2022 was a tough year for investors. Black swan events like the outbreak of war between Russia and Ukraine, as well as unstoppable inflation, hit the market hard and without mercy. As 2023 approaches, we are hoping for a turning point in the market—the Fed will start cutting rates, inflation will go down, and the Ukraine-Russia War will end.
However, the hope for a turn-around might seem a bit far from us. The World Bank has adjusted the 2023 global GDP to 1.7% this year, which will be the lowest in 30 years, indicating a potential global recession is around the corner.
Plus, there are 5 potential black swan events (though they only have a small chance of happening) that may trigger a full-blown market collapse. Let’s have a good look and better protect our investment.
What is a black swan event?
A black swan event is an uncommon and unpredictable occurrence that can have a significant impact on financial markets as well as the economy. These events are difficult to anticipate because they are rare. Instances of black swan events consist of natural calamities, political upheavals, and major technological disruptions.
The US unemployment rate is on the rise
The US unemployment rate has been the center of attention for the market in 2023, as there are concerns about a potential recession.
Major layoffs in the real estate and tech sectors to cut down on operating costs
Due to high inflation, demand for goods and services has dropped, leading many companies to cut costs through layoffs. This is especially true in highly leveraged industries with high debt, like the real estate and tech sectors.
At the beginning of the year, Amazon, Microsoft, Alphabet, and Meta all laid off tens of thousands of employees. The US unemployment rate is expected to reach 4.3% in the second and third quarters of 2023.
More than half of the 45 economists surveyed by the Financial Times predict that the US unemployment rate in 2023 will rise to between 5.5% and 6.5%.
The second quarter is the best turning point for the Fed to turn dovish
Interest rate cuts will slow down economic activity. Layoffs and salary freezes are inevitable for companies.
Interest rate cuts may occur in the second and third quarters, or the market may not stand the unemployment rate rising from 3% to 4%, which may trigger a full-blown market collapse. So, the Fed may stop raising interest rates in the second quarter, which could be the perfect turning point to go dovish.
If the Fed does not cut interest rates soon enough, asset prices may be reshuffled. At that time, US interest rate cuts will not have any motivating effect on the market.
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Uncertainty about the US dollar’s global status
Another black swan is the US dollar, as its international status is under threat. Despite being the most important currency in the world, used to price almost all goods and resources, an increasing number of countries are realizing the risks of relying too heavily on the dollar or the current Western-led settlement system.
For instance, after being kicked out of SWIFT in March last year, the Russian ruble depreciated by more than 60% within a few months. Additionally, the US’s aggressive implementation of monetary policies in recent years has made it challenging for many countries to implement their economic, import, and export policies.
Moreover, the US’s unlimited quantitative easing policy has caused a significant depreciation of assets held by countries that use the US dollar as their primary reserve currency.
The rise of the new global currency—the BRICS countries and RMB
In March 2023, Elon Musk once mentioned that the Federal Reserve’s overly interventionist monetary policies have prompted many countries to consider abandoning the US dollar as their reserve currency.
In reality, more and more countries are beginning negotiations to establish new currencies and settlement systems to reduce their dependence on the US dollar.
The BRICS countries (Brazil, Russia, India, China, and South Africa) are currently researching the establishment of a common currency within their group. The economic impact of these five countries collectively should not be underestimated.
Plus, China has been actively promoting its Renminbi calculation system for foreign trade in recent years and has completed its first transaction for liquefied natural gas settlement in Renminbi, which has some market value.
If the BRICS countries do establish their own currency system and China further promotes its Renminbi settlement system, the combined economic size of these countries will undoubtedly have a significant impact.
What if these developments make everyone doubt the value of the US dollar? If there is a change in the US dollar-dominated economic and financial system, what will be the final outcome? Of course, black swan events may not happen, but in today’s situation, we had better keep our eyes on the developments.
US debt default: raising the debt ceiling again…
Another major event that could have disastrous consequences is if the US defaults on its debt. This was already warned about a few months ago, but now the situation is even more serious and urgent.
