Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
127 Subscribers
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© Morgan Stanley & Co. LLC
Thoughts on the Market
127 Subscribers
Reviews
4.591397849462366 out of 5 stars
Based on 93 reviews
kdcarver
3 out of 5 stars
Concise and Monotonic
For investment and market professionals, this podcast gives a concise update and analysis of the market. Unfortunately for the novice investor, the script is filled with industry buzzwords / terminology, rendered in a flat, almost rushed manner, despite forced attempts by the host(s) at a jovial delivery.
realitystrikesback
1 out of 5 stars
Propaganda machine
Just put Joe Bidenâs face on the cover of your artwork and get it over with. Inflation is just in our minds. You people have turned into actual clowns. Shame on you.
Prometheus---
5 out of 5 stars
Great Mike Wilson teport
But please give MSâs most up to date consensus as to bottoms and end of year #
Xeens6s
5 out of 5 stars
Great insight in bite sized pieces
Really enjoy the quick and concise information passed on through this podcast. Excellent and essential listen!
MarioBours
5 out of 5 stars
Top Notch
Love this show. Great depth and thought in 3min. Listen to it everyday
RichardRaphael
5 out of 5 stars
Top Analysts
Mike Wilson has had the best equity price forecasts on Wall Street. Other MS analysts on the podcast are also first rate.
RoddyHere
1 out of 5 stars
No actionable insights
âWe recommend companies with idiosyncratic advantages and significant operating leverageâ - please tell me when thatâs not the case????
Falcon4CO
5 out of 5 stars
Quick hits for staying on top of mkts
Enjoy these on the daily commute, shorter frequent podcasts, geared towards those in investment industry.
Groovy Konky
5 out of 5 stars
A Must Listen for Serious Investors
I follow Mikeâs work very closely. Most importantly his assumptions on why his team believes in there market views. I have found his work to be extremely accurate. Anyone that takes a long term perspective in their investment strategy will see the brilliance of Mike and his team.
mattttyyice
5 out of 5 stars
The best 3-minute briefing
To me these guys are doing the best 3-minute briefing. I would be happier with a daily podcast though.
Linkinpark4all
5 out of 5 stars
Market Insight
Great insight by Mike Wilson and all! Thank you!!!
Steve O 64
5 out of 5 stars
On topic
I love the neat daily analysis provided by this podcast.
Boss507
1 out of 5 stars
Grizzly bear
Mike Wilson is so pessimistic lol
Alireza_S60
5 out of 5 stars
Very Informative
I am not a professional trader, but I found Thoughts on the marker very informative. What I like about the show is that each episode is a few minute and you can easily find a time during the day to listen.
don.co
5 out of 5 stars
Great analysis
I like the opinionated and thorough analysis. I also like the focus on macro economics. One of the best podcasts out there.
Love radio.
5 out of 5 stars
Mr. Marcus
I love the indebtedness, your present.
MAMCG53
4 out of 5 stars
Well worth a listen
Great podcasts, but some of these guys are really âwhistling past the graveyardâ latelyâŠ
SamPoliquin
5 out of 5 stars
Please go much slower!
This is interesting but dense content that Iâd be better able to absorb if the hosts spoke slower and the production cut in a bit more pauses. Thanks!
Samekkh
5 out of 5 stars
concise
all the stuff you need, delivered lean. Love it.
sussex Mike
5 out of 5 stars
Great listening
Enjoy each and every podcast
squidtropolis
5 out of 5 stars
All content, no fluff
More bang for your buck (or time) than any other financial podcast out there. No ad copy, no hypothesizing or proselytizing , just macro calls from actual investment banking leaders at Morgan Stanley.
Nighthawk237
5 out of 5 stars
Listen to every episode
Rich content and very well thought out viewpoints.
jmk355
5 out of 5 stars
Sign up
Deep thoughts in succinct fashion. High return on time invested
Athena11101985
3 out of 5 stars
Good content but indicative of the inequality in Wall Street
Thoughts on the market has great content in appropriate bite sized episodes to get the latest thinking of a big bank about the global markets.
Hartx6
5 out of 5 stars
Mike Wilson
Anytime you can listen for free to Mike Wilson take advantage of that. A must listen for anyone who wants to near what the top Wall Street analyst has to say about equities and macro view of markets
macspin
5 out of 5 stars
Stitcher
Please add to stitcher
yaymach
5 out of 5 stars
Amazing podcast
Could we get this added to stitcher please??
Don Shimoda
5 out of 5 stars
Concise, thoughtful and actionable
Thoughts on the Market is a must listen. The rotating team of strategists pack more market insight into just a few minutes than any other podcast iâve come across.
dunes baby
5 out of 5 stars
Good advice for retail investors
My daily updaon the world in business and perspective on investing
TheDinMan
5 out of 5 stars
The best show for financial insights
Super clear, digestible and succinct. Amazing what these guys can articulate in just a few minutes. This is a daily must.
KLSAustin1
5 out of 5 stars
Picking up a little more knowledge
I like to listen to the short update of the people who spend their careers researching. Iâm definitely a novice, but I can pick up good bits of new info.
t$ha
5 out of 5 stars
One of the best
I really enjoy these; short but thoughtful. Iâve subscribed to others from the usual suspects, and they range from good to not good, but this one is consistently varied, insightful and coupled with the FT, the Economist and a few others gives a great perspective to shape ones views.
JW5249
5 out of 5 stars
LOVE the cross asset team at MS!!
The cross asset team at MS is the absolute best!
stu1$
5 out of 5 stars
Good professional information
Keeps me up to speed on current issues across the markets. This podcast is at the top of my daily choices.
VivekBh
5 out of 5 stars
Excellent short take on the global markets
This is my go to podcast to get excellent insights, both short term, and long term, on the global markets by various experts. Love the short length of under 5 mins as well. Makes it super easy to listen everydayeven on short commutes or errand runs.
InsJavert
4 out of 5 stars
Informative
Provides timely, insightful, and specifically informative information an investor needs to understand the market.
pleaserain
5 out of 5 stars
Short & Impactful
Appreciate and enjoy these crisp & timely podcasts from Morgan Stanley
ViperFive!
5 out of 5 stars
Great show
Very informative and straight to the point
trav&mer
5 out of 5 stars
Compact straight to the point market info!
Compact straight to the point market info!
sagefire777
1 out of 5 stars
Surprised at the biased nature of this podcast
Guys, I have been listening to this podcast regularly. I know your narrative has been reflation stocks, cyclicals, defensive, and now Europe. What about tech?!? You guys totally missed the massive tech rally in June heading into earnings and continue to ignore it as if it hasnât happenedâŠprobably because you have to do a U-turn on your narrative and are unwilling to do so. Sadly you also donât invite your tech analysts to the podcast to give their views. Why did tech rally in June? As we head into Q2 earnings, investors know big tech will produce stellar results driven by secular tailwinds, inflation or not. Please try to provide a balanced perspective.
cydthemomma
5 out of 5 stars
Great start to my day
Succinctly informs me about a variety of topics which will impact the market and my investment decisions. Thank you
KELLYHCOBB
4 out of 5 stars
Needs more female thought leaders
Fantastic content. Would like to see more females leading discussions.
lcnyc1234
5 out of 5 stars
Great content
Super informative and thoughtful commentary. One of the best podcasts out there for cross-asset thoughts.
jayvaswani
5 out of 5 stars
Jay
The podcast is so amazing that it helps you to understand the big picture of different sectors rather than the regular focused news of the market.
UX Worker
1 out of 5 stars
What???
Great content. But some of the accents are very hard to understandâŠ
dayton44
4 out of 5 stars
Mike Wilson needs to slow down
Recently Mike has been reading much too fast.Please slow down. You are the best in the business so I am reluctant to be critical
RJ SC
5 out of 5 stars
Thoughts on the Market - very thoughtful
Enjoyed the show and appreciate the solid observations. I will use what I learn to make adjustments to my portfolio. Rosie J
LegioMartia
5 out of 5 stars
Great quick update on the Market
Thoughts on the Market is a quick yet very informative update.
