Navigating Global Investment Risks: A 2024 Forecast
Jan 17, 2024
Steve Davenport, Clement Miller
Prepare to navigate the murky waters of global investing risks with Clem Miller and Steve Davenport as we unveil the critical dangers that could redefine the financial landscape in 2024.
In particular we look at risks that others may not contemplate. From an unforeseen biotech disaster to the tangible threat of AI gone awry, to El Niño-driven African famine and migration, creating political instability in Europe, and others.
We explore the potential for a Russian political collapse, with its potential implications for nuclear security and separatist movements. We also look at China’a smoldering economic problems and their interplay with the Taiwan issue.
We don't shy away from the vulnerabilities at our doorstep, examining the pressures on the U.S. financial system, including the integration of cryptocurrencies and recent shake-ups in banking. And, of course, the potential for U.S. election year chaos.
Join us for this crucial conversation and arm yourself with the foresight to invest wisely amidst the uncertainties of tomorrow.
Prepare to navigate the murky waters of global investing risks with Clem Miller and Steve Davenport as we unveil the critical dangers that could redefine the financial landscape in 2024.
In particular we look at risks that others may not contemplate. From an unforeseen biotech disaster to the tangible threat of AI gone awry, to El Niño-driven African famine and migration, creating political instability in Europe, and others.
We explore the potential for a Russian political collapse, with its potential implications for nuclear security and separatist movements. We also look at China’a smoldering economic problems and their interplay with the Taiwan issue.
We don't shy away from the vulnerabilities at our doorstep, examining the pressures on the U.S. financial system, including the integration of cryptocurrencies and recent shake-ups in banking. And, of course, the potential for U.S. election year chaos.
Join us for this crucial conversation and arm yourself with the foresight to invest wisely amidst the uncertainties of tomorrow.
Straight Talk for All - Nonsense for None
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Steve Davenport:
Welcome everybody to Skeptic's Guide to Investing. I'm Steve Davenport and today Clem Miller and I will be discussing top 10 global investing risks for 2024. Clem, let's take these risks in reverse order. Your number 10 is biotech accident. Are you thinking of a new pandemic or has something else come up in your radar?
Clem Miller:
So it could be a pandemic, a new pandemic. It could be that we see the negative side effects of some drugs that have been released. Just as an example and I don't have any inside information these new weight loss drugs, relatively new, that are coming out of Lilly and Novo Nordisk and others. There could be some negative side effects to those that could have very negative market impacts. There are all sorts of things that could go wrong in the biotech area. I'm not saying they will. This is my tenth the risk. That's tenth on my list, but I think it's something that we need to look out for, that investors have to consider and really think about when looking at markets this year and even the following year. So yes, a biotech accident.
Steve Davenport:
Yes, just as a personal comment, my neighbors just got back from their working on a show in Macau and they came back and had some type of upper respiratory problems. The doctor he can't can't tell what it is, it doesn't fit any of the testing that we know. So they were naturally a little bit nervous going to China and they went to the emergency room in China and the emergency there works a little different than here, so I can see where there's stuff out there that we're not quite fully aware of.
Clem Miller:
Yes, and I think a lot of people had respiratory issues this wintertime and in some cases quite severe respiratory issues. So it just goes to show what might happen, and so I think there are possible market impacts to that. I mean, I put this tenth on the risk, but one of the things that I try to do when looking at risks is to not just put down the obvious risks. Some people put down obvious risks, like the Fed for example. That might be a risk, but we're trying to look around the corner at possible future risks that have market relevance, and certainly biotech accidents are one.
Steve Davenport:
I agree. Your number nine is an AI incident. Now, since AI is just starting and I don't know how much it's been implemented, it feels like you might be spending too much time reading the sci-fi novels. What do you mean by an AI incident?
Clem Miller:
Well, it could very well be that I am reading too much into sci-fi. As I think about AI, I think about an episode of the show Black Mirror. Maybe some of you are familiar with that show. In particular, there was an episode where there was a problem with B-dios, which was a real problem a few years ago, a dios of bees around the world. In this show they come up with artificial bees to pollinate crops, and the artificial bees are controlled by an artificial intelligence that then is exploited by evil to kill people. I'm not saying that there's evil attached to artificial intelligence necessarily, but there could be an accident or an incident involving AI, including robots, having problems. Already there have been accidents and deadly accidents actually involving AI associated with automobiles. This could get worse over time and lead to market issues for those companies that are involved in AI, not just on the robotic side, but also including generative AI. Generative AI sometimes invents or makes up things. Who knows, that might have negative consequences as well.
