Markets are reacting to the post-election Democratic sweep with considerable volatility.

We expect that to continue as markets reprice to reflect challenges from both the geopolitical environment and growing concerns about the tech industry and their data centers.

The American electorate have spoken clearly about their values. This would include an end to the war in Iran, a curtailment of the data center buildout, and the elimination of tariffs that are currently squeezing consumers, countries and businesses around the world.

While Trump retains the power of the presidential veto, legislators will increasingly be daring him to use it. With the electoral balance in the U.S. swinging so far to the left in last Tuesday’s election, he now has to worry about Republican defectors potentially voting to impeach him, alongside the near-certain barrage of attacks his administration are already facing.

The Energy Problem Is Far From Over

While a cessation of the Iranian conflict would be welcomed by nearly everyone, the problems in the oil market are far from being solved.

Oil prices have retreated fairly significantly from their highs on speculation that the war may be winding down. But systemic problems remain, particularly with transportation and refinery capacity.

Simply put, transportation costs for oil tankers have soared as a result of the wars in both the Persian Gulf and Russia.

The net effect is that shipping oil has become so expensive that, even with more crude coming onto the market, it could be a long time before cheap oil returns to grease the wheels of the world economy again.

Natural gas prices remain a whole other area of concern.

Recent riots in France and elsewhere in Europe can be traced, at least in part, to the rising cost of living. And those pressures will become increasingly evident as winter sets in across Europe.

Natural gas is priced regionally. So while we’ve seen prices increase marginally throughout North America, most people don’t realize just how much more expensive natural gas has become in both Europe and Asia. Last month it was roughly 10x more expensive in Europe and Asia than in North America.

Beyond driving up the cost of home heating and cooking, these elevated energy prices are acting as a brake on both manufacturing and other economic activity.

And all of this is happening just as we’re seeing government deficits explode throughout most of the Western world.  It’s interesting to note that some oil producing nations, such as Canada, may actually briefly benefit from higher tax revenues generated from the spike in oil prices.  That said, any short term gains will be more than offset by the demographics of aging baby boomers reaching pensionable age and the higher health care costs that come along with it

Rising Interest Rates and the Global Competition for Capital

The net result is, and will continue to be, upward pressure on interest rates as countries and corporations compete against one another for bondholders’ capital.

Just as the Canadian central bank recently raised rates, we saw rates in the UK jump on Thursday. The Federal Reserve in the U.S. has also made it clear to investors and consumers alike that it expects further increases down the road.

The simple translation of all of this?

Everyone — consumers, corporations, and countries — are spending more and more money.

And that money has to come from somewhere.

Governments either need to print it, which risks creating more inflation, or borrow it at increasingly higher interest rates.

So we’re entering a period of considerable instability, particularly in light of the recent Democratic victory with legislators’ threats to curtail data center development, which has been one of the few areas consistently driving growth in the U.S. economy.

Bond markets have already taken a hit, and they’re likely to remain soft for some time yet.

Globally, we’re starting to see the emergence of a credit crunch, with everyone from provincial and federal governments to corporations competing for increasingly expensive capital.

Warning Signs in Private Credit and Real Estate

There are other concerning signs emerging as well, particularly in private credit and real estate, where financial stresses have been building for some time.

Shares in private credit ventures, which offer higher yields in exchange for lending to riskier businesses, are showing signs of both liquidity problems and increasing redemption requests.

In many cases, redemptions are capped at around 5% to prevent a run on these funds.

Meanwhile, lenders are increasingly extending credit to troubled businesses, effectively pushing the problem further down the road rather than recognizing losses that might otherwise have been unavoidable.

The result is growing concern throughout the higher-risk corporate debt marketplace.

Much the same can be said for real estate.

Investments that made a great deal of sense when mortgage rates were 3% simply don’t make the same sense at 7%, particularly if rates continue to rise.

Higher financing costs change the economics of real estate dramatically, especially for highly leveraged investors and developers.

And when those higher rates persist, the pressure builds.

The Outlook: Higher Inflation for Longer

With the U.S. federal government forecasting a deficit of approximately $2 trillion, the government continues to face an enormous funding requirement.

That money has to come from somewhere.

It must either be financed through additional borrowing or, indirectly, through monetary expansion.

And with governments, corporations, and private borrowers all competing for capital at the same time, there’s little reason to assume that financing costs will quickly return to the levels we’ve become accustomed to.

The broader picture is one of growing economic and financial instability.

Geopolitical conflicts are disrupting energy markets and global transportation. Governments are running enormous deficits. AI investment is absorbing unprecedented amounts of capital. And traditional monetary policy may be increasingly ineffective at addressing the underlying causes of inflation.

Meanwhile, consumers — particularly those living on fixed incomes — are being squeezed from every direction.

The economy may continue to grow, especially if AI delivers the productivity improvements many are expecting.

But that doesn’t necessarily mean the benefits of that growth will be widely shared.

In fact, it may mean quite the opposite.

We could be entering a prolonged period of higher economic growth, higher interest rates, and persistent inflation, with an ever-widening divide between those who own appreciating assets and those who don’t.

And that has enormous implications for investors, consumers, and governments alike.

Mark & Sean