CrestRd
5 out of 5 stars
Good Listen
Mike Wilson & Adam Jonas are awesome!
Go4dapin
5 out of 5 stars
Very informative
Short and always to the point!
sdfgghtgbb
5 out of 5 stars
notrade
super informative
Real Adam Smith
5 out of 5 stars
Thoughts on Thoughts on the Market...
New to the podcast. Find TOM to be clear, concise and very informative. Expect to be a daily listener based on the high quality episodes Iâve heard so far. Well done. Thanks.
good nicknanes are hard
5 out of 5 stars
Great resource
Sharp analysis and concise and accessible format. I learn a lot each time.
mikedsfsafas
5 out of 5 stars
Nobody better than Mike Wilson!
Thanks for the informative market knowledge and thought provoking episodes. Especially appreciate how often you guys post episodes.
forrest013
5 out of 5 stars
I donât miss a single episode...
Thanks for sharing your insights and for being willing to state your opinion (with data and research). I appreciate that this is not fluff or disguised marketing. You get down to details and address topics beyond the obvious and somehow say so much in such a short briefing each day. I look forward to listening to this podcast daily.
investor from india
5 out of 5 stars
Mike Wilson is the best!
With his long experience He is very knowledgeable and his insights are spot on
Buttons2424
5 out of 5 stars
Chetan Ahya is Awesome!
More of this guy please! Knows his stuff.
John Halcrow
5 out of 5 stars
Outstanding
Tremendous content....much appreciated.......Mike Wilson is the man
Bill#1!
4 out of 5 stars
Insightful
My #1 pod cast source for economic outlook.
ah1549bd
5 out of 5 stars
Good podcast
Concise and informative
dannyev
5 out of 5 stars
Excellent
Insightful, concise, digestible
Vageli13
5 out of 5 stars
Very insightful
Very informative podcast, I am a dedicated listener. Great job from a great company!
Charles in Ithaca
5 out of 5 stars
Practical insights
Thoughtful, tradable perspectives on market developments. Nobody can be right every time but in the year I have been listening to them this team has made some great calls. Definitely worth a listen.
johnmilnet
4 out of 5 stars
Good show - Hate the music
Keep the commentary and change the music.
Rdhess
5 out of 5 stars
I LIKE IT
I like it. Short and sweet. đđđ
The biy 223
5 out of 5 stars
Donât miss out
I love there breif review of current financial happenings
Viking X
5 out of 5 stars
Great listen
I like the format. Short to the point with some actionable ideas. So many of these podcasts go down the rabbit hole of uninteresting investing ideas
slsjrb
5 out of 5 stars
Great Information
Michael Wilson is always spot on and heâs a very intelligent leader! I thoroughly enjoy thoughts on the Market.
drshakal
5 out of 5 stars
No on the other hand economists here!
To the point
@cslaterms
5 out of 5 stars
Smart, Focused, Helpful
These are very well thought-through episodes, that are short, understandable and thus easily digestible, and have great take-aways.
JDel46
5 out of 5 stars
Love the Show. Love the New Logo
A+ all around!!!!
Church99
5 out of 5 stars
Great
Clear, concise, impartial and actually gives guidance. Everything I want!
MJJ15
5 out of 5 stars
Informative
Mike and team do a great job being concise and informative. I appreciate their insight and thought process into their views, leaving the listener with actionable investments.
Pdx345677
4 out of 5 stars
Wish the episodes were a bit longer
I like this but I wish it was something I could put on and listen to for 15, 20 or even 30 minutes instead of just quick 4-5 minutes. The best episodes are the Mike Wilson updates. The other ones are usually fairly esoteric and donât really often seem that helpful. Looking forward to see if improvements are made...
Ben232425
5 out of 5 stars
I Just Cut My Hair and it Wasnât Bad
Interesting episode on haircuts and inflation. Prices are going up for haircuts but why pay? After watching YouTube tutorials for other parts of my life I decided to try it with my hair. No I didnât shave my head but gave myself a normal menâs haircut with affordable buzzers and free YouTube. Plus if I messed up I didnât need to go into the office the next day...just a thought. Perhaps there are other trends that are on the rise...
MSavola
5 out of 5 stars
Michael Zezas: Case for optimism
Podcast reminds us that information will evolve and to stay vigilant
tee.go
5 out of 5 stars
Thought provoking snippets on economic trends
Great podcast with nuggets of economic insight digestible no matter your base level of economic or investment experience.
tim_sullivan
2 out of 5 stars
Hamilton Episode
Review of the episode on the Legacy of Hamilton. Itâs quite laughable that Hamilton would support the massive federal spending and the federal government assuming all blue state debt incurred from unsustainable social services. Federal government assumed the war debt of the states, which is in the purview of federal responsibility. Just read any of Hamiltonâs writings and youâd know he wouldnât support carte blanche government spending.
nsfddjpp
5 out of 5 stars
Great Market Wrap
Great Market Wrap by Mike Wilson and team.
bgphish
5 out of 5 stars
Timely and informative
Very timely and informative whether you invest with Morgan Stanley or not. Regular, concise episodes are very helpful. The one on negative interest rates explained a confusing subject in a very clear way. Highly recommend
MikeM5454
5 out of 5 stars
Mike Wilson & Thoughts on the Market
Iâve searched for a reliable source for financial market analysis for many years. I stumbled across Mike Wilsonâs podcasts a couple of years ago and find he and his team to be in sync with future trends much more than anyone else Iâve ever followed. Most pundits have too much of a bias either to the bearish or bullish viewpoint. Morgan Stanley is willing to state a bearish view when warranted (see their call right before the steep downturn in December of 2018). They have also made very sound and well thought out calls when it makes sense to be bullish, and are not afraid to make neutral calls when appropriate. Along with following market breadth through the McClellan Oscillator (and reading Tom McClellanâs posts) I find these two sources of information to be about all I need to have a good general understanding of why the markets are where they are and where theyâre likely to go in the future. I hope these Morgan Stanley podcasts continue to be offered to the general public.
MattJamesMoran
5 out of 5 stars
Mike Wilson ...loved working with you
And thoroughly enjoy your market commentary. But the equity market has not bottomed. And even with the Fed buying IG credit, it cannot prevent defaults nor the downgrades that are coming.
jonny5-alive
5 out of 5 stars
Excellent Market Update
Grateful for this kind of quick and detailed update. Thank you for condensing all the noise out there into a digestible presentation of facts to make informed decisions.
MSclient
5 out of 5 stars
Impressive, smart and timely
Terrific market update with thoughtful and informed explanation
LizIsland
5 out of 5 stars
Really Good Summary
Good thoughtful quick summary. Good information, not sales-y.
A.Preston
3 out of 5 stars
Good info, more to be desired
You guys always have good info but thereâs always a general looming sense of doubt and uncertainty after listening to the podcast. Not that we want you to constantly paint a rosy picture, but I usually feel uneasy and unconfident listening to the podcast each time...
Jclandi
5 out of 5 stars
Michael Wilson is great
I worked at MS for 2 years. Michael Wilson is the best!
newt430
5 out of 5 stars
Timely market commentary
Useful 3 minute episodes with timely market commentary from Morgan Stanleyâs thought leaders.
Dloog
3 out of 5 stars
Are markets over reacting to the corona virus?
He poses a question and talks all around it.
tnbaier
5 out of 5 stars
Excellent Thought Leadership from an Excellent Team
Thoughts on the Market is the perfect, bite-sized commentary on current events and strategies effecting the economic outlook and investment landscape. I enjoy the frequent & concise format and find it very educational in understanding Morgan Stanleyâs high-quality analysis of what I need to know in order to be an informed, long-term investor. Well worth your time and attention to unpack each episode.
