By J Mulraj
Dec 28, ‘23 – Jan 5, ‘24

Is creating many black swan events

By: J Mulraj

We end 2023 with Indian, and several other, stock markets at a high. The BSE Sensex climbed 18.7% during the year, ending at 72240. The S&P 500 climbed 24.2% and Dow Jones Industrial Average rose 13.7%. With a GDP growth of 7.2% India is the fastest growing large economy. In 2023 India hosted a successful G20 summit, and also achieved a task no other country had managed, landing a space craft, Chandrayaan, on the South side of the moon. India, with its UPI system, which allows electronic financial transactions at no cost to either party, leads the world in digital transactions. Households, which traditionally invested in bank deposits, gold and real estate, are increasingly investing in financial assets. The assets under management (AUM) of the mutual fund industry is ₹50 trillion, and growing. India is reaping a demographic dividend, with an average age of 28.2 years, nearly a decade lower than China’s 39 years. So 2023 has been a good year for India.

Not so sure about 2024, though.

There are several potential black swan events due to the  insanely myopic actions of world leaders. All of them have the potential of upending international laws, and plunging the world into more conflicts, dangerous ones at that. Consider some of them.

Plan to expropriate $300 b. of frozen Russian assets: Prodded by USA, G7 nations are meeting to discuss the legality of confiscating $ 300 b of Russian assets, frozen by sanctions, and using this to help Ukraine in its rebuilding efforts. This raises several questions. Is such a seizure legal? Is it applicable to other nations? Was, for example, USA  made to forfeit its assets to pay for reconstruction of its unilateral wars on Iraq and Afghanistan. Or the UK for the havoc it created on its colonies? This would be a breach of international law and would set a dangerous precedent.

Russia would, of course, retaliate, at the very least by seizing Western assets in Russia (assets of Danone and Carlsberg, and German oil field, have been taken over by Russia). China, now a closer ally of Russia after being pushed by the collective West into an embrace, may well decide that it’s unsafe to hold US assets, like T- Bills, lest these assets are, one day, similarly confiscated. It might sell its losing of US T-bills, crashing the US bond market and making it difficult for USA to roll over its $ 33 debt burden. Of course, the price of gold will shoot up.

Russia would also cease talks on issues where dialogue is imperative, on issues such as nuclear disarmament, climate change and exchanges of crucial raw material. And for what purpose?

The black swan scenario would be if this were to escalate into a military conflict. Russia and China have (or claim to have) hypersonic missiles, which fly at 5 times the speed of sound, or Mach 5. Russian weapons include the Avangard hypersonic glide vehicle, the Burevestnik nuclear powered cruise missile, the Zircon hypersonic anti ship cruise missile and the Kinzal hypersonic air launched cruise missile.

Since these travel at hypersonic speeds, it’s extremely difficult to intercept them using missiles that don’t. Currently, USA doesn’t have hypersonic missiles, nor does NATO. Given that, the seizing of funds would be an act of provocation that borders on  lunacy. More likely, beyond that.

The crazy situation in the Red Sea and in Gaza: The civil war in Yemen has lasted nearly a decade, underlining the need to not let conflicts fester. Sadly there are no statesmen in the world today who advocate peaceful and early resolutions. Continued conflict has taken a toll on the people and the Houthi rebels have now resorted to firing missiles at commercial vessels passing through the Red Sea to reach the Suez Canal (about 12% of global trade). The alternate route, around the Cape of Good Hope, would add 15-20% to shipping costs, stoking inflation. India will be badly hit as around 65% of oil imports passes through this region.

The Houthis are engaging in asymmetric warfare, being ill equipped to fight bigger and well armed opponents. So they rely on drones, including under-water drones, missiles loitering munitions and such. The US and UK are sending warships to take military action against the Houthis, and thus remove the  threats to commercial shipping routes. The risk is that Iran, which has a strong, well armed army and navy, enters the fray. It could seek to blockade Israel. The recent killing of a Hamas leader in Beirut can escalate matters.

China’s wolf warrior stance over Taiwan and the Philippines: A powder keg situation is developing in the South China Sea, an area China claims almost entirely, by drawing an arbitrary nine-dash line to claim it. A claim denied by the International Court of Arbitration, a ruling China doesn’t accept. It is flexing its muscle against Philippines over the Scarborough Shoals as well as ratcheting up tensions with Taiwan, which it claims. Taiwan is going to the polls this month, and if the current ruling party, inimitable towards China, is voted in, Xi Jinping  may be tempted to assert himself militarily. He might be tempted into a misadventure by the brouhaha between Democrats and Republicans in USA.

China is facing huge economic problems. It’s new anti-espionage law, passed in September, has further prodded foreign businesses to flee. Companies fear that simple inquiries such as ‘how’s business?’ can trigger incarceration under the new law, and several have moved out. This has led youth unemployment to go over 25%. The realty sector, accounting for 30% of GDP, is in trouble and, consequently, so are State Governments, whose main source of revenue is through auction of plots to the realty sector.

One of China’s large shadow bank, the Zhongzhi, with $64 b. liabilities, warned of insolvency. Shadow banks take individual savings, paying a higher rate than banks, and invest in realty firms, which pay even more. With these firms, like Evergrande, going bust, the shadow banks themselves follow.

So a military adventure in Taiwan might be a means of diverting public attention.

These are just three examples of the lunacy of world leaders, who are putting the world at great risk of a serious, global, war. There are other potential flash points too.

Then there are financial time bombs waiting to explode. Financial Times warns of the dangers in the US commercial real estate (CRE) market, which needs to refinance $ 117 b of debt this year. After a 5% hike in interest rates this refinance, even if available, may not make the CRE building viable. The risk of failure of CRE will fall on banks, especially regional, community banks. So 2024 can see bank failures similar to Silicon Valley Bank.

last week the BSE Sensex added 1161 points to end at 72026.

Foreign investors continue to be bullish on, and pour money into, Indian stock markets. Hear this Morgan Stanley podcast. India’s Stockmarket, MSCI India, has outperformed MSCI China in the past three years, and is expected to outperform it in 2024 too. So foreign funds are over weighting India Stockmarkets, which means higher inflows into Indian markets. From Jan 2021, MSCI India EPS has grown by 61%, versus a decline in MSCI China of 18@ for MSCI China. So India’s Stockmarkets will attract large foreign as well as domestic investment.

Factors of concern are geopolitical, like the three unwelcome scenarios unfolding, as described above, any of which could prove calamitous. Or factors could be financial, such as the possibility of a banking collapse due to the inability of CRE to roll over its debt in a moribund commercial office/shop rental market. Or it could be political – over 100 countries go to the polls in 2024, starting with Taiwan in January, then India in May and USA in November. The standoff between the two parties in USA will affect several outcomes, including, perhaps, an earlier negotiated stop to the Ukraine conflict. Of course, if the G7 myopically decide to forfeit Russia’s $300 b of frozen funds.

If they do that, all bets are off! Let’s pray that the lunacy doesn’t spread that far.


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