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05 Oct, Wednesday
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Bull Trader USA

Paul Brandus: Which ‘gray swan’ risk could derail the U.S. economy and the stock market in 2022?

“It’s tough to make predictions, especially about the future,” the late great New York Yankee Yogi Berra famously said. It’s certainly true as we head into 2022, where all kinds of so-called “gray swans” lurk, any of which could slow the economy and derail the stock market. 

A gray swan is an event regarded as having a low probability of occurring — but having a large impact if it did. I’ve drawn up a list, starting with the economy, which most economists think looks rosy as the new year dawns. 

“I think the key thing is that we go into 2022 in pretty good shape,” says Joel Naroff of Naroff Economics, a Southampton, Penn.-based advisory firm. “The economy has essentially clawed back to where it was, or almost where it was, before the pandemic hit. The government has supported the economy immensely. Wages are up, but prices are up too because of the supply chain.” 

One key question is what happens as the immense government support that Naroff referred to eases. The Federal Reserve has begun dialing back a stimulus program—the monthly purchase of tens of billions of dollars worth of Treasury bond and mortgage-backed securities—that have kept long term interest rates low.

But this is just one thing that could impact growth in 2022. Here is some other things to watch out for: 

Inflation. What happens if inflation surges even higher? The consumer price index jumped 6.8% in the 12 months ending in November—the highest since 1982. “It’s not even clear that those higher inflation readings have peaked,” warns Scott Brown, technical market strategist at LPL Financial. Galloping inflation could spook the stock market SPX, +0.05% and put the cost of everyday goods and services out of the reach of many Americans. 
Higher interest rates. The Federal Reserve has already signaled as many as three interest-rate hikes in 2022. Higher rates could help curb inflation, but it could also mean higher borrowing costs for consumers.
Financial instability. Soaring stock prices and a red-hot real-estate market have generated vast amounts of wealth for tens of millions of Americans. Yet tens of millions of others have missed this bounty and continue to live paycheck to paycheck.  A separate study in July, this one by Bankrate, shows just how precarious the finances are for most Americans. More than half of Americans — 51% — have less than three months’ worth of expenses stashed away in an emergency fund, it found. This includes 1 in 4 Americans who said they have no emergency fund at all — up from 21% in 2020. 
Geopolitical risks. Will Russia invade Ukraine? What about Chinese saber-rattling over Taiwan? Ever since the U.S. pulled out of a nuclear agreement with Iran, that country has resumed enriching uranium—and appears to be edging closer toward atomic-bomb-grade capacity. There’s also kooky North Korea, which of course already has a small stockpile of bombs. 
Another COVID variant. Who’s to say that the delta variant, and now omicron, will be the last variants of the pandemic, now about to enter its third year? In addition to the horrid death toll—more than 800,000 Americans have perished—the virus continues to take a toll on everything from the snarled supply chain to travel to where we’ll work, whether our children will go to school and more.

Looking out even further, there are additional economic risks. Here are three of these longer-term gray swans:

Civil war? “We are closer than any of us would like to believe,” Barbara Walter, a University of California at San Diego professor, tells me. Walter, who also serves on a Central Intelligence Agency advisory panel that studies instability around the world, says her analysis—reached independently of the CIA, which isn’t allowed to assess what’s happening within the United States—says “if you assess conditions that have sparked civil wars around the world, the United States has descended into dangerous territory.” In fact, she writes in her upcoming book that the U.S. is now an “anocracy,” somewhere between a democracy and an autocratic state. Talk about an economic question mark—among other things. 
Worker shortages. We’ve all heard about the drop in the labor-force participation rate during the pandemic, driven by older Americans retiring early, and younger workers leaving because of issues like child-care shortages. Yet there are forces in play that predate, and perhaps overshadow these latest developments. For example, the U.S. birth rate, falling for years, now stands at a multi-decade low. This, combined with opposition (in some quarters at least) to even legal immigration is creating labor shortages that won’t go away when the pandemic fades. Who’s going to pay Social Security and Medicare taxes, and taxes in general, if there aren’t enough new workers?
Deglobalization. The accelerated flow of capital, labor, goods, technology and more across borders has defined our world for a generation or more. Richard Haass, president of the Council on Foreign Relations, writes that globalization, once widely regarded as a net benefit, can “also be destructive as well as constructive, and in recent years, a growing number of governments and people around the world have come to view it as a net risk.” As countries, including the United States pull back, overhaul supply chains and more, there will certainly be consequences. Such disruption will be hard to quantify and may impact us in ways that we currently cannot see. 

Read: The supply-chain disaster is actually good news — for these 3 reasons

More opinion: The simple way to ease the labor shortage is to raise limits on legal immigration

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