Fintan the leftie
5 out of 5 stars
Great analysis, thank you
Thank you all for the excellent work you do on these podcasts. Theyâre thoughtful, interesting and well-articulated (with an appropriate dose of humour when needed). I especially enjoy Mike Wilsonâs commentary - well done Mike and thank you.
Hoanandonly
5 out of 5 stars
Mike Wilson
I just want to thank you guys for continuously posting thoughts on the market especially mike Wilson. I have learned a lot and his analysis have helped me tremendously. Hope to meet with you one day Mike . Keep up the great work
Pods4Life
5 out of 5 stars
Digestable and insightful
Love these 3 min updates on the market. Very easy to listen to since they are short and to the point.
Podcast information
- Amount of episodes
- 717
- Subscribers
- 127
- Verified
- No
- Website
- Explicit content
- No
- Episode type
- episodic
- Podcast link
- https://podvine.com/link/..
- Last upload date
- October 6, 2022
- Last fetch date
- October 7, 2022 6:26 PM
- Upload range
- DAILY
- Author
- Morgan Stanley
- Copyright
- © Morgan Stanley & Co. LLC
susbcribers
- U.S. Housing: Are Home Prices Decelerating?As month over month data begins to show a downturn in home prices, will overall price growth and sales begin to fall steeper than expected? Co-Heads of U.S. Securitized Products Research Jim Egan and Jay Bacow discuss. -- Transcript -- Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-head of U.S. Securitized Products Research here at Morgan Stanley. Jay Bacow: And I'm Jay Bacow, the other Co-head of U.S. Securitized Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing why home prices could turn negative in 2023. It's Thursday, October 6th, at 3 p.m. in New York. Jay Bacow: Jim, it seems like every month the housing data is getting worse when we look at the sales activity. But, now I think I just saw something about home prices falling? What's going on there? I thought we call it home price appreciation, now we're seeing home price depreciation? Jim Egan: There is a lot going on out there. There's a lot of volatility, things are moving fast, and yes, there are home price indices that are showing negative numbers. I would caveat that a lot of those negative numbers are month over month, not the year over year that we've typically talked about here. But that doesn't mean it isn't important. Jay Bacow: In the past we've talked about this bifurcation narrative where we were going to get a big drop in home sales and housing starts, which we've seen, but home prices were more protected. Do you still believe that? Jim Egan: We do still believe in the bifurcation narrative, but the levels of the forecasts have changed, and they've changed for a couple of reasons. I think one reason is that there have been a number of forecast changes, expectations for 2023 are different. Our U.S. economics team has raised their hiking forecast 25 basis points in each of the next three meetings, and our interest rate team on the back of that forecast change has moved up their expectations for the 10 year Treasury. What that move means for us is that the incredible affordability deterioration that we've seen, probably isn't going to get a whole lot better next year. And that's happening in a world in which you mentioned some home prices turning negative. The home price deceleration that we were calling for, from plus 20% all the way down to plus 3% at the end of next year, that relied upon or I can say we expected home prices to fall month over month, but we thought that was going to start in September. It started in July. Sales volumes have been coming in weaker than we thought they would. When we take that weaker than expected housing data, we marry that with different expectations for affordability next year, the forecasts have to change. Jay Bacow: And so what exactly are we forecasting for this year and next year? Jim Egan: So in this world, we do think that sales are going to fall steeper than we thought. We think that starts are going to fall steeper than we thought, and that next year a single unit starts are going to be lower in 2023 than they were in 2022. We had originally been forecasting a return to growth in 2023, but the change to the forecast that's getting the most attention is that we went from plus 3% year over year growth in December of 2023 to -3% year over year growth by the end of next year. Jay Bacow: So if I buy a house today, it might be lower a year from now? That seems worrisome. Jim Egan: Yes. And I think there is a positive and a negative headline to that, right. The negative headline, the worrisome, if you will, that you mentioned is that not only is it down 3% next year, but that's down 7% from where we are right now. The positive headline is that even with that decrease in home prices from today, that only brings us back to January of 2022. That's 32% above where they were in March of 2020. Jay Bacow: All right, that doesn't seem so bad, given that stocks are a lot lower than where they were in January of 2022. So it's more stalling out than a real correction in home prices. But, why wouldn't home prices fall further from there? Jim Egan: We haven't seen anything in the data that changes kind of the underlying narrative that we've been discussing on this podcast in the past. In particular, two things. The first is how robust credit standards have been. If anything, lending standards, which were pretty tight to begin with in the first quarter of 2020, have tightened substantially since then. What that means, again, it constrains sales volumes. We think sales are going to fall more than home prices, but it also means that the likelihood of defaults and foreclosures is limited. And it is those distressed transactions, those forced sellers that we would need to see a leg down in prices. The other point is, away from defaults and foreclosures, actual inventory is still incredibly low. And because current homeowners sit on 30 year fixed rate mortgages, well below the current mortgage rate, when we talk about affordability deteriorating, we're not talking about it deteriorating for current homeowners. They're much more likely to stay in their home, much less likely to list their home for sale, they're not going to be selling into depressed bids. So that credit availability and those tight lending standards, we think that keeps home prices supported. Jay Bacow: So home prices are protected because we're not going to get the forced sellers that we saw during the financial crisis and the fundamentals of the housing market are in much stronger footing. What would actually get you, though, to forecast more of a real correction than just the stalling out? Jim Egan: I'm going to make this really complicated and say the supply and demand. If demand were to be weaker than we already think it is, and that could happen because the historic deterioration we've seen in affordability has a bigger impact than we think it will. Maybe because the unemployment rate picks up faster than we're expecting it to next year. If you have a much weaker demand environment than we're already envisioning, and you combine that with more supply, perhaps people who'd be a little bit more willing to part with their home at slightly lower prices than we expect them to, people who've owned their home for 10, 15, 20 years and might be looking to downsize. That's where you might have a little bit more of a marriage between uneconomic sellers and depressed demand that could bring home prices lower than we expect. Now, how does all of that, if we think about the implications to investors, what does all that mean for the MBS market? Jay Bacow: I'm going to make this really complicated, too. A lot of it comes down to supply and demand. The lack of housing activity and the lower home prices means that there's going to be less supply for mortgage investors to buy. That's good for the mortgage market. The rapid increase in unaffordability has been because of the rapid increase in implied volatility, which is bad for mortgage investors. This has brought nominal spread to the Treasury curve for agency mortgages to levels that are basically at the post GFC wides. And we think that move is a little bit overdone. And so for institutional investors we think this is an opportunity to own agency mortgages versus treasuries as a way to fade some of these moves, and take advantage of some of the more forward looking supply projections that we think will be coming as supply slows down. Jay Bacow: But Jim, it's always great talking to you. Jim Egan: Great talking to you too, Jay. Jay Bacow: And thank you for listening. If you enjoy Thoughts on the Market, please leave us a review on the Apple Podcast app and share the podcast with a friend or colleague today.0 comments0
- Michael Zezas: Shifting Global Supply ChainsAs globalization slows and companies begin to nearshore their supply chains, investors may be wondering what the costs and benefits are of bringing manufacturing back home. Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasuryâs Office of Foreign Assets Control (âOFACâ), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly informational, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions. -- Transcript -- Welcome the Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, October 5th, at 10 a.m. in New York. We speak often here about the themes of slowing globalization, or slowbalization, and the shift to a multipolar world. It's important to understand these megatrends, as they will likely impact global commerce for decades to come and in many ways we cannot yet anticipate. But one impact we have anticipated is multinational companies spending money to shift their supply chains. Whereas globalization meant companies could focus on lowering their labor and transportation costs through 'just in time' logistics, 'just in case' logistics are the watchword of the multipolar world. Companies will have to invest money to nearshore or friend shore to protect their supply chains from seizing up due to geopolitical conflicts, be it war, such as Russia invading Ukraine leading to sanctions, or the proliferation of policies by Western governments, preventing companies from producing and/or sourcing sensitive technologies overseas. Now, we're increasingly seeing evidence that this dynamic is already at play. Take Apple, for example, which, according to the Wall Street Journal, recently released a supplier list showing that in September of 2021, 48 of its suppliers had manufacturing sites in the U.S., up from 25 just a year before. The article goes on to cite several semiconductor chip makers who have recently opened US based sites. One company recently agreed to invest as much as $100 billion in a semiconductor manufacturing facility in upstate New York. Another announced plans to invest $20 billion for chip factories in Ohio. So it's clear that companies are starting to respond to geopolitical incentives. The long term public policy benefits of these moves could prove to be quite sound, but in the short term they're a challenge to markets. These investments cost money and represent elevated costs relative to what these companies would have enjoyed had the geopolitical environment not become more challenging. That means investors have to price in yet another margin pressure on top of the ones our colleague Mike Wilson continues to highlight in U.S. equities, from labor costs and the fed hiking rates to engineer slower economic growth. So bottom line for investors, shifting to a new geopolitical world order may be necessary, but it will cost something along the way. And for the moment, that means extra pressure on a U.S. equity market that's already got its fair share. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.0 comments0
