In his weekly Sunday night note, Morgan Stanley economist Joachim Fels writes that something weird happened this week: His own clients with whom he had spoken about the economy during the week thought he was sounding “bearish.”
Fels does not consider himself to be a bear, which lead him to this concerning revelation:
I do worry that investors may be too complacent about the looming near-term macro risks that I highlighted in my meetings: a sell-off in US Treasuries as predicted by our US rates strategists as the Fed’s forward guidance becomes ‘woolier’ and the US economy rebounds from the cold freeze, a renewed bout of weakness of the double-deficit club economies in EM on the back of this external shock, a period of weaker economic data and policy procrastination in Japan before another round of BoJ easing in 3Q, and more signs of Japanification in the euro area as banks keep deleveraging and the euro pushes higher. In fact, my biggest surprise was that the majority of investors now assume a broad-based QE program by the ECB at some stage later this year as their base case. Most of them were surprised to hear that I thought this was only likely if the euro area was to experience another major debt crisis. In summary, relative to the present consensus amongst investors I’d characterise myself as a near-term pessimist but a long-term optimist. Put differently, I believe there will be near-term pain, but long-term gain. In the very short term, however, have a lovely Sunday!
The resilience of Western equity markets has been astounding. Between the Fed, China, Ukraine, and everything else, there’s certainly enough pieces out there to make a bear case. And yet, even with stretched valuations, there’s been very little that’s gotten on anyone’s nerves.