When last I checked in on Credit Suisse’s James Sweeney, he was busy delivering a rather sobering assessment of balance sheet risk in the U.S. corporate sector in the context of the current economic cycle.
One of the things Sweeney mentioned was that two things you shouldn’t do if you’re interested in forecasting the next recession are: “1) Count the months since the last recession, 2) Observe postwar recessions and write down what patterns emerge just prior to most recessions”.
It’s not, he said, that counting months and observing patterns are exercises in futility. “They have been done so often that the stylized facts that emerge have become platitudes, some of which are surely still relevant”, he conceded. Rather, Sweeney simply suggested that things have changed over the past three or so decades and although post-crisis monetary policy has undoubtedly prolonged the current cycle, that’s not the only factor at play when it comes to explaining the length of expansions which, Credit Suisse reminds you, have been lengthening since in the Great Moderation began. “Things seem to work differently after 1982″, Sweeney observed.
In a separate piece out last month, Sweeney noted that Credit Suisse’s risk appetite measures had fallen into “panic” territory, a state of affairs he attributed to “trade disputes, the Italian budget, Fed tightening, emerging market turbulence” and disappointing European data.
It goes without saying that exactly none of those factors have gone away in terms of being a source of market angst since the first of July. In fact, they’ve all gotten materially worse with the possible exception of European data. Emerging markets, for instance, have cratered, with developing economy equities falling into a bear market and EM FX coming under immense pressure thanks to the collapse of the Turkish lira.
Strong U.S. data (the recent downward trend in the Citi Economic Surprise index notwithstanding) continues to argue for more gradual hikes from the Fed and when it comes to trade frictions, it’s gotten to the point where the mere prospect of low-level discussions is the best we can hope for.
Well, James is back and in a piece dated August 15, he notes that the bank’s global risk appetite indicator “fell below -3, the level we call ‘panic,’ for the first time since early 2016.”
Sweeney goes on to make a conceptually similar observation to something Goldman said a couple of weeks back about the somewhat anomalous juxtaposition between across-the-board strength in earnings growth and narrow market breadth. “This risk appetite panic is notable in that it occurs at a time of strong global growth and good developed equity market performance”, Sweeney writes.
The bottom line for Credit Suisse is that fundamentally speaking, the global growth picture is solid and the “panic” inherent in that risk appetite indicator is a function of “noise” rather than “signal”. To wit:
Ultimately, in our view, Turkey, trade tensions, recent Chinese data, and even the first half slowdown in Europe, represent more noise than signal for a change in trajectory in global growth. The basic, underlying reason for our view is resilient investment and consumption trends in the US and Europe that are well supported by underlying income and credit trends.
Industrial production can only slow so far when demand in the largest markets is experiencing brisk growth. We see both Chinese and Euro area IP momentum rising in the months ahead, while the US slows from scorching recent growth.
There’s a country-by-country breakdown in the full note which is full of caveats and extended analysis, but that’s the gist of it. Clearly, trade frictions represent a threat, but the bank writes that they’ve already incorporated a slowing in Asian growth into their outlook.
From what I can tell, Sweeney thinks the real risk emanates from the prospect of auto tariffs, but as has generally been the case this year when it comes to analysts pondering the black box that is Trump’s decision calculus, the assumption is that the U.S. President wouldn’t risk a stock market crash ahead of the midterms.
“If auto tariffs became widely expected in the short term that would be a negative shock to developed market IP growth expectations, but we do not think that the US administration would risk the shock to developed market equities and investment spending that auto tariffs could present – at least before the November elections, that is”, Sweeney writes.
Here’s hoping, James. Here’s hoping.