- Vishy Tirupattur: Can Corporate Credit Provide Shelter?With investors becoming pervasively bearish on stocks and bonds in the face of a worsening growth outlook, can the U.S. investment grade credit market provide shelter from the storm? -- Transcript -- Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Global Director of Fixed Income Research. Along with my colleagues, bringing you a variety of perspectives, today I'll share why corporate credit markets may be a sheltering opportunity amid current turbulence. It's Tuesday, October 4th, at 11 a.m. in New York. At a September meeting, the Federal Open Market Committee delivered a third consecutive 75 basis point rate hike, just as consensus had expected. The markets took this to mean a higher peak and a longer hiking cycle, resulting in sharp spikes in bond yields and a sell off in equities. At the moment, both 2 and 10 year Treasury yields stand at decade highs, thanks to pervasively bearish sentiment among investors across both stocks and bonds. As regular listeners may have heard on this podcast, Morgan Stanley's Chief Global Economist, Seth Carpenter, has said that the worst of the global slowdown is still likely ahead. And our Chief U.S. Equity Strategist, Mike Wilson, recently revised down his earnings expectations for U.S. equities. Navigating this choppy waters is a challenge in both risk free and risky assets due to duration risk in the former, and growth or earnings risks in the latter. Against this backdrop, we think the U.S. investment grade corporate bonds, IG, particularly at the front end of the curve, which is to say 1 to 5 year segment, could provide a safer alternative with lower downside for investors looking for income, especially on the back of much higher yields. But investors may wonder, wont credit fundamentals deteriorate if economy slows, or worse, enters the recession and company earnings decline. Here is where the starting point matters. After inching higher in Q1, median investment grade leverage improved modestly in the second quarter and is well below its post-COVID peak in the second quarter of 2020. Gross leverage is roughly in line with pre-COVID levels. Notably, while median leverage is back to pre-COVID levels, the percentage of debt in the leverage tail has declined meaningfully. But if earnings were to decline, as our equity strategists expect, leverage ratios may pick back up. That said, interest coverage is the offsetting consideration. Given the amount of debt that investment grade companies have raised at very low coupons over the years, their ability to cover interest has been a bright spot for some time. Despite sharply higher rates, median interest coverage improved in the second quarter and is around the highest levels since early 1990. This modest improvement in interest coverage comes down to the fact that even though yields on new debt are higher than the average of all outstanding debt, the bonds that are maturing have relatively high coupons. Therefore, most companies have not had to refinance at substantially higher funding levels. In fact, absolute dollar level of interest expense paid out by IG companies actually declined in the quarter and is now well below the peaks of 2021. With limited near-term financing needs, higher rates are unlikely to dent these very healthy interest coverage ratios. The combination of strong in-place investment grade fundamentals, relatively low duration for the 1 to 5 year segment and yields at decade highs, suggests that this part of the credit market offers a relatively safe haven to weather the storms that are coming for the markets. History provides some validation as well. Looking back to the stagflationary periods of 1970s and 80's, while we saw multiple decisions and volatility in equity markets, IG credit was relatively stable with very modest defaults. And while history doesn't repeat, it does sometimes rhyme, so we look to the relative safety of IG credit once again in the current environment. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.0 comments0
- Mike Wilson: The Problem with the U.S. DollarWith rates and currency markets experiencing increasing volatility, the state of global U.S. dollar supply has begun to force central bank moves, leaving the question of when and how the Fed may react up for debate. -- Transcript -- Welcome to Thoughts on the market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, October 3rd, at 11 a.m. in New York. So let's get after it. The month of September followed its typical seasonal pattern as the worst month of the year, and given how bad this year has been, I don't say that lightly. But as bad as stocks have been, rates and currency markets have been even more volatile. With volatility this severe, some of the cavalry has been called in. The Bank of England's surprise move last week was arguably necessary to protect against a sharp fall in U.K. bonds. Some may argue the U.K. is in a unique situation, and so this doesn't portend other central banks doing the same thing. However, this is how it starts. In other words, investors can't be as adamant the Fed will choose or be able to follow through on its tough talk. Like it or not, the world is still dependent on U.S. dollars, which provide the oxygen for global economies and markets. Former U.S. Treasury Secretary John Connolly's famous quote that "the dollar is our currency, but it's your problem" continues to ring true. It's also one of the primary reasons why several countries have been working so hard to de-dollarise over the past decade. The U.S. dollar is very important for the direction of global financial markets, and this is why we track the growth of global dollar supply so closely. In fact, the primary reason for our mid-cycle transition call in March of 2021 was our observation that U.S. dollar money supply growth had peaked. Indeed, this is exactly when the most speculative assets in the marketplace peaked and began to suffer. Things like cryptocurrencies, SPACs, recent IPOs and profitless growth stocks trading at excessive valuations. Now we find global U.S. dollar money supply growth negative on a year over year basis, a level where financial and economic accidents have occurred historically. In many ways, that's exactly what happened in the U.K. bond market last week, forcing the Bank of England's hand. There are many reasons why a U.S. dollar liquidity is so tight; central banks raising rates and shrinking balance sheets, higher oil prices and inflation in many goods bought and sold in dollars, incremental regulatory tightening and lower velocity of money in the real economy as activity dries up in critical areas like housing. In short, U.S. dollar supply is tight for many reasons beyond Fed policy, but only the Fed can print the dollars necessary to fix the problem quickly. We looked at the four largest economies in the world, the U.S., China, the Eurozone and Japan, to gauge how much U.S. dollar liquidity is tightening. More specifically, money supply in U.S. dollars for the Big Four is down approximately $4 trillion from the peak in March. As already mentioned, the year over year growth rate is now in negative territory for the first time since March of 2015, a period that immediately preceded a global manufacturing recession. In our view, such tightness is unsustainable because it will lead to intolerable economic and financial stress, and the problem can be fixed very easily by the Fed if it so chooses. The first question to ask is, when does the U.S. dollar become a U.S. problem? Nobody knows, but more price action of the kind we've been experiencing should eventually get the Fed to back off. The second question to ask is, will slowing or ending quantitative tightening be enough? Or will the Fed need to restart quantitative easing? In our opinion, the answer may be the latter if one is looking for stocks to rebound sustainably. Which leads us to the final point of this podcast - a Fed pivot is likely at some point given the trajectory of global U.S. dollar money supply. However, the timing is uncertain and won't change the downward trajectory of earnings, our primary concern for stocks at this point. Bottom line, in the absence of a Fed pivot, risk assets are likely headed lower. Conversely, a Fed pivot, or the anticipation of one, can still lead to sharp rallies like we are experiencing this morning. Just keep in mind that the light at the end of the tunnel you might see if that happens, is actually the train of the oncoming earnings recession that even the Fed can't stop. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.0 comments0
