When BofA's Michael Hartnett releases his monthly Fund Managers' Survey, the one chart we always head straight to is the one showing what the "smart money" investors, aka those polled clients who make up the survey (and the same ones who we reported earlier have been selling this bear market rally for the past seven straight weeks) are most worried about, or as they put it: what are the biggest "tail risks."
A brief walk down memory lane.
The chart below shows that as recently as January, what kept everyone up at night by a substantial margin, with 45% putting it as their top fear, was a China Recession, followed by an EM debt crisis.
That changed dramatically just the next month, when the biggest fear in February had nothing to do with a Chinese recession or an EM Debt crisis, and everything to do with the dreaded "R" word right inside the gold ole' US of A. In fact, four of last month's top "tail risks" were brand news, and in addition to a US recession, these included energy debt defaults, quantitative failure and a topic we have been covering since mid-2015, China's relentlessly encroaching capital controls.
Fast forward to today when once again a month makes all the difference in the world, and concerns of a US recession have receded dramatically, no doubt in response to the price action in the markets, which have seen a 200 point surge in the S&P and a 50% rebound in oil, and instead all eyes are on the Fed, where "quantitative failure" is now the top concern among 18% of those polled, just fractionally ahead of Recession with 18%, and China devaluation with 14%. While energy debt default has slid to fourth place with 14% of the vote, we are confident this will become a major topic in the coming months when the next, and biggest to date, wave of energy defaults hits the US market (incidentally, a China recession is nowhere to be found which probably means it is time to start worrying about China's economy again).
And while recession fears have clearly receded, is a contraction in the US economy taken off the table? While a recession may no longer be the top "tail risk" any more, that too looks set to return at the top very soon because according to a separate poll, a great majority, or 59% of respondents, believe the global economy is now in its "late cycle", the highest since August 2008 when the last crisis was unleashed. As a reminder, recessions always follow the "late cycle economy" transition.