Once upon a time, Wall Street analysts had just two things to worry about: interest rate risk and corporate profits – virtually everything else was derived from these.
Unfortuantely, we now live in the new normal, where central banks step in every time there is even a whiff of an imminent market correction (as BofA explained last week), and the result is that nobody know what is and what isn’t priced into the market any more, simply because the market in the conventional sense of a future discounting mechanism no longer exists (as Citi explained earlier this summer).
Which is why, paradoxically, even as the VIX slides to record lows, the number of things to worry about on Wall Street grows longer and longer. In fact, according to Deutsche Bank’s Torsten Slok, there are no less than 30 material risks investors should beware in the coming year, ranging from a U.S. equity correction to a reversal of Brexit to Irish presidential elections, to a “Bitcoin crash,” rising inflation, danger from North Korea and results from special counsel Robert Mueller’s probe.
The risks should be thought of “not only as potential VIX-boosters but also as potential sources of faster or slower growth than what we have in our baseline forecast,” Slok explained in his note, which also shows that even without a major risk materializing, the GDP rebound of 2017 is unlikely to persist.
As for the recent surges and drops in Bitcoin, “you wonder where prices will even be by the end of 2017,” Slok said during an appearance on CNBC’s Trading Nation broadcast.
Predicting that price swings of the cryptocurrency will remain an issue in 2018, Slok said questions about Bitcoin regulation, transparency and disclosure issues remain unanswered. “It’s mainly because it is something that I think financial markets so far have been discounting as a small issue,” Slok said. “We do worry a bit that it could become more systemic, in particular, if the current trends continue into 2018.”
But the Deutsche Banker’s biggest worry is understandably a spike in inflation in the coming months. Low national unemployment, growth projections for the nation’s gross domestic product, and other financial measures signal a potential rise, Slok said. As we have reportedly previously, virtually every bank from BofA to Goldman to Barclays has warned that their optimistic forecasts are null and void if inflation in the coming months spikes, forcing the Fed to tighten monetary conditions at a faster pace.
On the geopolitical front, U.S. and global uncertainty about North Korea’s test launches of ICBMs capable of reaching the U.S. mainland and other potential targets could roil financial markets. Slok cited fear that we could have a “further escalation of the situation.”
The bank’s worry list, in random order and featuring both upside and downside concerns for financial markets, questioned whether Jerome Powell, the incoming Federal Reserve chairman, will be “politically driven or driven by the incoming data.”
Other risks include tests for the Fed’s near chair, the potential replacement of BOJ’s head Haruhiko Kuroda, the ECB announcing its QE exit in Q2, housing bubble bursts in Canada, Australia, Sweden or Norway, a correction in the U.S. stock market where there is a mismatch between valuation and fundamentals, a harder landing than expected for China as economic growth there slows, and many other risks which would all weigh on financial markets.
“Are markets ready for even a small correction?” the Deutsche Bank strategist asked rhetorically, reminding his reads that there has not been one for “a long time.”
The full list of 30 risk factors is below.