- Global Macro: Intervention & InflationAmidst increased volatility across credit, equity and FX markets, many investors this week are wondering, what is the path ahead for Fed intervention? Chief Cross Asset Strategist Andrew Sheets, Global Chief Economist Seth Carpenter and Head of Thematic and Public Policy Research Michael Zezas discuss. -- Transcript -- Andrew Sheets: Welcome to Thoughts in the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Seth Carpenter: And I'm Seth Carpenter. Morgan Stanley's Global Chief Economist. Michael Zezas: And I'm Michael Zezas, Head of Global Thematic and Public Policy Research. Andrew Sheets: And on this special edition of the podcast, we'll be talking about intervention, inflation and what's ahead for markets. It's Friday, September 30th at 9 a.m. in San Francisco. Michael Zezas: So, Andrew, Seth, we've been on the road all week seeing clients and that's come amidst some very unusual moves in the markets and interventions by a couple of central banks. Andrew, can you put in a context for us what's happened and maybe why it's happened? Andrew Sheets: Thanks, Mike. So I think you have the intersection of three pretty interesting stories that have been happening over the last couple of weeks. The first, and probably most important, is that core inflation in the U.S. remains higher than the Federal Reserve would like, which has kept Fed policy hawkish, which has kept the dollar strong and U.S. yields moving higher. Now, one of the currencies that the dollar has been strongest against is the Japanese yen, which has fallen sharply in value this year. Now we saw Japan finally intervene into the currency markets to a limited extent to try to support the yen but that support was short lived and we saw the dollar continue to strengthen. The other story that we saw occurred in the U.K., a country we discussed on this podcast recently about some of its unique economic challenges. The U.K. has also seen a weak currency against the dollar. But in addition to that, because of the market's reaction to recent fiscal policy proposals, we saw a very large rise in U.K. bond yields, which caused market dislocations and pushed the Bank of England to intervene in bond markets in a way that drove some of the largest moves in U.K. interest rates, really in recorded history. So a lot's been going on, Mike, it's been a very busy couple of weeks, but it's a story at its core about inflation leading to intervention, but ultimately not really changing a core backdrop of higher U.S. yields and a stronger U.S. dollar. Seth Carpenter: I completely agree with you on that, Andrew. And I think it brings up some of the questions that you and I have got in our client meetings this week, which is, 'where can this end?' Any trend that's not sustainable won't last forever, as the saying goes. So what would cause sort of an end to the dollar's run? And I think a natural place to look is, what would cause the Fed to stop hiking? I think the first thing that's worth strongly emphasizing is, from the Fed's perspective, a narrow monetary policy mandate, the rising dollar is actually a good thing. A stronger dollar means lower imported inflation. A stronger dollar means less demand for U.S. exports from the rest of the world. The Fed is fighting inflation by hiking interest rates, trying to slow the economy and thereby reduce inflationary pressures. Right now, this run in the dollar is doing their job for them. Michael Zezas: I would add to that that we've been getting a lot of questions about, 'when would the Fed or the Treasury see this weakness and want to intervene on behalf of markets?' And I think the answer is it's unlikely to happen anytime soon. And there's really kind of two reasons for that. One, doing so would contradict the Fed and the Treasury's own stated goals of fighting inflation right now. I think there are heavy political and policy incentives that haven't changed that support that being the policy direction for those institutions. And then the second is, even if you intervened right now, our FX research team has pointed out it's probably unlikely to work. At the moment, there aren't a tremendous amount of FX reserves in the system with which to intervene. And so any intervention would probably deliver short term results. So long story short, if the intervention is against your goals and wouldn't likely work anyway, it's probably not going to happen. So, Andrew, I think this kind of brings the conversation back around to you. If there really isn't going to be any net change in the Federal Reserve's stance towards monetary policy, then what should investors expect going forward? Andrew Sheets: So at the risk of sounding simplistic, if we're not going to see a change in policy response from the Fed, then we shouldn't expect a major change in market dynamics. Core inflation remains higher than we think the Fed is comfortable with. That will keep pressure on the Fed to keep making hawkish noises that should keep upward pressure on the front end of the curve and keep the curve quite inverted. We think that helps support the dollar because while the dollar might be expensive in many measures of foreign exchange valuation, the dollar is still paying investors much more than currencies like the yen or the UK pound in real interest rates. And that differential is powerful, that differential is important. And I think that differential will keep investors looking for the safety and stability and higher yields of the U.S. dollar. Look, taking a step back, I think markets are adjusting to this dynamic where the Fed is not your friend as an investor. Which is the pattern that we saw through most of financial market history, but was different in the post global financial crisis era, when the level of stress on the markets was so severe that the level of policy support had to be extraordinary. And so that is a dynamic that's shifting now that we're facing a stronger economy, now that we're facing much stronger consumer and corporate demand, we're facing the more normal tradeoff where strong labor markets, strong consumer demand leads to a Federal Reserve that's really trying to tighten the reins and slow the economy down, slow financial market activity down. So, you know, investors are still sailing into that headwind. We think that presents a headwind to risky assets. We think that presents a headwind to the S&P 500. And we think, with the Fed still sounding quite serious on inflation, still erring on the side of caution, that will lead investors to continue to think more rate hikes are possible and support the U.S. dollar against many other currencies in the developed market, which still have lower yields, especially on an inflation adjusted basis. Seth Carpenter: So, Andrew, I think I want to jump in on that because I think what you're saying is, for now, nothing's changing and so we should expect the same market dynamics. Which brings up the question that you and I have got this week as we've been seeing clients, which is, 'what would cause the Fed to pivot? What would cause the Fed to change its policies?' And I think there, I would break it into two parts. Going back to my first point about what the rising interest rates and the rising dollar have been doing, they've been doing exactly what the Fed wants, limiting demand in the United States, slowing growth in the United States, and, as a result, putting downward pressure on inflation. If we get to the point where the US economy is clearly slowing enough, if we get data that is convincing that inflation is on a downward trajectory, that's what the Fed is looking for to pause their hiking cycle. So I think that's the first answer. The other version, though, is the market volatility that we're seeing is being driven by some of this policy action. We could get feedback loops, we could get increasing bouts of volatility where markets start to break, we could get credit markets breaking, we could get more volatility and interest rate markets like we saw in the U.K.. I think at some point we can see where there's a feedback loop from financial market disruptions globally that threatens the United States. And at some point, that kind of feedback could be enough to cause the Fed to take a pause. Andrew Sheets: So Seth, that's a great point. And actually, I want to push you on specifics here. How do you and the economics team think about a scenario where, let's say inflation is 3/10 lower than expected next month, or where we go from a very strong level of reading in the labor market? What would be an indication of the type of market stress that the Fed would care about relative to something it would see as more the normal course of business? Seth Carpenter: I don't think one month's worth of data coming in softer than forecast would be enough to completely change the Fed's mind, but it would be enough to change the Fed's tone. I think in those circumstances, if both nonfarm payrolls and CPI came in substantially below expectations, you would hear Chair Powell at the November meeting saying things like, 'We got some data that came in softer and for now, we're going to monitor the data to see if this same downward trajectory continues.' I think that kind of language from Powell would be a signal that a pivot is probably closer than you might have thought otherwise. Conversely, when it comes to financial markets, I think the key takeaway is that it has to be the type of financial market disruptions that the Fed thinks could spill back to the U.S. and hurt overall growth enough to slow the economy, to bring inflation down. Credit market disruptions are a key issue there. Sometimes we've seen global risk markets and global funding markets get disrupted. I think it's very hard to say ex-ante what it would take. But the key is that it would have to be severe enough that it would start to affect U.S. domestic markets. Andrew Sheets: So, Seth, Mike, it's been great to talk to you. So just to wrap this up, we face a backdrop where inflation still remains higher than the Federal Reserve would like it. We think that keeps policy hawkish, which keeps the dollar strong. And even though we've seen some market interventions to a limited degree, we don't see much larger interventions reversing the direction of the dollar. And we don't think such interventions, at the moment, would be particularly effective. We think that keeps the dollar strong and we think that means headwinds for markets, which leaves us cautious on risky assets in the near term. As always, this is a fast evolving story and we'll do our best to keep you up to date on it. Andrew Sheets: Thanks for listening. 