheavals that led to the resettlement trend have led countries to seek safer – and greener – raw material supply chains both within their own and allied borders.
In recent years, rare earth mining has been outsourced to countries with cheap and abundant labor and lax tax regulations. As these operations move to jurisdictions with higher taxes and higher wages, the sourcing of raw materials must be reconsidered. In some countries, this will lead to more investment in exploration. For those who are unable to get goods at home, this could lead to shifting business alliances.
We can expect such alliances to reflect the geopolitical shift from a unipolar world order to a multipolar one (more on that below). For example, many countries in the Asia-Pacific region will be more likely to prioritize China’s agenda over the US agenda, with implications for US access to goods now sourced from Asia.
Given these pressures, inflation is unlikely to slow any time soon. This poses a major challenge to central banks and their preferred instrument of price control: interest rates. High borrowing costs will have limited power now that we’re in The era of secular inflationwith the imbalances of supply and demand resulting from the disintegration of globalization.
Previous inflationary cycles ended when prices rose to an unsustainable degree, resulting in a collapse in demand (destroying demand). This process is straightforward when it comes to discretionary purchases but problematic when it comes to necessities like energy and food. As consumers and businesses have no alternative but to pay higher costs, there is limited scope to ease upward pressure, particularly with many governments subsidizing consumer purchases of these essential goods.
Accelerate decentralization in major institutions and systems
This fundamental shift is driven by two factors. First, the realignment of the global geopolitical order has been affected by disrupted supply chains, tight monetary policy, and conflict. Second, global trust in institutions has been eroded by the chaotic response to COVID-19, economic problems and rampant misinformation.
The first point is essential: Countries that once viewed the United States as the opinion leader and enforcer of the regime question this consensus and fill the gap in regional relations.
Meanwhile, distrust of institutions is mounting. Pew Research Center Survey have found Americans are increasingly suspicious of banks, Congress, big corporations, and the health care systems — even against each other. The mounting protests in the Netherlands, France, Germany and Canada, among others, illustrate that this is a global phenomenon.
This discontent has also led to the rise of far-right populist candidates, most recently in Italy with the election of Georgia Meloni.
It has also sparked a growing interest in alternative ways to access services. Homeschooling rates have skyrocketed during the pandemic. Then there is Web3, which is designed to provide a file An alternative to traditional systems. Take Action in Bitcoin (BTC) on the Beef Initiative, which seeks to connect consumers with local livestock breeders.
Historically, periods of extreme centralization follow waves of decentralization. Think of the disintegration of the Roman Empire into local fiefs, the successive revolutions of the 18th and early 19th centuries, and the rise of antitrust laws across the West in the 20th century. All of them witnessed the fragmentation of homogeneous structures into component parts. Then the slow centralization process started again.
Today’s transmission is accelerated by revolutionary technologies. Although this process is not new, it is devastating to markets and society alike. After all, markets thrive on the ability to calculate results. When the basis of consumer behavior undergoes a phase shift, it is increasingly difficult to do so.
Taken together, all of these trends point to a period when only the cautious and opportunistic investor is coming out. So fasten your seat belts and get ready to ride.
Joseph Bradley He is the Head of Business Development at Heirloom, a software-as-a-service startup. He started in the cryptocurrency industry in 2014 as a freelance researcher before going to work at Gem (which was later acquired by Blockdaemon) and later moved into the hedge fund industry. He holds a master’s degree from the University of Southern California with a focus on portfolio creation / alternative asset management.
This article is for general information purposes and is not intended and should not be considered legal or investment advice. The opinions, ideas and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.