A credit freeze, falling money supply and crypto regulations are risks worth noting

Newsflash! The world did not end in 2023. Last February, I told you widely watched fears from interest rate increases to inflation, Chinese growth to global recession and war were false – they would not sink global stocks.

And they did not. Even with numerous widespread worries added, global stocks soared by 23.5 per cent last year. Why? Markets pre-price fears. Real risks are unseen shocks.

I warned of unlikely but real torpedoes in my February column. They did not materialise – but they were not defused.

Here is an update on risks, both ruses and real. Last February’s column preceded bank failures and fears of “systemic” financial risks. Those began on March 10, when Silicon Valley Bank failed. Signature Bank fell days later, with Credit Suisse next as it collapsed into the arms of rival UBS. Many envisioned bank “contagion”.

The KBW Regional Banking Index, which tracks small US bank stocks, plunged. Now? It is up 6.7 per cent from pre-SVB levels, obliterating the fear.

European junior bank bond issuance recovered.

Central bank fears? Fast Federal Reserve and European Central Bank rate increases through summer did not kill stocks or gross domestic product. Now many eye cuts. Maybe. But I have long said central banks’ actions are unpredictable; their words worthless. Ignore them. Despite the chatter, markets have. Global stocks rose along with rates since this bull market’s birth in October 2022. A global recession did not come.

Russia’s Ukraine invasion persisted last year as an ugly fear ... yet stocks climbed. They kept climbing after Hamas attacked Israel. Many assumed a Middle East war would drive up oil and tank stocks. No.

Fighting erupted amid a broader correction. Yet stocks bottomed in days, then surged to record highs. Israeli stocks now top prewar levels. Oil is down despite Red Sea tanker attacks. This conflict lacks scope to interrupt commerce and hit stocks. These ruse risks not only did not knock stocks, they also formed bricks in last year’s “wall of worry”.

What about potential risks I detailed? Thankfully, none struck. Geopolitically, while Ukraine and Gaza are not torpedoes, war between India and Pakistan – potentially involving China – could be. That has not happened. But Pakistan and Russia cosying up to each other could rile India anew. Stay alert.

I warned of a silent credit freeze – not from bank failures but from loan growth falling below inflation rates, implying contracting credit. This risked a deeper recession than markets had pre-priced. Keep watching.

US loan growth slowed from 12.2 per cent annually at the start of last year to November’s 3.3 per cent. That nearly matched November’s inflation, suggesting vast cooling.

Behind that lending and inflation slowdown? Falling money supply. US M4 – the broadest money supply measure – fell by 1 per cent annually in October.

Normally, that might concern me. But it follows a peak rivalling Mt Everest. So, it is not so abnormal.

Overreaching cryptocurrency regulation was concerning. But sweeping regulation reaching beyond cryptocurrency into ancillary assets has not happened. It still may.

Then came a new regulatory risk: Artificial intelligence.

Excessive rules could similarly stymie innovation. The EU’s new package looks navigable for Big Tech. But talk abounds of more globally. Stay tuned.

Recency bias, which is the tendency to overrate or use recent events to forecast, blinds.

Free yourself from this psychological trap. Consider potential new events in the next three to 30 months, not those from the last three to 30. Watch for stealth risks, which as 2023 revealed are everywhere.

Next month, I will give you my 2024 forecast. Stay tuned.

Consider potential new events in the next three to 30 months and avoid the tendency to use recent events to forecast