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- Jonathan Garner: An Unusual Cycle for Asia and EM EquitiesAsia and EM equities are on the verge of the longest bear market in their history, so what is the likelihood that a sharp fall in prices follows soon after? -- Transcript -- Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market Equity Strategist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing the ongoing bear market in Asia and Emerging Market equities. It's Thursday, September the 29th at 8 a.m. in Singapore. We have repeatedly emphasized that patience may be rewarded during what will likely, by the end of this month, become the longest bear market in the history of Asia and Emerging Market equities. Indeed, we argued that the August Jackson Hole speech by Fed Chair Powell, and the mid-September upside surprise in U.S. CPI inflation likely accelerated a downward move towards our bear case targets near term. And in recent weeks, the MSCI Emerging Markets Index has indeed given back almost all of the gains it had recorded from the COVID recession lows. To our mind, this raises the likelihood that a classic capitulation trough, a sudden sharp fall in prices and high trading volumes, could be forming in a matter of weeks. Now, all cycles are not made alike, and this one is unusual in a number of key regards. Most notably, the dislocations in the supply side of the global economy caused by COVID and geopolitics. Moreover, China is not easing policy to the same extent as helped generate troughs in late 2008 and early 2016. Thus, caution is warranted in drawing too firm a set of conclusions from relationships that have held in the past. That said, by the end of this month, the current bear market will likely become the longest in the history of the asset class, overtaking in days duration that triggered by the dot com bust in the early 2000's. And after a more than 35% drawdown, the MSCI Emerging Markets Index is now trading close to prior trough valuations at only 10x price to consensus forward earnings. Our experience covering all previous bear markets back to 1997/1998 suggests to us ten sets of indicators to monitor. We've recently undertaken an exercise to score each indicator from 1, which equates to a trough indicator not enforced at all to 5, which indicates a compelling trough indicator already in place. Currently, the sum of the scores across the factors is 32 out of a maximum of 50, which we view as suggesting that a trough is approaching but not yet fully conclusive at this stage. In our view, the U.S. dollar, which continues to rise, including after the most recent FOMC meeting, gives the least sign of an impending trough in EM equities. Whilst the underperformance of the Korean equity market and the semiconductor sector, the recent sharp fall in oil price and the fall in the oil price relative to the gold price give the strongest signs. In this regard, we would note that within our coverage we recently downgraded the energy sector to neutral, upgrading defensive sectors, including telecoms and utilities. We intend to update the evolution of these indicators as appropriate as we attempt to help clients move through the trough of this unusually long Asia and Emerging Markets equity bear market. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and recommend Thoughts on the Market to a friend or colleague today.0 comments0
- Ellen Zentner: The Narrowing Path for a Soft LandingAs the Fed continues to increase their peak rate of interest, the path for a soft landing narrows, so what deflationary indicators need to show up in the real economy to take the pressure off of policy tightening? -- Transcript -- Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss the narrowing path for a soft landing for the U.S. economy. It's Wednesday, September 28, at 10 a.m. in New York. Last week, we revised our outlook to reflect the expectation that the Fed will take its policy rate to a higher peak between 4.5% to 4.75% by early next year. And that's 75 basis points additional tightening than what we had envisioned previously. Tighter policy should push the real economy further below potential and substantially slow job gains. And while higher interest rates are needed to create that additional slack in the economy, this dynamic raises the risk of recession. There's still a path to a soft landing here, but it seems clear to us that path has narrowed. Now beyond directly interest sensitive sectors such as housing and durable goods, we've seen little evidence that the real economy is responding to the Fed's policy tightening. Just think about how strong monthly job gains remain in the range of 300,000. So in the absence of a broader slowdown, and facing persistent core inflation pressures such as a worrisome acceleration in rental prices, the Fed is on track to continue tightening at a faster pace than we had originally anticipated. Looking to the November meeting, we expect the Fed to hike rates by 75 basis points, and then begin to step down the pace of those rate hikes to 50 basis points in December and 25 basis points in January. We then expect the Fed to stay on hold until the first 25 basis point rate cut in December 2023. While inflation has remained stubborn, the growth environment has softened, and the lagged effect of monetary policy on economic activity points to further slowing ahead. So in response to substantially more drag from higher interest rates, we've lowered our 2023 growth forecast to just 0.5%. We then think a mild recovery sets in in the second half of 2023, but growth remains well below potential all year. In our forecast, weakness in economic activity will be spread more broadly, and monetary policy acts with a 2 to 3 quarter lag on interest rate sensitive sectors such as durable goods. So the sharper slowdown we envision in 2023 predominantly reflects a downshift in consumption growth. Business investment also tends to respond with a lag and will become a negative for growth in the first half of 2023. With growth falling more rapidly below potential, the labor market is on track to follow suit. We now see job gains bottoming at 55,000 per month by the middle of 2023. Lower job growth in combination with a rising participation rate, lifts the unemployment rate further to 4.4% by the end of next year. Inflation pressures have still not turned decisively lower, in particular because of rising shelter costs. High frequency measures point to eventual deceleration, though it should be gradual, even as the labor market loosens on below potential growth. We see core PCE inflation at 4.6% on a year over year basis in the fourth quarter of this year, and slow to 3.1% year over year in the fourth quarter of next year. So inflation is a good deal lower by the end of next year, but that's still too high to allow for rate cuts much before the end of 2023. Turning to risks, we think the risk to the outlook and monetary policy path now skew to the downside and a policy mistake is coming into focus. At the Fed's current pace of tightening uncertainty as to how the economy will respond a few months down the line is high. The labor market tends to be slow moving, but we and frankly monetary policymakers have no experience with interest rate changes of this magnitude. And activity could come to a halt faster than expected. Essentially, the higher the peak rate of interest the Fed aims for, the greater the risk of recession. We are already moving through sustained below potential GDP growth. We now need to see job gains slow materially over the next few months to ease the pressure on the pace of policy tightening. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.0 comments0
- Martijn Rats: Will Oil Prices Continue to Fall?While the global oil market has seen a decrease in demand, supply issues are still prevalent, leaving investors to question where oil prices are headed next. -- Transcript -- Welcome to Thoughts on the Market. I'm Martijn Rats, Morgan Stanley's Global Commodity Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss the current state of the global oil market. It's Tuesday, September 27th, at 2 p.m. in London. U.S. consumers have no doubt noticed and appreciated a welcome relief from the recent pain at the gas pump. Up until last week, U.S. gas prices had been sinking every day for more than three months, marking the second longest such streak on record going back to 2005. This gas price plunge in the U.S. was driven in part by the unprecedented releases of emergency oil by the White House. But what else is happening globally on the macro level? Looking at the telltale signs in the oil markets, they tell a clear story that physical tightness has waned. Spot prices have fallen, forward curves have flattened, physical differentials have come in and refining margins have weakened. A growth slowdown in all main economic blocks has pointed to weaker oil demand for some time, and this is now also visible in oil specific data. China has been a particularly important contributor to this. However, prices have also corrected substantially by now. Adjusted for inflation, Brent crude oil is back below its 15 year average price. In this context, the current price is not particularly high. Also, the Brent futures curve has in fact flattened to such an extent that current time spreads would have historically corresponded with much higher inventories expressed in days of demand. That means, in short, that the market structure is already discounting a significant inventory built and/or a large demand decline. Then there is still meaningful uncertainty over what will happen to oil supply from Russia once the EU import embargo kicks in later this year for crude oil, and early next year for oil products. The EU still imports about three and a half million barrels a day of oil from Russia. Redirecting such a large volume to other buyers, and then redirecting other oil back to Europe is possible over time, but probably not without significant disruption for an extended period. For a while, we suspect that this will lead to a net loss of oil supply to the markets in the order of one and a half million barrels a day. To attract enough other oil to Europe, European oil prices will need to stay elevated. The relative price of oil in Europe is Brent crude oil. Elsewhere, there are supply issues too. We started off the year forecasting nearly a million barrels a day of oil production growth from the United States. But so far this year, actual growth in the first six months of the year has just been half that level. We still assume some back end loaded growth later this year, but have lowered our forecast already several times. Then Nigerian oil production has deteriorated much faster than expected, currently at the lowest level since the early 1970s. Kazakhstan exports via the CBC terminal are hampered, OPEC's spare capacity has fallen to just over 1%, and the rig count recovery in the Middle East remains surprisingly anemic. The long term structural outlook for the oil market still remains one of tightness, but for now this is overshadowed by cyclical demand challenges. As long as macroeconomic conditions remain so weak, oil prices will probably continue to linger on. However, that should not be taken as a sign that the structural issues in the oil market around investment and capacity are solved. As we all know, after recession comes recovery. Once demand picks up, the structural issues will likely reassert themselves. We have lowered our near-term oil price forecast, but still see a firmer market at some point in 2023 again. