People who come bearing warnings are rarely popular. Cassandra was not enjoying herself when she told her fellow Trojans to beware of the Greeks and their wooden horses. However, with financial markets facing turmoil, it is important to look at the economic reality.
Analysts agree the market faces serious headwinds. The International Monetary Fund has forecast that a third of the world’s economy will be in recession in 2023. Energy is in high demand and short supply, prices are high and rising and emerging economies are emerging from the pandemic in a shaky state.
There are five fundamental problems – and interlinked – that spell trouble for the asset market in 2023, with the understanding that in an uncertain environment, there is no clear choice for investors. Every decision requires trade-offs.
Net energy deficit
Without dramatic changes in the geopolitical and economic landscape, fossil fuel shortages are likely to persist through next season.
Russian supplies have been cut by sanctions related to the war in Ukraine, while Europe’s energy architecture suffered irreparable damage when an explosion destroyed part of the Nord Stream 1 pipeline. It cannot be repaired because new infrastructure takes time and money to build and ESG mandates made energy companies to justify large-scale fossil fuel projects.
Meanwhile, strong demand will only increase as China emerges from its COVID-19 weakness. Record growth in renewable and electric vehicles has helped. But there is a limit. Renewables require hard-to-source elements such as lithium, cobalt, chromium and aluminum. Nuclear will ease the pressure, but new plants take years to bring online and gaining public support can be difficult.
Reshoring of manufacturing
Supply chains shaken by the pandemic and Russia’s invasion of Ukraine have fueled appetites in major economies to produce more. While this may prove a long-term benefit for domestic growth, restoration requires investment, time and the availability of skilled labor.
In the short to medium term, the reshoring of jobs from low-cost offshore locations will feed inflation in high-income countries as it pushes up wages for skilled workers and cuts corporate profit margins.
Transition to a commodity-driven economy
The same disruptions that have fueled the reshoring trend have led countries to seek safer – and greener – raw material supply chains either within their own borders or with allies.
In recent years, important rare earth mining has been outsourced to countries with abundant cheap labor and lax tax regulations. As these processes move to high-tax and high-wage jurisdictions, the source of raw materials must be reconsidered. In some countries, this will lead to a rise in exploration investment. In those who cannot source commodities at home, it can lead to trade deals that replace them.
We can expect such an alliance to reflect the geopolitical shift from a unipolar to a multipolar world order (more on that below). Many countries in the Asia Pacific region, for example, will be more likely to prioritize China’s agenda than the United States, with implications for US access to commodities currently sourced from Asia.
Given these pressures, inflation is unlikely to slow down anytime soon. This poses a huge challenge to central banks and their preferred tool for price control: interest rates. Higher borrowing costs will have limited power now that we have entered era of secular inflationwith the imbalance of supply / demand resulting from the unraveling of globalization.
The past inflationary cycle has ended when prices rise to the point of unaffordability, triggering a collapse of demand (demand destruction). This process is straightforward when it comes to discretionary purchases but it is a problem when needs such as energy and food are involved. As consumers and businesses have no alternative but to pay higher costs, there is limited scope to ease upward pressure, especially with many governments subsidizing consumer purchases of these staples.
Accelerating the decentralization of key institutions and systems
This fundamental shift is driven by two factors. First, the realignment in the geopolitical world order was touched off by a broken supply chain, tight monetary policy, and conflict. Second, the global erosion of trust in institutions caused by the chaotic response to COVID-19, economic woes and widespread misinformation.
The first point is key: Countries that once saw the United States as a leader of opinion and an enforcer of orders are asking for this alignment and to fill the gap with regional relations.
Meanwhile, mistrust of institutions is surging. A pew survey Research Center found that Americans are increasingly suspicious of banks, Congress, big business and the health care system – and even against each other. Increasing protests in the Netherlands, France, Germany and Canada, among others, make it clear that this is a global phenomenon.
Such discontent has also led to the rise of right-wing populist candidates, most recently in Italy with the election of Georgia Meloni.
It has also led to a growing interest in alternative ways of accessing services. Homeschooling increased during the pandemic. Then there is Web3, forged to provide one alternative to the traditional system. Take work on Bitcoin (BTC) community on Beef Initiative, which seeks to connect consumers to local farmers.
Historically, periods of extreme centralization have been followed by waves of decentralization. Think of the disintegration of the Roman Empire into local fiefdoms, the back-to-back revolutions of the 18th and early 19th centuries and the rise of antitrust laws throughout the West in the 20th. All saw the fragmentation of the monolithic structure into component parts. Then the slow process of centralization began anew.
The transition is now being accelerated by revolutionary technology. And while the process isn’t new, it’s disruptive — for the market as well as the public. Markets, after all, thrive on the ability to calculate results. When the foundation of consumer behavior undergoes a phase shift, this becomes increasingly difficult to do.
Taken together, all these trends point to an era where only cautious and opportunistic investors will come out ahead. So fasten your seat belts and get ready for the ride.
Joseph Bradley is head of business development 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 then moved to the hedge fund industry. He received his master’s degree from the University of Southern California with a focus on portfolio construction/alternative asset management.
This article is for general information purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed here are solely the author’s and do not necessarily reflect or represent the views and opinions of Cointelegraph.