Silicon Valley Bank’s failure! Global contagion fears! Fright over America’s Federal Reserve! Western inflation still raging! What horrors beyond China’s borders could shock world stocks and reverberate in the Middle Kingdom? Potential pitfalls are front of mind for me today, and always. But my worries aren’t hotly hyped fears like those above. Nor are they the U.S.-China tensions so many Western commentators fret. All are too widely watched. Instead, threats to my contrarian bullish 2023 outlook are stealthy risks few presently fathom. None seem ripe to impale stocks now. But that can change fast. Here are some worth watching.
In February, I told you why widely watched domestic worries won’t derail Chinese stocks’ rally since October. Neither recent dips nor China’s “conservative” GDP target change that view. But global forecasters fixate on foreign risks threatening China’s market, too — “systemic” financial risks, weak Western earnings stinging exports, the Ukraine war and more. Trade ties and global trends do mean China isn’t immune to overseas trouble — Chinese stocks’ 0.61 correlation with world stocks shows they move together more than not, given 1.0 is lockstep movement and -1.0 is polar opposite. But fretting over widely known issues is wasted worry — efficient markets pre-price widely known data, opinions and news, fast and continuously. That saps surprise power. Big new surprises move markets most.
So, what big negative surprises lurk globally? One possibility is a weird credit freeze. No, not from the Silicon Valley Bank fallout. Overall, US banks are in good shape compared to the past, with deposit-to-loan ratios higher than almost any point in my 50 years of managing money. Despite fears, loan growth is robust globally — a key force supporting resilient economic activity. You have seen it quickening in China, with total social financing growth accelerating to 9.9% year-on- year in February. But lending in the West is solid, too — U.S. February loan growth was 11.4% in 2023, nearly triple the 4.5% from a year ago. Eurozone business lending slowed some but remains a solid 5.5% year-on-year, through January. New lending drives economic growth.
The sneaky threat: Lending data aren’t inflation-adjusted. If loan growth slows below core inflation rates — which exclude volatile costs like food and energy — for a long period of time, it will dent growth, risking a far deeper, credit-driven recession stocks haven’t pre-priced.
That isn’t a problem in China, with February inflation creeping along at 1.0% from the previous year. It also isn’t a problem in the West now. U.S. core inflation is 5.5% year-on-year, less than half of loan growth. The eurozone’s 5.3% core inflation slightly lagged business loan growth in January, when the latest figures for inflation data were made available. But inflation topping lending for a sustained stretch could happen if banks’ fat, low-cost lending base — the deposit glut I detailed in December — deteriorates. That would spur bank funding competition, perhaps suddenly, and higher deposit rates, lower new loan profits and less incentive to lend. Hence less lending.
Deposit rates are tiny now across most of the world. U.S. savings rates average just 0.35%, even after the Federal Reserve’s raft of hikes. Still, some big global banks hint at higher deposit rates. U.S. financials are increasingly tapping overnight funding markets indicating deposit bases may be eroding. Regional bank failure jitters may incentivize their competition for deposits. Be watchful.
Here's something scarier. Watch for one particular undiscussed global central bank shift: The U.S. Federal Reserve and others, upset that rate hikes aren’t slowing the economy, could instead reimpose the reserve requirements they scrapped in 2020. Political pressure from recent bank failures renders this even more likely. Not handled correctly, it can torpedo lending. This very thing drove 1937’s huge U.S. recession and brutal bear market.
Geopolitics runs stealth risks — not the widely watched and priced ones like the Ukraine war, which has been analyzed from every possible angle, or U.S.-China tensions. Western commentators are always quick to hype them as looming disaster — they pitched a fit this year after the balloon incident, just as they shrieked about tariff “wars” a few years back. Fears were overblown then and likely are now and are pre-priced regardless.
So instead, monitor neighboring long-time foes India and Pakistan. Pakistan has begun importing Russian oil, which riles India by inflating the discounted Russian crude it devoured since Ukraine war sanctions and boycotts began. This could grow hot and violent. America, low on South Asian political capital after years of blunders, has little ability to act as peacemaker. It isn’t clear China could either, given occasional tensions with India. This can become nuclear threatening ugly fast. Be watchful.
Cryptocurrency arms another possible torpedo — though not the price implosion contagion many fear. Yes, Hong Kong SAR is hoping to become a crypto hub and speculation abounds about China warming to digital assets. But overall, crypto is too small and disconnected from real economies, despite endless headline coverage. The real threat is the devil in the details of upcoming crypto regulation — on tap in a number of Western areas, including the European Union and Canada. Regulations are surely coming to America and elsewhere, too, after the demise of big crypto exchanges like FTX and lenders Silvergate and Signature Bank. But well-intended regulations often spark unintended trouble.
Examples include America’s 2002 Sarbanes-Oxley and 2007’s mark-to-market accounting rules. One extended 2002’s global bear market. The other spurred RMB 13.8 trillion of unnecessary bank write-downs, amplifying 2008’s U.S. subprime mortgage problems into a near bottomless debacle reverberating worldwide. Well-intended regulations with disastrous intermediate-term outcomes are as old as capitalism. What’s the risk now? Crypto regulations unintentionally impinging non-digital investments widely — good intent, bad outcome.
My worst worry? Any big problem virtually no one, myself included, foresees. A true stealth torpedo!
That said, don’t obsess. Remember, stocks rise far more often than fall. Good Chinese market data only begin in 1994 — too short a time to assess fairly. Even so, Chinese stocks rose in 56% of rolling 12-month periods over that span. But using America’s S&P 500 for its long history dating to 1926, 75% of rolling 12-month returns are up since 1925.
I stand by my contrarian bullish outlook for 2023 and beyond, both for Chinese and world markets. But keep watch for big, unexpected negatives shifting from unlikely possibilities to incoming torpedoes.
Ken Fisher is the founder and executive chairman of Fisher Investments.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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