Those who come bearing warnings are rarely popular. Cassander did herself a disservice by telling her fellow Trojans to beware of the Greeks and their wooden horse. But, with financial markets facing unprecedented turbulence, it is important to take a critical look at economic realities.
Analysts agree that the markets are facing some serious headwinds. The International Monetary Fund has predicted that a third of the global economy will be in recession in 2023. Energy is in high demand and in short supply, prices are high and rising, and emerging economies are emerging from the pandemic in dire conditions. precarious.
There are five fundamental – and interrelated – issues that will cause problems for asset markets in 2023, with the understanding that in uncertain environments there is no clear choice for investors. Every decision requires compromises.
Net Energy Shortages
Without dramatic changes in the geopolitical and economic landscape, fossil fuel shortages are expected to persist through next winter.
Russian supplies were cut by sanctions linked to the war in Ukraine, while Europe’s energy architecture suffered irreparable damage when an explosion destroyed part of the Nord Stream 1 gas pipeline. This is irreparable because construction new infrastructure takes time and money and ESG mandates make it difficult for energy companies to justify large-scale fossil fuel projects.
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Meanwhile, already strong demand will only pick up as China emerges from its COVID-19-related slowdown. Record growth in renewable energy and electric vehicles has helped. But there are limits. Renewable energy requires hard-to-find elements such as lithium, cobalt, chromium and aluminum. Nuclear would ease the pressure, but new plants take years to come online and it can be difficult to gain public support.
Relocation of manufacturing
Supply chain shocks caused by the pandemic and Russia’s invasion of Ukraine have sparked an appetite in major economies to relocate production. While this can be a long-term boon to domestic growth, relocation requires investment, time, and the availability of skilled labor.
In the short to medium term, the relocation of jobs from low-cost offshore locations will fuel inflation in high-income countries, as it drives up wages for skilled workers and squeezes corporate profit margins.
Transition to commodity-based economies
The same disruptions that sparked the reshoring trend have led countries to seek safer – and greener – supply chains of raw materials within their borders or those of allies.
In recent years, the mining of crucial rare earths has been outsourced to countries with abundant cheap labor and lax tax regulations. As these processes move to jurisdictions with high taxes and wages, the supply of raw materials will have to be redesigned. In some countries, this will lead to increased investment in exploration. For those who cannot source from home, this can lead to shifting business alliances.
We can expect such alliances to reflect the geopolitical shift from a unipolar to a multipolar world order (more details below). Many countries in the Asia-Pacific region, for example, will become more likely to prioritize China’s agenda over that of the United States, with implications for US access to raw materials. now coming from Asia.
Given these pressures, inflation is unlikely to slow any time soon. This poses a huge challenge to central banks and their favorite tool for controlling prices: interest rates. Higher borrowing costs will have limited power now that we have entered an era of secular inflation, with supply and demand imbalances resulting from the dismantling of globalization.
Past inflationary cycles ended when prices reached an unaffordable point, triggering a demand slump (demand destruction). This process is simple when it comes to discretionary purchases, but problematic when it comes to basic necessities such as energy and food. Since consumers and businesses have no choice but to pay the higher costs, opportunities to mitigate the upward pressure are limited, particularly as many governments subsidize purchases of these products. basic by consumers.
Accelerate the decentralization of key institutions and systems
This fundamental change is motivated by two factors. First, a realignment of the global geopolitical order has been triggered by broken supply chains, restrictive monetary policy and conflict. Second, a global erosion of trust in institutions caused by a chaotic response to COVID-19, economic hardship, and widespread misinformation.
The first point is critical: Countries that once saw the United States as a thought leader and enforcer of order are challenging that alignment and filling the void with regional relationships.
Meanwhile, distrust of institutions is skyrocketing. A Pew Research Center survey found that Americans are increasingly suspicious of banks, Congress, big business and health care systems, even against each other. The escalation of protests in the Netherlands, France, Germany and Canada, among others, clearly shows that this is a global phenomenon.
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This disaffection has also caused the rise of far-right populist candidates, most recently in Italy with the election of Georgia Meloni.
It has also sparked growing interest in alternative ways of accessing services. Homeschooling has spiked during the pandemic. Then there’s Web3, forged to provide an alternative to traditional systems. Take the Bitcoin (BTC) community’s work on the Beef Initiative, which seeks to connect consumers with local ranchers.
Historically, periods of extreme centralization are followed by waves of decentralization. Think of the disintegration of the Roman Empire into local fiefdoms, the consecutive revolutions of the 18th and early 19th centuries, and the rise of antitrust laws in the West in the 20th. All saw the fragmentation of monolithic structures into building blocks. Then the slow process of centralization began again.
The current transition is being accelerated by breakthrough technologies. And while the process is not new, it is disruptive, both for markets and for society. Markets, after all, thrive on the ability to calculate outcomes. When the very foundation of consumer behavior undergoes a phase shift, it becomes increasingly difficult.
Taken together, all of these trends point to a period when only the prudent and opportunistic investor will come out on top. So fasten your seatbelts and get ready for the ride.
Joseph Bradley is the Business Development Manager at Heirloom, a software-as-a-service startup. He started in the cryptocurrency industry in 2014 as an independent researcher before going to work at Gem (which was later acquired by Blockdaemon) and later moving into the hedge fund industry. He received his master’s degree from the University of Southern California with a specialization in portfolio construction/alternative asset management.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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