Inflation fears fade as geopolitical risks rise

CNN

By Paul R. La Monica, CNN

Inflation fears roiled the markets in 2022. Now, investors may have scarier things to worry about in 2023, according to a report from global research and consulting firm Eurasia Group. Most notable? Concerns about the increasingly chaotic geopolitical landscape.

“Inflation shockwaves” still feature as one of Eurasia’s top political risks for 2023 in a new report.

But perhaps surprisingly, inflation ranks fourth on the list, behind worries about a rogue Russia under the leadership of Vladimir Putin and Xi Jinping’s consolidation of power in China.

The Putin problem

Eurasia’s third biggest fear — the increased use of artificial intelligence technology to wreak havoc on the global economy — only adds to jitters about disruption from Russia and China. Eurasia called AI “a gift to autocrats.”

Eurasia, led by political scientist and author Ian Bremmer, pointed out that Russia’s war with Ukraine may become an even bigger problem for the United States and Europe.

“Nuclear saber-rattling by Moscow will intensify. Putin’s threats will become more explicit,” Eurasia said in its report. It is also concerned that “Kremlin-affiliated hackers will ramp up cyberattacks on Western firms and governments.”

That could mean attempts to disrupt oil pipelines, American and European satellites and other telecom and tech infrastructure, as well as further efforts to influence and sabotage global elections.

“Moscow will step up its rogue behavior…with newly empowered influence operations targeting NATO countries,” Eurasia said in the report.

Eurasia pointed to upcoming Polish elections in 2023 as “the most obvious target” but that other Western nations “will be vulnerable, too.”

China conundrum

Autocracy in China is a potential economic and market headache as well.

“Xi’s drive for state control will produce arbitrary decisions and policy volatility. China’s economy is in a fragile state after two years of harsh Covid-19 controls,” Eurasia noted, pointing out that “plummeting homebuyer and market sentiment have ground growth in the critical real estate sector to a halt, depleting local government revenue.”

Eurasia added that the “backdrop of weakening global growth and deepening domestic challenges demands competent economic management from Beijing.” Instead, “the Chinese leadership is delivering opacity and unpredictability.”

Chinese officials announced in October that they were delaying the release of key economic data, news that Eurasia said “was an ominous sign of things to come for global markets.”

All of this uncertainty comes as China continues to face the growing Covid outbreak in the country. Eurasia fears that “if a severe new strain of Covid were to emerge,” it is “more likely that it would spread widely in China and beyond.

“China would be unlikely to identify the new variant because of reduced testing and sequencing, to recognize more severe disease due to an overwhelmed health system, and to let news of a more severe variant get out given Xi’s track record on transparency,’ Eurasia said. “The world would have little or no time to prepare for a deadlier virus.”

Meanwhile, Eurasia also is worried that Beijing “will deploy new technologies not only to tighten surveillance and control of its own society, but also to spread propaganda on social media and intimidate Chinese language communities overseas.”

So what about inflation?

None of this is to suggest that worries about rising prices have dissipated.

While inflation is listed as the fourth-biggest risk, Eurasia is still concerned that “rising interest rates and global recession will raise the risk of emerging-market crises.”

Energy prices in particular will remain a sticking point for the global markets and economy as Eurasia notes that “higher oil prices will also increase frictions between OPEC+ and the United States.”

And Eurasia also listed concerns about instability in Iran, shrinking water levels and economic inequality as major global challenges.

Then there’s another new and distinctly 21st century worry: the rise of social media.

“Gen Z has both the ability and the motivation to organize online to reshape corporate and public policy, making life harder for multinationals everywhere and disrupting politics with the click of a button,” Eurasia said, referring to the phenomenon as the “Tik Tok Boom.”

Legal woes for SBF and FTX continue

Sam Bankman-Fried, the disgraced founder of bankrupt crypto exchange FTX, had another day in court on Tuesday.

Bankman-Fried, more commonly referred to by his initials, SBF, plead “not guilty” to charges ranging from wire fraud and conspiracy to commit money laundering to conspiracy by misusing customer funds.

SBF appeared in a Manhattan court Tuesday after he was arrested last month in the Bahamas, extradited to the United States and then released by a judge on a $250 million bail package. But as my colleague Kara Scannell reports, the legal drama for SBF is only beginning. The judge set a trial date of October 2.

Prosecutors allege that SBF was in charge of “one of the biggest financial frauds in American history.” They claim that he moved (or stole) billions of dollars from FTX customers to cover losses at the firm’s companion hedge fund, Alameda Research.

The cryptocurrency world was already in turmoil before FTX imploded. The prices of bitcoin, ethereum and other digital coins all plummeted in 2022. But FTX and Alameda were each forced to file for bankruptcy in December after investors rushed to pull deposits.

FTX was once valued at $32 billion, based on funding from private investors. The company was expected to be one of the hottest initial public offerings of 2023 as recently as the middle of last year. Not any more.

iPhone production in China ramps up again

Covid woes hurt Apple last year, as the world’s largest iPhone factory in China faced production disruptions since October due to the pandemic.

But the giant campus, owned by top Apple supplier Foxconn, is reportedly now back at 90% production capacity following worker protests and Covid-related restrictions.

Apple needs to get more of its latest smartphones into people’s pockets. Delays with the various iPhone 14 models have cost the company — and its investors — dearly.

Wedbush Securities analyst Dan Ives estimated in November that disruptions in China led to about $1 billion a week in lost revenue.

And analysts at UBS also said in November that wait times for the new iPhone 14 Pro and 14 Pro Max in the US were more than a month long due to supply chain woes. That couldn’t have come at a worse time since it was just before Christmas and other winter holidays.

Apple’s stock had a tough 2022, like the rest of Big Tech, and it didn’t start off 2023 in a festive fashion either. Shares of Apple hit a new 52-week low Tuesday. Apple’s market value dipped below $2 trillion in the process. Just a year ago, Apple was the first company in the world to reach a $3 trillion market valuation.

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