The Morgan Stanley report warned investors that the "master plan" of the U.S. to offset the negative impact of the trade war by cutting interest rates and tax cuts may not work. The lagging effects of monetary and fiscal policies cannot offset the immediate shocks of the trade war in a timely manner, and investors should be cautious about the market, especially as global security asset supply is at decades lows.

The "master plan" in the United States is doomed to fail

In an April 14 report, Morgan Stanley analysts said the main challenge for investors is to understand the "master plan" of the U.S. government in trade policy and its possible frequent changes.

Analysts believe the U.S. government appears to recognize that restructuring trade relations will bring economic pain. Trump has encouraged the Fed to relax monetary policy, and also called on Congress to relax fiscal policy. This suggests that the U.S. government may have a "master plan": use U.S. monetary and fiscal policy to offset the adverse consequences of rebalancing global trade.

However, according to Morgan Stanley's analysis, the plan has fatal flaws: the effect of monetary and fiscal policies lags far beyond the impact of changes in trade policy. Before April 2, consumer confidence has already ripped off, and a 90-day suspension period is unlikely to bring much relief.

Analysts warn that the market is not fully priced at present and economic deterioration risks:

If a 'master plan' relies on the use of monetary and fiscal policies to offset the adverse consequences of rebalancing global trade, the lag that these policies may have will put the economy in the near term with worse outcomes – a risk that has not been fully priced in the market. "

CEO confidence collapses indicate recession risk

Analysts stressed that US CEO confidence had collapsed before the tariff announcement on April 2. Historical data shows that when the CEO confidence index fell below 5 and remained below 5 in more than two months, real GDP growth stagnated and eventually contracted, and the number of people applying for unemployment benefits for the first time increased.

In October 2007, US CEO confidence fell into a net pessimistic range (index below 5). From then until January 2010, CEO confidence has remained purely pessimistic. According to the National Bureau of Economic Research (NBER), the U.S. economy entered a recession in December 2007. The recession only experienced a net pessimism period of 3 months before it began.

It is worth noting that when this three-month net pessimism and subsequent recession began to occur, the S&P 500 price fell by only 10% from its all-time high on October 9, 2007. Although the number of initial unemployment benefits has increased with the CEO's optimism decline, claims did not rise above the peak in October 2005 until July 2008 - 8 months after the recession began and 11 months after the CEO turned to net pessimism.

Safe Asset Supply Crisis

Morgan Stanley also warned that investors are currently facing a crisis of insufficient supply of "safe assets".

Government bond markets often benefit from high-risk environments. In the past, U.S. Treasury bonds have been shown as the ultimate "safe haven" securities. However, over the past week, U.S. Treasury bonds have shown higher risks than many investors have expected.

Another question arises when investors question the safe-haven status of U.S. Treasury bonds: Are there alternatives? The answer is yes, but the number may not be as many investors think.

In the Bloomberg Global Comprehensive Treasury Index, U.S. Treasury bonds account for 35.7% of the total, or approximately $14.0 trillion. This means there are $25.3 trillion in the index non-U.S. Treasury bonds.

Another way to consider safe-haven assets is to rely on rating agencies.

Only 11.8% of the bonds in the Bloomberg Global Composite Index have a median rating of AAA/Aaa. In August 2023, Fitch lowered the U.S. long-term debt rating from AAA to AA+, which dropped significantly.

Analysts believe that if the macro environment further deteriorates, causing the Federal Reserve to cut interest rates again, investors do not need to worry about the supply of US Treasury bonds. The proportion of U.S. Treasury bonds that meet the index inclusion criteria continues to rise in global GDP, which is in sharp contrast to the situation of AAA/Aaa rated bonds.