One day after Bank of America’s bearish Chief Investment Strategist, Michael Hartnett laid out 9 signals that the market has finally bottomed, and another 5 that the bottom is a lot lower, one of his BofA peers, David Woo, head of the bank’s global rates and currency and EM fixed income and econ research, came out with an even more dismal outlook, told Bloomberg that he is the most worried about volatility in global markets – particularly in the developing world – since the 2008 financial crisis.
According to Woo, the Democratic takeover of the House will weaken Donald Trump’s hand on trade, making a deal with the Chinese less likely, while spurring a bruising fight over the U.S. debt ceiling. According to Woo, the ceiling will need to be raised sometime probably in the summer, but to agree to that, the Democrats will demand some kind of concession before offering the votes in the House, and it’s very possible that the two sides will have zero common ground.
Furthermore, according to the Bank of American, the 2020 election will be in full swing by that point, putting pressure on the Democrats not to deal, which is why even though the upcoming debt ceiling fight is a risk that few people are focused on, he believes it is time to start getting worried.
Looking back to the last debt ceiling crisis, in 2011, Woo notes that “brinkmanship literally took the country to the verge of default and culminated in the U.S. losing its AAA credit-rating status. That year we saw more volatility than we can remember. I think 2019 could turn out to be a little worse.”
“The only thing I’m confident in is volatility will be high next year.”
Meanwhile, it is unlikely that any of the “legacy” problems will have been resolved by then:
“We’ll have a $1 trillion budget deficit, a big fight over the debt ceiling, gridlock and the U.S. economy will be slowing at the same time,” Woo told Bloomberg TV. “That makes me very nervous.”
Separately, speaking about his core specialty, emerging markets, Woo said that he wouldn’t touch emerging markets “with a 10 foot pole”, to wit: “You want to buy EM? I wouldn’t touch EM with a 10-foot pole until there’s a resolution between the U.S. and China.” Emerging-market equities, of course, followed China into a bear market earlier this year amid the escalating trade war between Washington and Beijing.
In summary, while reluctant to make any forecasts about the coming years, Woo said that “the only thing I’m confident in is volatility will be high next year.”
Some other comments from Woo, courtesy of Bloomberg:
On trade
- “The market is starting to realize that this issue won’t go away anytime soon.”
- “You want to buy EM? I wouldn’t touch EM with a 10-foot pole until there’s a resolution between the U.S. and China.”
- “If people were hedging against G-20, they probably shorted the yuan. So on Monday after the news came out, we saw massive unwinding of short renminbi positions. I wouldn’t make too much out of that price action.”
- “Up until now, Beijing has been careful not to let the genie out of the bottle because it’s difficult to put it back in. But we may be slowly reaching that point where it will be more and more difficult for Chinese policy makers to make concessions. There’s no question that the concessions that the White House wants, which you could argue are legitimate, are over IP. And IP is where it gets very complicated.”
On the Fed
- “I love this Fed. I have a lot of respect for Jay Powell.”
- “A few months ago he said something that really impressed me. If you want to know what we’ll do next, don’t listen to what we say, just look at the data. He’s saying the Fed doesn’t know much more about the economic outlook than you, me and anyone walking the street.”
- “I think he’ll be more of a risk manager like Greenspan.”
- Woo said Federal Reserve Vice Chairman Richard Clarida, his PhD adviser, is also good for global markets given his background as an international economist.
On risks next year
- In 2011, “brinkmanship literally took the country to the verge of default and culminated in the U.S. losing its AAA credit-rating status. That year we saw more volatility than we can remember. I think 2019 could turn out to be a little worse.”
- “The only thing I’m confident in is volatility will be high next year.”
Watch his full interview below:
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