Posted on the Wall Street Journal MarketBeat by Dave Kansas:
Richard Berner, top economist at Morgan Stanley, has sounded a bit more downbeat than some of his peers in recent months. With the stock market showing a bit of exuberance, let’s check in with Mr. Berner.
His mood? Still a bit darker than most of the chin-scratching crowd. He does acknowledge that the economy is showing more and more signs of bottoming, which has become a fairly mainstream view in the past few weeks. But this brings him little cheer, because even as the economy gets off the mat, he believes “the recession will linger, the recovery will be slow.”
Mr. Berner and his team argue that investors have become a bit too blithe about the still-extant risks in the finance and credit sectors. Indeed, he thinks that investors are underestimating the size of potential loan losses facing the financial sector.
Moreover, Mr. Berner believes that loan and credit losses will contribute to a weaker recovery and may even re-ignite the credit crunch which would certainly be a grimmer scenario than the credit markets are anticipating. Indeed, as Mr. Berner notes, credit spreads have tightened “dramatically” as the investors embrace the rosiest scenarios.
Lastly, Mr. Berner says the “full impact of deleveraging” is still coming. And that means more hurdles up ahead.
Fed Chief Ben Bernanke sounded a bit more optimistic in his testimony on Capitol Hill today. But he also made some of the same cautious notes raised by Mr. Berner, especially when it comes to the still fragile financial system. Bernanke appears more upbeat than Berner, but just by a few letters.