5 Risks for 2023 to Keep an Eye On

The start of the year is the time to reflect on risks that were realized, and risks the will rear their heads in the year to come.

Looking back, the risks going into 2022 were inflation, recession, and a tech bubble bursting. We all know how those have turned out. Inflation has been realized; recession remains on the horizon, but might have been largely discounted at this point; and no bursting bubble, rather a steady leak. So although uncertainty remains, risk has largely been resolved, given that the markets adjust to expectations.

Looking forward, I take a different tack and focus on the risks that are material to individuals, and thus to financial advisors. Which is natural given that my company, Fabric, focuses on risk and portfolio deign for that segment of the investment space. What I mean by material risk is that the risk matters to a person’s financial plan. For most, the financial plan extends years out, a time frame where recessions and the like live somewhere between noise and bumps in the road.

The material risks for 2023 are the same ones as for 2022, and will be the same ones for years stretching into the future. They will veer course, will rise is amplitude, and finally dissipate or reach a steady state. It is not a matter of whether they occur, but rather the course they take, the dynamics that evolve, and the collateral damage in their wake.

Here are the five that I have my eyes on. I have written about each of them, and will continue to do so.

Climate. 

Climate is the dominant one. Not only is it systemic, it might become existential. Although it will evolve over a timeframe of decades, climate risk already is manifest on energy, agriculture, production, and supply chains. And follow-on effects are on the horizon from immigration and geopolitical conflict. 

Demographics. 

Demographic risk comes from an aging population and lower labor supply. It includes health costs and the strain of social programs, as well as production effects due to a smaller labor supply. These are starting to be realized (Demographics and China). And because we already know what the aged population and the workforce  (taking away the possible mitigation from immigration) will look like a generation forward, it is a risk only to the extent that it is ignored. 

Deglobalization. 

Deglobalization will affect production costs and the supply chain. Also the related geopolitical risk, especially from China, because deglobalization is basically de-Chinaization. We have seen the march of globalization over the past two generations, so the developments from deglobalization will not happen overnight. 

Artificial intelligence. 

AI is a wild card in terms of risk because there is no precedent for it (The Risk of AI is Not Coming From Where You Think). By its very nature it is difficult to know what AI will become over the next decades. Certainly risks in terms of the end of work on the one hand, a shift in costs industry by industry, and resulting societal effects. It will also change the nature of war — on the positive side. perhaps taking soldiers out of the loop.

Lost decades. 

The standard sorts of risks become material risks if one comes after the other, leading to a decade or more of sideways martens. The risks from inflation, recession, irrational exuberance in fundamentals, high leverage, overstretched credit might lead the market to drop for a few years. But there is a greater risk if they pile on, one happening after the other. That might occur through bad luck; or maybe one shock setting up the next; or perhaps a shock having an outsize effect because the market has become weakened and vulnerable from earlier shocks. Are We in For a Lost Decade?