Ken Fisher: Beware the ‘silent’ credit crunch that could hit Irish stock prices in 2024
Figures from the Central Bank of Ireland show that loan growth turned negative last year potentially signalling an impending economic slowdown
With St. Brigid’s Day passed, spring has officially sprung to re-awaken the Iseq bears from their temporary hibernation. In my first column, I forecast that investors would, again, be shocked by double-digit gains in 2024.
Against that, bears mostly cite the same myriad of risks that they feared in 2023. But they are wrong! Big surprises, either positive or negative, will always sway stocks the most. Markets pre-price all widely watched worries very fast. Anyone who might sell on concerns like central bank rate wiggles, inflation, tragic regional wars, or recession fretting, almost surely did so long ago. Stock prices reflect those fears already.
Real risks must be big, economically significant events that few foresee, which is why they are unpriced by markets. My forecast told you none currently lurk, but multiple stealth risks do bear monitoring. Let me dissect some for you.
Silent credit freeze
One of the main stealth risks I see in the market right now is a lurking ‘silent’ credit freeze, potentially from the growth in global loans falling too far below annual inflation rates. This scenario implies contracting credit—a potential driver of a deep recession.
Hot inflation and interest rate hikes could have skyrocketed bank deposit costs in 2023 but they didn’t. In the US, year-end deposit base costs were 0.47 per cent, barely up from last February’s low of 0.35 per cent.
Irish deposit rates quadrupled since January 2023—but from a microscopic 0.03 per cent to November’s still teensy 0.12 per cent. The cost of deposits could still increase sharply to kill loan profitability, but right now lending at longer term rates remains very profitable for the banks.
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Despite these favourable conditions, lending has slowed. Total US loan growth fell from 11.4 per cent year-on-year at the start of 2023 to an anaemic 2.3 per cent in December – well below consumer price inflation at 3.4 per cent.
In the eurozone, meanwhile, business lending fell slightly last year. Irish bankers tightened standards broadly as business lending slid from 2.9 per cent year-on-year growth in January 2023 to -6.4 per cent in November. That’s not great, and far below Ireland’s 2.7 per cent January inflation rate.
Happily, November’s Irish consumer lending flipped positive. And surveys conducted by the Central Bank of Ireland show rising loan demand right now. Regardless, overall global lending is what matters most. And it is barely okay.
Investors should be very concerned if loan growth falls much lower relative to inflation. That would cause a silent credit crunch and signal a major economic slowdown.
Falling money supply underpinned the easing of inflation throughout 2023. In the US, the amount of cash on deposit, in savings accounts and other sources, fell throughout 2023, while a similar trend has been happening in the eurozone since July.
Normally, that might worry me. Shrinking money supply can cause recession. But that decline followed an insanely abnormal Covid-induced explosion in cash deposits and savings. The declines in cash supply are slowing, but I think it is still worth monitoring.
Regulation
Otherwise, history has shown us how overzealous, well-intended regulations with unintended consequences often hurt markets. For example, the global mark-to-market accounting rules introduced in Europe in 2007 ended up clobbering bank balance sheets by several trillion euros. That could bite bad if things like America’s bitcoin ETF rules and the rollout of the EU’s new Markets in Crypto Assets (MiCA) regulations include wording that hits non-crypto assets. The ramifications could potentially be huge.
The other technology that could be laden with potential surprise regulatory risk is Artificial Intelligence (AI). Again, overzealous unintended consequences could easily clobber innovation, and the productivity of AI-reliant Irish businesses, by hitting the big Irish domiciled tech firms with burdensome regulations.
The EU’s new package seems navigable so far. But rules stemming from the G7’s poorly named “Hiroshima AI Process” could easily explode. This will be followed by the American regulations. It’s definitely one to stay tuned for.
Risk of war
Whilst many still fear that the ongoing conflicts in Ukraine and the Middle East will hurt stocks, these are actually too long, too widely watched and economically too small to have a real impact. Instead, the tension between China and Taiwan are a bigger threat but these have been discussed to death—and the risk of war there has actually declined.
Instead, consider the neighbouring nuclear triangle of Pakistan, India and China. These three countries never got along, with historical border skirmishes, conflicting religions, cultures, and competing economies and politics.
Pakistan has a dinky, moribund economy. Its 2023, the country’s GDP tumbled whilst inflation increased to 30 per cent year-on-year and debt ballooned. Next door, India is the world’s fifth-largest economy and growing swiftly. Yet it bristles at Russia luring Pakistan into Putin’s orbit with discounted oil that India itself previously bought on the cheap.
China is huge but can’t reignite its formerly fast-growing economy because of President Xi’s endless economic restrictions. India chafes—wanting to be the regional swing factor playing East against West – and is stewing enviously as China favours Pakistan. The odds of war are not high, but not insignificant either. And the impact could be huge. Chinese foreign investment—rising rapidly in Ireland—could be destabilised if such a conflict broke out.
Regardless of the uncertainty facing the world economy, I remain adamantly bullish on 2024. Risks are always worth watching for, especially a true wallop that nobody foresees. Detecting these requires clearing your mind of recent events.
Don’t seek “the next” Israel/Hamas or central bank wiggle. Those are yesterday’s fears, only repackaged. Instead, consider potential all-new events looming in the next three to 30 months. As 2023 revealed, widely watched fears are already priced-in, which is why I remain bullish that markets will rise in 2024.
– Ken Fisher is the Founder, Executive Chairman and Co-Chief Investment Officer of Fisher Investments, an investment adviser with over €200 billion in assets under management worldwide. He is the author of 11 books, including 4 New York Times bestsellers, and writes customised columns in leading publications across 21 countries.
