Ken Fisher: These hidden risks to the TSX and global stocks worry me even more than bank contagion and the Fed

   2023-03-16 14:03

Silicon Valley Bank sunk! Contagion in European bank fears. The Fed fright. Inflation raging!

What horrors can sink stocks anew?

With 2022′s dismal global stock market still haunting us all and new bogeymen lurking, that question plagues most – plagues me, always. But my worries aren’t hotly hyped fears like those above, still hot Canadian consumer prices or America’s debt ceiling jabbering. They are too widely watched. Threatening my contrarian bullish 2023 outlook are stealthy negatives few fathom.

None seem ripe to impale stocks now. But that can change fast.

Here are some worth watching.

Despite 2023′s early gains, forecasters are fixating on stocks’ relative weakness since February, keying on headline fears: Bank of Canada “dovishness” amid soaring inflation and strong employment, “systemic” financial risks, weak earnings, Ukraine. But efficient markets pre-price widely known data, opinions and news – fast and continuously. That saps surprise power. Big new surprises move markets most.

One possibility? A weird credit freeze. No, not from SVB fallout. Overall, banks are in pretty good shape compared to history. Despite fears, loan growth is robust globally, a key force supporting resilient economic activity. U.S. February lending growth was 11.4 per cent year-over-year, nearly triple the 4.5 per cent of a year ago. Canada’s December, 2022, non-mortgage loan growth (the latest available) was 9 per cent year-over-year, nicely above the prior year’s 5.5 per cent. Euro zone business lending slowed some, but remains a solid 5.5 per cent year-over-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 food, energy, mortgage interest, transportation and tobacco prices – for long, it will dent growth, risking a far deeper, credit-driven recession stocks haven’t pre-priced.

That isn’t now. Canada’s December loan growth nicely exceeded core inflation’s 5.4 per cent year-over-year that month, and almost doubled January’s slower 4.9 per cent. But it can happen. How? If banks’ fat, low-cost lending base – the deposit glut I previously detailed in a Globe and Mail column – 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 globally. You know interest paid on your savings accounts is near non-existent. Even U.S. savings rates average just 0.35 per cent, 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 cash-hoarding. Be watchful.

Scarier, watch for one particular undiscussed global central bank shift: The U.S. Federal Reserve and others, upset rate hikes aren’t slowing the economy, could instead reimpose reserve requirements they scrapped in 2020. Political pressure from recent bank failures renders this even likelier. Done wrongly and badly timed, it can torpedo lending. This very thing drove 1937′s huge U.S. recession, which hammered Canadian stocks, too.

Geopolitics runs stealth risks – not the widely watched and priced ones such as global China tensions or the Ukraine war. Instead, monitor India and Pakistan, long-time neighbouring foes. Pakistan now starts importing Russian oil, which riles India by inflating the discounted Russian crude it devoured since Ukraine war sanctions and boycotts began. This can grow hot and violent. Decades of Western policy blunders offer little diplomatic leverage to calm eruptions. America, low on South Asian political capital, can’t militarily contain another hot theatre there. This can become nuclear-threatening ugly fast. Be watchful.

Cryptocurrency arms another possible torpedo, but not the price implosion contagion many fear. Crypto is too small and disconnected from the real economy, despite endless headline coverage.

The threat: devils in the details of upcoming crypto regulation – like in Canada, where the Canadian Securities Administrators’s “enhanced investor protection commitments” start soon. Regulations surely come to America and elsewhere, too, after SVB’s failure and the demise of big crypto lenders Silvergate and Signature. But well-intended regulations often spark unintended trouble.

Examples? America’s 2002 Sarbanes-Oxley Act and 2007′s mark-to-market accounting rules. One extended 2002′s global bear market. The other spurred $2.7-trillion of unnecessary bank write-downs, amplifying 2008′s U.S. subprime mortgage problems into a near bottomless debacle reverberating in Canada and beyond. Well-intended regulations with disastrous intermediate-term outcomes are as old as capitalism. The risk now? Crypto regulations unintentionally impinging non-digital investments widely. Good intent, bad outcome.

My worst worry? Any big problem virtually no one – me included – foresees. A true stealth torpedo!

That said, don’t obsess. Remember: Stocks rise far more often than fall. Using America’s S&P 500 for its longest history, 75 per cent of rolling 12-month returns are up since 1925. Canadian stocks rose in 74 per cent of them since good data started in 1969. While I’m contrarianly bullish, keep watch for big unexpected negatives shifting from unlikely possibilities to escalating torpedoes.

Ken Fisher is founder, executive chairman and co-chief investment officer of Fisher Investments.

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