Why? The US Treasury’s cash balance has decreased significantly, with only $163 billion left—the lowest level in nearly three years. What should they do? They would agree to raise the US debt ceiling.
The political game between the Republican Party and the Biden administration
As expected, the Republican Party is taking advantage of their majority in the House of Representatives to demand that President Biden cut government and welfare spending before agreeing to increase the debt ceiling.
On the other hand, the Biden administration has stated that the debt ceiling issue should not be linked to government spending and that they will not accept any Republican request. This is not just about economics; it’s also about politics.
US re-election is coming next year—the Biden administration cannot afford a cut on welfare spending
Biden is running for re-election as US president next year, and it will be difficult for him to make concessions on welfare spending in order not to lose votes. So now, the Congress is completely deadlocked on the debt ceiling issue.
What if the US defaults? There will be a global shock in the market.
As we mentioned before, once the US defaults on its debt, or like in 2011, when its sovereign rating was downgraded, the stock market is likely to experience a major adjustment. S&P was like that at the time, and the Hang Seng Index fell by almost 10,000 points.
According to the US Congressional Budget Office’s February forecast, the Treasury could default as early as July if the cash balance continues to decrease at a faster rate.
Therefore, be alert by the end of May, as the stock market could experience volatility due to the debt crisis.
Global nuclear threat
This is about the danger of nuclear weapons around the world. The situation between Russia and Ukraine has been getting worse for a year.
Recently, Putin announces plans to deploy nuclear weapons in Belarus. Plus, North Korea conducted another test of a nuclear-capable underwater attack drone in early April 2023.
All these events combined indicate that the world is facing a high risk of nuclear disaster, which is the most serious since the Cold War. Although things are still in the early stages of threats, if they get worse and the North Korean nuclear issue comes back, it could lead to a global panic and cause a sudden and severe drop in the stock market.
Possible escalation before winter?
The conflict between Russia and Ukraine is most likely to escalate before this winter. Once winter arrives, the war may enter a stalemate again. Therefore, we must pay close attention to the developments and news of nuclear threats in the second and third quarters because, if they escalate, the market will tank drastically.
Commercial property bubble
The Fed has been steadily raising the target interest rate from almost nothing to almost 5%. This means that the 30-year fixed mortgage rate in the US has gone up to over 7%. Interest rates around the world are also going up, which is causing problems not only for homeowners but also for real estate developers and big banks that might not be able to pay their bills.
This is definitely a time of high interest rates, which will have consequences, just like they have in the past.
US commercial real estate loans will have $400 billion in debt due this year
US commercial real estate loans will have $400 billion in debt due at the end of this year and another $500 billion due in 2024.
Large banks have been aware of the risks in commercial real estate debt and have significantly reduced their issuance of commercial real estate loans in the past year, leading to developers turning to smaller banks that generally offer higher interest rates (possibly by a few basis points).
Under the circumstances of high interest rates and declining profitability, the debt bubble in the commercial real estate sector is becoming increasingly larger.
The bubble might burst if interest rates continue to rise
The Federal Reserve’s interest rate monitoring tool suggests that the interest rate will have a 50% chance of staying between 4.75% and 5% at the May-June 2023 meeting. However, some studies predict that interest rates could keep going up later in the year, possibly reaching 6 basis points by the end of 2023. And that will significantly increase the risk of the commercial property loans.
In short, we can’t overlook the risk of the bubble.
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Last words: hope for the best, prepare for the worst
No one knows when unexpected events will happen, but we can be proactive by doing our homework. Keep an eye on the situation and economic doubts among people and the market. Although the stock market still offers opportunities for growth, any investment should be taken seriously.
As always, “hope for the best, and be prepared for the worst.”
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Disclaimer:
The information on this webpage should not be taken as investment advice and does not constitute an offer or solicitation for any investment product. It is intended for general purposes only and may not take into account your individual needs, investment objectives, or specific financial circumstances. Investing always involves risk.