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts, and share Thoughts on the Market with a friend or colleague today.0 comments0
- Mike Wilson: A Sudden Drop for Stocks and BondsAfter last weekâs Fed meeting and another rate hike, both stocks and bonds dropped back to June lows. The question is, will this turn to the downside continue to accelerate? -- Transcript -- Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, September 26, at 11 a.m. in New York. So let's get after it. Last week's Fed meeting gave us the 75 basis point hike most investors were expecting, and similar messaging to what we heard at Jackson Hole a month ago. In short, the Fed means business with inflation and is willing to do whatever it takes to combat it. So why was there such a dramatic reaction in the bond and stock markets? Were investors still hoping the Fed would make a dovish pivot? Whatever the reason, both stocks and bonds are right back to their June lows, with many bellwether stocks and treasuries even lower. As we wrote a few weeks ago, we think investor hopes for a Fed pivot were misplaced, and Chair Powell has now made that crystal clear. Secondly, we noted last week that the only remaining hope for stocks would be if the bond market rallied at the back end on the view that the Fed was finally ahead of the curve and would win its fight against inflation, while slowing the economy materially. Instead, interest rates spiked higher, squelching any hopes for stocks. While 15.6x price earnings ratio is back to the June lows, that P/E still embeds what we think is a mispriced equity risk premium given the risk to earnings. Said another way, with a Fed pivot now off the table, the path on bond and equity prices will come down to growth - economic growth for bonds and earnings growth for stocks. On both counts we are pessimistic, particularly on the latter as supported by our recent cuts to earnings forecasts. We have been discussing these forecasts with clients for the past several weeks and while most are in agreement that consensus 2023 earnings estimates are too high, there is still a debate on how much. Suffice it to say, we are at the low end of client expectations. Interestingly, recent economic data have kept the economic soft landing view alive, and interest rates have moved above our rates team's year end forecast. From an equity market standpoint, that means no relief for valuations as earnings come down. This is a major reason why stocks sank to their June lows on Friday. Ultimately, we do think economic surprise data will likely disappoint again, but until it does there is no end in sight for the rise in 10 year yields, especially with the run off of the Fed's balance sheet increasing. As such, our rates team has raised its year end target for 10 year Treasury yields to 4% from 3.5%. This is a very tough backdrop for stocks and epitomizes our fire and ice thesis to a T. In other words, rising cost of capital and lower liquidity in the face of slower earnings growth or even outright declines. Finally, the Fed's historically hawkish action has led to record strength in the U.S. dollar. On a year over year basis the dollar is now up 21% and still rising. Based on our analysis that every 1% change in the dollar has a .5% impact on S&P 500 earnings growth, fourth quarter S&P 500 earnings will face an approximate 10% headwind to growth all else equal. This is in addition to the other challenges we've been discussing for months, like the pay back in demand and higher cost from inflation to name a few. Bottom line Part 2 of our Fire and ice thesis is now on full display, with rates and the U.S. dollar ratcheting higher, just as the negative revisions for earnings appear set to accelerate to the downside. In our view, the bear market in stocks will not be over until the S&P 500 reaches the range of our base and bear targets, i.e. 3000 to 3400 later this fall. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.0 comments0
- U.S. Economy: The Fed Continues to Fight InflationAfter another Fed meeting and another historically high rate hike, itâs clear that the Fed is committed to fighting inflation, but how and when will the real economy see the effects? Chief Cross-Asset Strategist Andrew Sheets and Global Chief Economist Seth Carpenter discuss. -- Transcript -- Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Andrew Sheets: ] And on this special edition of the podcast, we'll be talking about the global economy and the challenges that central banks face. It's Friday, September 23rd at 2 p.m. in New York. Andrew Sheets: So, Seth, it's great to talk to you. It's great to talk to you face to face, in person, we're both sitting here in New York and we're sitting here on a week where there was an enormous amount of focus on the challenges that central banks are facing, particularly the Federal Reserve. So I think that's a good place to start. When you think about the predicament that the Federal Reserve is in, how would you describe it? Seth Carpenter: I think the Federal Reserve is in a such a challenging situation because they have inflation that they know, that everyone knows, is just simply too high. So they're trying to orchestrate what what is sometimes called a soft landing, that is slowing the economy enough so that the inflationary pressures go away, but not so much that the economy starts to contract and we lose millions of jobs. That's a tricky proposition. Andrew Sheets: So we had a Federal Reserve meeting this week where the Fed raised its target interest rate by 75 basis points, a relatively large move by the standards of the last 20 years. What did you take away from that meeting? And as you think about that from kind of a bigger picture perspective, what's the Fed trying to communicate? Seth Carpenter: So the Federal Reserve is clear, they are committed to tightening policy in order to get inflation under control, and the way they will do that is by slowing the economy. That said, every quarter they also provide their own projections for how the economy is likely to evolve over the next several years, and this set of projections go all the way out to 2025. So, a very long term view. And one thing I took away from that was they are willing to be patient with inflation coming down if they can manage to get it down without causing a recession. And what do I mean by patient? In their forecasts, it's still all the way out in 2025 that inflation is just a little bit above their 2% target. So they're not trying to get inflation down this year. They're not trying to get inflation down next year. They're not trying to get inflation down even over a two year period, it's quite a long, protracted process that they have in mind. Andrew Sheets: One question that's coming up a lot in our meetings with investors is, what's the lag between the Fed raising interest rates today and when that interest rate rise really hits the economy? Because, you are dealing with a somewhat unique situation that the American consumer, to an unusual extent, has most of their debt in a 30 year fixed rate mortgage or some sort of less interest rate sensitive vehicle relative to history. And so if a larger share of American debt is in these fixed rate mortgages, what the Fed does today might take longer to work its way through the economy. So how do you think about that and maybe how do you think the Fed thinks about that issue? Seth Carpenter: It's not going to be immediate. In round terms, if you take data for the past 35 years and come up with averages, you know, probably take something like two or three quarters for monetary policy to start to affect the real side of the economy. And then another two or three quarters after that for the slowing in the real side of the economy to start to affect inflation. So, quite a long period of time. Even more complicated is the fact that markets, as you know as well as anyone, start to anticipate central bank. So it's not really from when the central bank changes its policy tools when markets start to build in the tightening. So that gives them a little bit of a head start. So right now, the Fed just pushed its policy rate up to just over 3%, but markets have been pricing in some hiking for some time. So I would say we're already feeling some of the slowing of the real side of the economy from the markets having priced in policy, but there's still a lot more to come. Where is it showing up? You mentioned housing. Mortgage rates have gone up, home prices have appreciated over the past several years, and as a result we have seen new home sales, existing home sales both turnover and start to fall down. So we are starting to see some of it. How much more we see and how deep it goes, I think remains to be seen. Andrew Sheets: So Seth, another issue that