Steve Davenport:
I was watching something this morning and they said that JPMorgan systems are attacked 45 billion times during the day. So there are people trying to get into their systems and hack them and I thought the number would be 45 times a day, not 45 billion. But that tells you the complexity of their network, the number of things going on, the number of areas they're in. I mean, I believe that when you set up these bots to go into these different systems, the people building them are not amateurs, they're pros and I know where the systems have some patches and they know how to get around some of those patches. So I agree there could be an AI incident. Number eight is African famine. What puts that kind of humanitarian crisis on your list? It doesn't seem like people are talking about it.
Clem Miller:
So normally you wouldn't, but this is an El Nino year and when you have El Nino you have global effects, one of which is often an African famine. An African famine can lead to migratory flows. Well, not only to lots of death, but also to migratory flows headed north into the Mediterranean area and the Middle East, and also into Europe. To the extent that they move into the Mediterranean, eastern Mediterranean area, they could affect some of the civil wars and conflicts we already have in that area, and also there could be migration across the Mediterranean into Europe, which could further exacerbate political tensions in Europe.
Clem Miller:
There's already quite a bit of concern saw an article just today where the Spanish prime minister was quoted. There's already a bit of concern in Europe about the possibility of right wing politicians taking over in more countries, not just in the Netherlands, where there is one right now, but in other countries and Hungary, where there's one, but also in other countries as well. So this could be exacerbated by African famine, which in turn is exacerbated by El Nino. So this is an example of you might want to say the butterfly effect, where something off the coast of Peru can affect political stability in Europe, and the vehicle through which that happens is African famine.
Steve Davenport:
Yeah, I think that the immigration issues around the world seem like they keep coming up and then going away and eventually, if there is a famine, I think there would be more immigration questions. Number seven is a devastating cyber attack. What do you consider devastating versus just an away?
Clem Miller:
Okay, so there was a cyber attack a few years ago called the SolarWinds cyber attack, and SolarWinds offered a software, orion software, which was used as a software as a service by many, many companies, and when that was penetrated by cyber attackers, by state sponsored cyber attackers, it penetrated a whole bunch of companies and basically took down the operations of some companies for quite a long period of time.
Clem Miller:
So devastating is both in terms of the impact on each company sort of times, the number of companies that might be impacted by that. So that's what I would call a devastating cyber attack Lots of companies affected by a small amount. Of course, you can have other cyber attacks which can have really super serious impacts on a particular company. There was a Ukrainian cyber attack, a Russian cyber attack on Ukraine called NotPetya, that had a particularly negative impact on the big shipping company Maersk, which almost lost their ability to maintain supply chains a few years ago. So, yeah, a devastating cyber attack could be one of those and it could be even worse. And the fact that we've got so many conflicts around the world right now going on means that the possible likelihood or impact of a cyber attack could be worse than what we've seen so far.
Steve Davenport:
You know the sixth is expanded Middle East war. I already think it has expanded. Do you need this? I think that sometimes we talk about incidents in other countries and we use the word war, and I kind of believe that we need to talk about conflicts until we have US soldiers involved. Then it becomes a war. Right now these are just conflicts and disagreements, but what do you mean by a Middle East war?
Clem Miller:
So war? Yeah, I would agree that it has expanded. It's expanded to include US and and Houthi, which is a Yemen political force, controls most of the country. There've been missile attacks exchanged between US forces in the Red Sea and the Houthi rebels, or, you know, Houthi government, you could almost say, in Yemen. So you have that. You've got exchange of fire between US forces that are still in Iraq, some US forces that are still in Iraq and groups in Syria that are affiliated with Iran and sort of supported by the Iranian Revolutionary Guard Corps. So you have some of that as well. So you know, I think the biggest expansion possible of this war would be one where Iranian forces get directly involved in a war with Israeli forces, whether by air or by sea or by land. So right now it's sort of all done by proxy. The Iranians are operating by proxy through Hamas and Hezbollah and other forces and the Houthis. But if the Iranians get involved directly, that would be the next major expansion of this war.
Steve Davenport:
Okay, that's not something to look forward to. Now we're entering the top five. Your number five is China in turmoil, and I honestly don't know which turmoil you're talking about. So it could be the Taiwan turmoil, it could be the problems in the economy, it could be the real estate turmoil. Can you be more specific about how much turmoil and what kind of turmoil you're talking about?
Clem Miller:
Well, let's keep in mind before I get into some specifics, let's keep in mind that there are relationships among all of these things.
