Last week, BofA's HY credit strategist Michael Contopoulos, laid out a list of the four things that keep him up at night, which included:
1. Zombie Companies And Massive, Rising Student Debt Loads
2. Sliding Used Car Prices, Rising Delinquencies And Subprime Defaults
3. Declining Loan Growth, Lack of commodity rebound and tighter balance sheet
4. Lack of Investment, No Small Business Creation And No Earnings growth
(there was more in the full article)
Having let the genie out of the bottle, just 24 hours later it was JPM's turn to unveil its own answer to this same question, and in his weekly Froday note, JPM's Jan Loeys said that when it comes to what "keeps the bank up at night" in the context of the bank's economic outlook "regime change is the main risk."
While that in itself is hardly unexpected or new, what we found surprising is that even JPM now admits that "large parts of society are not seeing any growth in income and job opportunities at all and thus demand change" and as a result "regime change could thus come from politicians deciding we have gone too far in the trade-off between stability and growth."
And in a preview of things yet to come, JPM concedes that "the anger of those left behind by slow and stable growth could lead to more populist measures that eventually give us both less stability and less growth."
Or, alternatively, just wait until all those who voted for Trump in hopes of a radical systemic overhaul, end up being disappointed. That's when the real regime change will begin.
Here is the full excerpt from JPM's note explaining what keeps America's most valuable bank up at night:
The most frequent question we receive from you today is: What keeps us awake at night? To us, the main risk to our strategy and markets is a change in what we like to call the regime we are currently in.
The regime we believe we are in is one of a slow and stable global expansion, with cautious economic agents, conservative fiscal authorities, and determined central banks that provide easy money, but retain strict control on financial leverage. We note there are many potential shocks, from political turmoil to policy errors, that could disturb markets, but we will treat them as just volatility that should not affect our strategy if these shocks do not change the regime we are in. The shocks that keep us awake are the ones that could change the current regime into another one.
- Regimes do not last forever. Some die because they do not deliver the goods to society and voters demand change. Some die of their own success. The Global Moderation Regime from the mid-80’s to 2007 brought good growth, low macro volatility and shallow recessions. The longer it lasted, though, the more agents assumed it would be forever, thus inducing them to apply less caution and more leverage. This ultimately made the regime vulnerable to a regional fall in house prices in 2006-07 that would otherwise not have done that much damage.
- We note the current slow-and-stable regime risks coming to an early end if too many economic agents are dependent on easy money, or if it does not deliver the goods to society. This analyst thinks the latter risk is more acute as large parts of society are not seeing any growth in income and job opportunities at all and thus demand change.
- Regime change could thus come from politicians deciding we have gone too far in the trade-off between stability and growth, and that it is time to let companies and banks loose, through deregulation and tax reform/stimulus. Alternatively, the anger of those left behind by slow and stable growth could lead to more populist measures that eventually give us both less stability and less growth.
- The alternatives to our Slow-and-Stable regime could thus be called Growth, and Populism. Slow-and-Stable has been good for both equities and fixed income, with equities outperforming. A Growth Regime could boost equities even more, but would likely hurt fixed income badly as it would bring more inflation and monetary policy tightening than investors are prepared for. Populism would likely hurt both equities and bonds.