In the face of Trump's "antics," there are too few safe assets

Morgan Stanley's report warns investors that the "overall plan" of the United States to offset the negative impacts of the trade war through interest rate cuts and tax reductions may not work. The lagging effects of monetary and fiscal policies cannot timely counteract the immediate shocks of the trade war, and investors should adopt a cautious attitude towards the market, especially as the supply of global safe assets is at a decades-low.

The "Overall Plan" of the United States is Destined to Fail

Morgan Stanley analysts stated in a report on April 14 that the main challenge facing investors currently is understanding the U.S. government's "overall plan" in trade policy and its potential frequent changes.

Analysts believe that the U.S. government seems to recognize that restructuring trade relations will bring economic pain. Trump has encouraged the Federal Reserve to ease monetary policy while calling on Congress to loosen fiscal policy. This suggests that the U.S. government may have an "overall plan": to use U.S. monetary and fiscal policies to offset the adverse consequences of rebalancing global trade.

However, according to Morgan Stanley's analysis, this plan has a fatal flaw: the effects of monetary and fiscal policies lag far behind the impacts of changes in trade policy. Consumer confidence had already shown cracks before April 2, and a 90-day pause is unlikely to provide much relief.

Analysts warn that the market has not fully priced in the risks of economic deterioration:

"If an 'overall plan' relies on using monetary and fiscal policies to offset the adverse consequences of rebalancing global trade, the lag period during which these policies may take effect will leave the economy facing worse outcomes in the short term—this risk has not been fully priced into the market."

Collapse of CEO Confidence Signals Recession Risk

Analysts particularly emphasize that CEO confidence in the U.S. collapsed before the tariff announcement on April 2. Historical data shows that the last time the CEO confidence index fell below 5 and remained below 5 for more than two months, actual GDP growth stagnated and eventually contracted, while initial jobless claims rose.

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

Notably, during this three-month period of net pessimism and the subsequent onset of recession, the S&P 500 index price fell by no more than 10% from its historical high on October 9, 2007. While initial jobless claims rose as CEO optimism declined, claims did not exceed the peak of October 2005 until July 2008—eight months after the recession began and eleven months after CEOs turned net pessimistic

Crisis of Safe Asset Supply

Morgan Stanley simultaneously warns that investors currently face a crisis of insufficient supply of "safe assets."

The government bond market typically benefits from high-risk environments. In the past, U.S. Treasuries have acted as the ultimate "safe haven" securities. However, over the past week, U.S. Treasuries have exhibited higher risks than many investors expected.

When investors question the safe-haven status of U.S. Treasuries, another question arises: Are there alternatives? The answer is yes, but the quantity may not be as abundant as many investors imagine.

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

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

Only 11.8% of the bonds in the Bloomberg Global Aggregate Index are rated AAA/Aaa. This proportion has significantly decreased since Fitch downgraded the U.S. long-term debt rating from AAA to AA+ in August 2023.

Analysts believe that if the macro environment worsens further, leading the Federal Reserve to cut interest rates again, investors need not worry about the supply issue of U.S. Treasuries. The proportion of U.S. Treasuries that meet the index inclusion criteria continues to rise in global GDP, contrasting sharply with the situation of AAA/Aaa rated bonds