Clem Miller:
So, for example, the really poor economic conditions in the real estate sector and sometimes in the agriculture sector, these are things that have political impacts in China that a lot of us may not be all that aware of. They're not terribly public, there's not a lot that's reported through social media. But whenever there are glimpses into what happens in China, there are always reports that there's a lot of political unrest at the local level, and so that could potentially expand. And if you're familiar with Chinese history, local level disputes and I'm talking about history before communism local level disputes can turn into massive nationwide political problems for whoever the leadership is. So I think there are economic problems that could become a problem and could become political problems later on, and the way that links into Taiwan is that the Xi Jinping government could use Taiwan as a distraction, as a way to achieve nationalist support, irrespective of the economic problems that are happening, so as a rallying cry, but, on the other hand, maybe not in the sense that, if there are a lot, of.
Steve Davenport:
Do you think the Chinese people believe that Taiwan should be part of China?
Clem Miller:
Well, I think they're being told that and therefore they do believe that. Okay.
Steve Davenport:
I just think that.
Clem Miller:
I don't think they, I don't think they are aware. There's not a lot of understanding by a lot of people, even in the US, as to what the history of Taiwan and its relationship with China, its relationship with other countries, has been over the last couple of centuries. It's not as clear-cut a case that Taiwan has 100% always been a part of China and therefore China is reclaiming it back. That's revisionist history. That's not 100% true. Actually, all right, it's partly true, but it's not 100% true. Okay.
Steve Davenport:
We got to find the truth eventually. Here you know, before is a Russian collapse. One of the things about your rankings that I'm trying to figure out is how does Russia, a 3% of the overall global economy, compare with China, who is 20% of the overall? How does Russia jump ahead of China on your list when they're relatively a small part of the global economy?
Clem Miller:
Well, you have a good point there in terms of the relative size of the economies. I would go to the question of probability. I think that the probable it's one thing to have economic problems in China that slow up the economy, have some effects worldwide in terms of slowing growth and a collapse of Russia, which I think is a much more likely circumstance. Now, when I say much more likely, I'm still not saying above 50% and I'm still this is still a look around the corner risk assessment but when I think of Russian collapse, I look around what's going on and I see there's lots of sabotage going on in Russia, some of it by Ukraine, obviously, but there's a lot of discontent about how things are going. You've got this election coming up. We all know who's going to win that election, but it's not because of Should we call it an election?
Steve Davenport:
No. Are we giving credibility to Putin by calling an election when we know that it's not a real election? I mean, I don't think it's what the UN or any other organization would call a fair and appropriate election.
Clem Miller:
It's more along the lines of the recornation of a czar.
Steve Davenport:
Or a casting of ballots. I don't think they're being cast legally, but they're now being cast.
Clem Miller:
My point is is that, irrespective of this election this year, that election could be a flashpoint for creating the conditions for the collapse of Russia. But think about what that means, though the collapse of Russia. It could be that Russian nuclear weapons are not secure. It could mean I agree.
Clem Miller:
Yeah, it's a big one, yeah, it's potentially huge, and, and what a lot of people don't realize is that is that Russia actually is a is itself a multinational federation. It's got other countries. You can call them countries, they call them republics. Chechnya, for example, is in there, and Dagestan, and and and other. You know Tatar stand, bashkortostan, places you've that one has never heard of, or I've heard of infrequently, but these places could split off Russia and so you might have a completely different world if, or different Eurasian continent, so to speak. Super fun if, if you have this kind of collapse.
Steve Davenport:
Okay, so the top three. Now your number three is US financial crisis. Do you mean a repeat of what we saw at Silicon Valley Bank, signature bank and first republic, or are you thinking something bigger or more comprehensive?
Clem Miller:
I am thinking somewhere between the same and bigger. Okay, Now, what am I thinking about in particular? First of all, you know you had these issues that affected the other banks that had problems last year with with regard to their bond holdings, and I'm not necessarily talking about about that. What actually I'm talking about is a narrowing of margins. You know, as rates presumably come down a bit this year, especially on the long term. Now they haven't done that yet, which is a problem for some sectors, but presuming that, you know, the 10 year starts to narrow, that's going to narrow the interest rate margins, which are essentially the gross profits for banks. So that's going to have, you know, an issue for for banks.
