¶ Global Investing Risks for 2024
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 ?
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 .
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 .
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 .
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 ?
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 .
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 .
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 .
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 .
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 ?
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 . 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 .
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 ?
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 .
Okay , that's not something to look forward to .
¶ Global Risks and Potential Crises
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 ?
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 . 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 .
Do you think the Chinese people believe that Taiwan should be part of China ?
Well , I think they're being told that and therefore they do believe that . Okay .
I just think that .
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 .
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 ?
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 ?
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 .
It's more along the lines of the recornation of a czar .
Or a casting of ballots . I don't think they're being cast legally , but they're now being cast .
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 .
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 .
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 ?
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 . 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 .
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 . 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 .
Yeah . 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 .
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 .
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 ?
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 ?
Isn't that a case of you being the number one ?
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 .
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 .
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 .