Financial markets are prepared for a rough year due to inflation, energy shortages, and instability. People who bring warnings are rarely welcomed. When Cassandra warned her fellow Trojans to avoid the Greeks and their wooden horse, she did herself no favors. But it’s crucial to look closely at economic realities given the tremendous instability that the financial markets are currently experiencing.

Analysts concur that financial markets face significant challenges. Prices are high and growing, there is a huge demand for energy, and emerging economies are emerging from the pandemic under uncertain circumstances. According to IMF predictions, the global economy will be in recession for one-third of 2023.

Given that there are no clear options for investors in uncertain circumstances, five basic problems will affect asset markets in 2023. These problems are interconnected and pose a threat to their stability. Trade-offs are necessary for all decisions.

Energy shortages overall

Without significant changes to the geopolitical and economic environment, fossil fuel shortages appear to continue into the upcoming winter.

Due to sanctions resulting from the conflict in Ukraine, Russian supplies have been drastically reduced. A blast that destroyed a portion of the Nord Stream 1 pipeline has irreparably damaged Europe’s energy infrastructure. Because building new infrastructure requires time and money and because ESG regulations make it difficult for energy corporations to defend significant fossil fuel projects, the situation is irreparable.

Meanwhile, after China recovers from its COVID-19 slowdown, the current robust demand will only grow. Electric vehicles and renewable energy have seen record growth. Yet there are boundaries. Hard-to-find materials like lithium, cobalt, chromium and aluminum are needed for renewable energy sources. Nuclear power would relieve the strain, but new reactors take years to come online, and public backing can be challenging.

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Manufacturing industry reshoring

The pandemic’s impact on the supply chain and Russia’s invasion of Ukraine have sparked a desire to restore production in major economies. Although reshoring may eventually benefit domestic growth, it requires money, patience, and the availability of skilled personnel.

Reshoring jobs from low-cost offshore sites will, in short to medium term, reduce corporate profit margins and drive up pay for skilled workers in high-income countries.

Changing to economies that are driven by commodities

The same disturbances that sparked the trend of reshoring have prompted nations to look for safer and more environmentally friendly raw material supply chains, either within their own borders or those of allies.

Critical rare earth mining has recently been outsourced to nations with cheap labor in abundance and low tax laws. The supply of raw materials will need to be rethought as these processes relocate to high-tax and high-wage nations. This will increase exploration investment in several nations. It can lead to changing trade alliances in people who are unable to obtain commodities locally.

Such alliances should reflect the geopolitical transition from a unipolar to a multipolar international order (below). For example, several nations in the Asia Pacific region may start prioritizing China’s agenda over that of the United States, which will impact American access to goods currently derived from Asia.

Ongoing inflation

Inflation is unlikely to calm down anytime soon, given these forces. Now that we have entered a period of secular inflation, with supply/demand imbalances brought on by the dissolution of globalization, higher borrowing costs will have little impact. This presents a significant issue for central banks and their preferred method of price control: interest rates.

In the past, inflationary cycles stopped when prices reached an unaffordable level, causing a decline in demand (demand destruction). When it comes to discretionary expenditures, this method is simple, but it becomes challenging when purchasing needs like food and energy. There is no room to relieve upward pressure because firms and customers are forced to pay the increasing prices, especially since many governments subsidize consumer purchases of these essentials.

Increasing the decentralization of important organizations and systems

Two elements are driving this fundamental change. First, conflict, tight monetary policy, and damaged supply networks caused a reconfiguration in the geopolitical world order. Second, a general decline in faith in institutions as a result of a disorganized response to COVID-19, poor economic conditions, and widespread misinformation.

The first point is crucial: Nations that once considered the United States a voice of reason and an upholder of the order are now doubting this alignment and attempting to fill the void with regional ties.

Institutional mistrust is rising at the same time. According to a Pew Research Center survey, Americans are becoming more distrustful of Congress, big businesses, healthcare institutions, banks, and even one another. Growing demonstrations, for example, in the Netherlands, France, Germany, and Canada, show that this is a worldwide phenomenon.

The growth of far-right populist candidates has also been sparked by this discontent, most notably in Italy with the election of Georgia Meloni. Additionally, it has sparked an increase in interest in alternative service access methods. During the pandemic, homeschooling increased. Then there is Web3, developed as a rival to conventional platforms. Consider the Bitcoin BTC work.

Waves of decentralization have historically followed times of severe centralization. Consider the fall of the Roman Empire into small fiefdoms, the simultaneous revolutions of the 18th and early 19th centuries, and the development of antitrust laws in the 20th century in the West. All witnessed the disintegration of massive constructions into their component components. The gradual centralization process then started over again.

Revolutionary technologies are accelerating today’s shift. While not novel, the process is disruptive for both markets and society. After all, financial markets depend heavily on being able to predict events. This is getting harder and harder to execute as the fundamentals of customer behavior change. When considered collectively, all these trends indicate a time when only the cautious and savvy investor will prosper. So buckle up and get comfortable for the trip.