Clem Miller:
Additionally, I am concerned about as, as you know, all of our listeners know, concerned about cryptocurrency. You know, with the approval of these ETFs last week, I think, to the extent cryptocurrency creeps into our broader financial system. You know that could that could have some very serious impacts on the financial system and on banks. You know, one of the things that we know about banks is how much we don't know about them. We don't know what's inside them. They're kind of black boxes, and so you know, I don't think many people, if at all, expected what happened with Silicon Bank, Silicon Bank, SVB and the other ones. So you know one one bank could fail and it could topple. You know several other banks. So, yeah, I'm quite concerned about US financial crisis. I think the probability of that is higher than a lot of the other scenarios that we're seeing here, and the magnitude is it would also be quite high, you know, depending on how widespread the infection is across the economy.
Steve Davenport:
Yeah, there's a good article on Bloomberg by Bill Dudley, who's the former chairman or the president of the New York Bank, and he says that there was more fed citations out on banks right now than there were last year at this time, and so some of those citations and critiques were for Silicon Valley and others and they were just ignored by the analysts and ignored by the company.
Steve Davenport:
So his comment is there's a lot of things still happening at the banks and it isn't exactly clear who is reporting it, because there's a requirement if it's significant to shareholders that the banks report, and some of them are being a little less than totally clear about how much they're impacted by some of the fed citations. So I think you're right on with that political and the impact of the US financial crisis. The runner up is US political chaos, which could probably be a series of podcasts on its own, but in two minutes, what do you think the drivers are of this political chaos? I think it's hard to keep it contained, but I have a feeling it starts with a guy in New York.
Clem Miller:
Yeah.
Clem Miller:
So I think this, of all of these risks that I'm laying out today, I think this is actually the most obvious risk, and if you ask people outside the United States where the greatest worldwide or geopolitical risk is in the world these days, it's actually the US.
Clem Miller:
So that might be kind of surprising to a lot of people, but whoever becomes president later this year or is elected president later this year is going to have a pretty serious impact on US relations with the rest of the world, as well as with respect to the domestic US economy and even governmental structure inside the United States. So at this moment, there is an awful lot of uncertainty, and when you have this uncertainty, this combination or this interplay between the judicial system and the different trials a pretty popular within a certain segment of the population candidate it's a really volatile mix that can create a lot of chaos in society, and so I wouldn't put it past, I wouldn't say that the probability of violence in the US is low. I think it's quite high that we might see outbreaks of politically motivated violence here and there. So, yes, I think it's a significant concern that could have economic and financial market impacts.
Steve Davenport:
Wow, political chaos is your runner up. I can't imagine what your top risk would be. Drum roll please. And the top risk for 2024 on the skeptics guide to investing is accidental military conflict. Now, since we're all adults here, I'm not sure we do accidental military conflicts, because there's usually a purpose given for our conflicts, so that's a bit of a surprise. Why is this on the top of your list?
Clem Miller:
So this might well. I think the probability of this is rising and the magnitude is potentially very serious. So what do I mean by that? So you have US military forces deployed to various areas of the world. You have them in the Taiwan Strait, you have them in the Red Sea, you have them in the Eastern Mediterranean, you have them sometimes in the Black Sea, you've got Chinese military forces in the South China Sea, in the Taiwan Straits, but haven't we always had forces all over the world?
Steve Davenport:
Isn't that a case of you being the number one?
Clem Miller:
But the probability of a China-Taiwan conflict has been rising. You've got the Russian invasion of Ukraine and its potential maritime features. For example, ukraine has had quite some success in killing some Russian ships on the Black Sea and in turn, as you know, the Russian Navy has tried to blockade Ukraine in terms of their agricultural exports. I mean, basically, you've got this and you've had some incidents already. I'm surprised there haven't been more but incidents involving stray missiles going into Poland. You could have a number of circumstances where there could be border incidents involving NATO. Now I believe NATO's border with Russia has doubled with the inclusion in Finland into NATO.
Clem Miller:
So basically, there are many, many different additional touch points between US forces and the forces of Russia, China, Iran with regard to the Middle East. That could all lead to unintended conflict. Those could spiral out of control, and so I'm quite concerned that we might see an incident such as that. It would be, from some people's standpoint, a sort of black swan, super-unanticipated event. From my standpoint, it may not happen, but if it does and the chances are rising I think it would have some potentially serious impacts on the geopolitical situation and also potentially on financial markets If you have a spread of conflict due to this.
Steve Davenport:
Well, there you have it, Our list of the top 10 global investing risks for 2024. Clem, you did a very thoughtful and complete survey and I really appreciate it. I think I feel like I'm in a class at Georgetown or something we appreciate listening. We're listening to our podcast. So long till the next edition of Skeptics Guide to Investing. Make it a good day. Thanks, Steve.