Systemic risk, anyone? Upbeat Davos' dark undertone

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The mood at Davos, Switzerland, this week for the World Economic Forum?

Let the good times roll.

“America is roaring back,” President Trump said in a speech before world leaders and titans of business and banking, as he touted his tax cut and efforts to slash regulatory red tape, along with the booming stock market and strong employment figures.

Yet he was far from the only one offering up big doses of confidence. Executives from Bank of America’s Brian Moynihan to Blackstone’s Steve Schwarzman hyped the idea of more global companies investing in the U.S. over the next year in the wake of the $1.5 trillion tax plan that passed Congress last month.

“I think it's possible you're going to hit 4% [growth] sometime this year,” JPMorgan Chase CEO Jamie Dimon — who is hardly a Trump fan — told CNBC earlier this week. “I promise you, we are going to be sitting here in a year and you all will be worrying about inflation and wages going up too high.”

But still there’s a problem that’s been nagging some: gravity.

What goes up must come down — the iron law of physics that seems to hold for the markets and the broader economy, too. And with the financial crisis a mere 10 years in the rearview, the line between abandoning worry and irrational exuberance can seem awfully thin.

Indeed, references to the crisis, both explicit and more veiled, seemed to wind their way around coverage of the events this week, punctuating the clinking of champagne glasses and boastful projections of the boom times ahead.

“It does feel to me a little bit like 2006,” Jes Staley, chief executive of Barclays, said in The Wall Street Journal on Friday. “ ‘Maybe we’ve solved the riddle of economic cycles’ — that’s what we were all saying. We really got that wrong.”

Scott Minerd, chief investment officer at Guggenheim Partners, went so far as to call Davos a “valuable contra-indicator” for investors in a note this week.

“Optimism about global growth is disturbingly high at Davos. While I am of the opinion that the global economy is gaining momentum, I always find it discomforting when virtually everybody shares the same opinion,” he told Reuters on Tuesday. “My fear is that that economic optimism is spilling over into global equities, which will lead to a mania in stocks.”

At the same time, Carlyle Group co-founder David Rubenstein warned on a forum panel that, oftentimes, “something wrong happens” when people are this optimistic.

"Right now, the biggest concern I have is that most people think there is no problem of a likely recession this year or even maybe early next year. Generally, when people are very happy and confident, something wrong happens," he said.

For analysts watching the events play out, the instinct is understandable.

“I don’t think it can be understated how deep and long-lasting the scars from the financial crisis are — we almost ended world finance as we knew it,” said Edward Mills, a policy analyst at Raymond James.

And the laundry list of potential threats remains lengthy, from a possible cyberattack to a hiccup in monetary policy to the bursting of the bitcoin bubble to the threat of a trade war, all of which could hurt financial system and corporate America alike.

But despite all of the possible things that could go wrong, things actually look OK for the moment, Mills said.

“The concern is well placed, but it is likely too early,” he added.

Still, the skeptics should take heart: Worrying is never a bad hedge. Whether the next crisis or recession is just around the corner or further out into the future, it’s sure to come.

Whether she realized it or not, Mary Callahan Erdoes, the CEO of asset and wealth management at JPMorgan Chase, may have summed up best the mixture of exuberance and angst that permeated the conference.

“There’s always things to worry about,” she said. “But not a lot until the middle of 2019.”