investors are struggling with is on the one hand, they're seeing all of these quite large moves by global central banks. We're also seeing a reduction in the central bank balance sheet, a reversal of the quantitative easing that was done to support the economy during COVID, the so-called quantitative tightening. How do you think about quantitative tightening? What is it? How should we think about it? Seth Carpenter: I have to say, during my time at the Federal Reserve, I wrote memos on precisely this topic. So what is quantitative tightening? It is in some sense the opposite of quantitative easing. So the Federal Reserve, after taking short term interest rates all the way to zero, wanted to try to stimulate the economy more. And so they bought a lot of Treasury securities, they bought a lot of mortgage backed securities with an eye to pushing down longer term interest rates even more to try to stimulate more spending. So quantitative tightening is finding a way to reverse that. They are letting the Treasury securities that they have on their balance sheet mature and then they're not reinvesting, and so their balance sheet is shrinking. They're letting the mortgage backed securities on their balance sheet that are prepaying, run off their balance sheet and they're not reinvesting it. And when they make that choice, it means that the market has to absorb more of these types of securities. So what does the market do? Well, the market has to make room for it in someone's portfolio, and usually what that means is to make room on a portfolio prices have to adjust somewhere. Now, markets have been anticipating this move for a long time, and I suspect our colleagues who are in the Rate Strategy Group suspect that most of the effect of this unwind of the balance sheet is already in the price. But the proof is always really in the pudding, and we'll see over time, as the private sector absorbs all these securities, just how much more price adjustment there has to be. Andrew Sheets: And then, I imagine this is a hard question to answer, but if the Fed started to think that it was tightening too much, if the economy was slowing a lot more than expected or there was more stress in the system than expected - do we think it's more likely that they would pause quantitative tightening or that they would pause the rate hikes that the market's expecting? Seth Carpenter: I feel pretty highly convicted that if the slowing in the economy that they're seeing is manageable, if it's within the range of what they're expecting, it's interest rates. Interest rates are, to refer once again to what Chair Powell has said many times, the primary tool for adjusting the stance of monetary policy. So they're hiking rates now, at some point they'll reduce the size of those rate hikes and at some point they'll stop those rate hikes. Then the economy, hopefully in their mind, will be slowing to reduce inflationary pressure. They might judge that it's slowing too much if they feel like the adjustment they have to make is to lower interest rates by 25 basis points, maybe 50 basis points, even a little bit more than that if it happens over the course of a year, I still think the primary tool is short term interest rates. However, if the world changes dramatically, if they feel like, oh my gosh, we totally misjudged that. Then I think they would curtail the run off of the balance sheet. Andrew Sheets: Seth, thanks for taking the time to talk. Seth Carpenter: Andrew, It's always my pleasure to talk to you. Andrew Sheets: And thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you.0 comments0
- Thematic Investing: What is the Next Big Tech Idea?With high returns in mind, investors may be looking to get in on the ground floor with the next ambitious and disruptive technology, but how are these âmoonshotsâ identified and which ones could make a near-term impact? Head of Thematic Research in Europe Ed Stanley and Head of the Global Autos and Shared Mobility Team Adam Jonas discuss. -- Transcript -- Ed Stanley: Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research based in London. Adam Jonas: And I'm Adam Jonas, Head of the Global Autos and Shared Mobility Team. Ed Stanley: And on this special episode of the podcast, we'll be discussing the bold potential of moonshot technologies, and particularly in the face of deepening global recession fears. It's Thursday, the 22nd of September, at 4 p.m. in London. Adam Jonas: And 11 a.m. in New York. Adam Jonas: Let me start with an eye popping number. Since 2000, 1% of companies have generated roughly 40% of shareholder returns by developing moonshots, that is ambitious and radical solutions to seemingly insurmountable problems using disruptive technology. So here at Morgan Stanley Research, we naturally spend a lot of time wondering what are the potential moonshots of the next decade? What's the next light bulb, airplane, satellite, internet? What technologies are developing literally as I record this that we'll be focused on in 2032? So Ed, I know you really want to dig into the specifics of some of the sectors that are touched on in the Moonshot Technologies report you wrote, but first can you maybe explain the framework for identifying these moonshots? Ed Stanley: So this is a totally different horizon and way of thinking to what most investors are used to. Typically, when looking for investable themes or technologies in public markets, we focus on those that are at or have surpassed a 20% adoption rate, those essentially with the wind at their back already. But clearly, with moonshots, we're looking much, much earlier, but with a much greater risk reward skew. There are a number of potentially groundbreaking technologies out there incubating right now. The next iPhone moment is out there, is being developed, and it should be all of our job to sniff out what, when and where that pivotal product will come from. But the question we've received is how do you whittle that funnel of potential technologies down? So we come at it from first principles. Academic research, either by individuals, governments or companies, tends to be the genesis for most groundbreaking ideas. This then feeds patenting, or in other words R&D, for small and big companies alike to build a moat around that research they pioneered. And then venture capital comes in to support some of those speculative innovations, but importantly, only those that have product market fit, which is what we focus on. Adam Jonas: So Ed, why do you think now is such an interesting time to be thinking about moonshots, given such a challenging macro backdrop? Ed Stanley: It's a great question. So if you take a step back, there are always reasons to be concerned in the markets. But moments of peak anxiety in hindsight tend to be the moments of peak opportunity. I'll steal an overused cliche, necessity is the mother of invention. We're more likely to see breakthroughs in energy technology, for example, at the moment, at the point of peak acute pain than five years ago when there was no real impetus. This is exactly why some of the most innovative companies are born during or just after recession or inflationary periods. In fact, if you look at the stats, one third of Fortune 500 companies were born in the handful of recessionary years over the last century. So macro may be getting worse, but we remain pretty committed to uncovering long term, game changing themes and investments. Adam Jonas : Can you give us a summary of the output and to which moonshots really stood out to you as having the potential for profound change over the medium term? Ed Stanley: Sure. So there are clearly some that are not only profound but frankly unfathomable in terms of their potential impacts. Things like life extension, a startup developing artificial general intelligence, also known as a singularity, and Web3 remains a fascinating sandbox of crypto and blockchain experiments. So there's a wealth of fascinating moonshots in there, but I'd focus on two that have more prescient implications for investors near-term. First is pre-fab housing. It's nothing new as a concept. It's essentially the process of bringing construction into the factory to increase efficiency. But we're now moving from 2D assemblies of walls and roof panels to the real moonshot, which is 3D assembly of the entire house, pre-made, and that is now happening. These pre-built whole houses can be 40 to 50% cheaper and quicker, and so coming back to your question around why now? Moonshots like this have little momentum in good years, but construction input costs up 20% year on year, suddenly you have the catalyst for innovative, greener, low waste pre-fab solutions. And the second one, I think is really fascinating and few people are well versed in it, is deepfakes and the new era of synthetic reality. These are livestream videos and voice renderings to create the impression that you are watching or speaking to someone that you are not. And I think by highlighting this, we are also trying to show that not all moonshots are good news. At the moment, the risk is fake news, but that is the tip of the iceberg. But with that said, Adam, I want to jump to you. You're the perfect person to speak to given your knowledge of EVs in particular. And just like the smartphone market, those were once considered to be far fetched moonshots by some people, and yet they're heading towards ubiquity. So you've written a lot in the last couple of years around the "muskonomy", as you call it. Before we get into some moonshots you're interested in, can you explain to us what the "muskonomy" is? Adam Jonas: We're referring to the portfolio of businesses and endeavors of Elon Musk, of course, across EVs and batteries and renewable energy and autonomous vehicles. Of course, his efforts in space and tunneling technology. Taken together we think he's in a position where any improvement in one of those businesses can help the advancement and accelerate development of the other three domains and then kind of feedback on itself and create a bit of velocity. But the point is, these businesses address huge physical markets. Markets that address the atomic economy, what I mean by that, the periodic table not the not the metaverse. Right, we need to kind of sort reality out here. These are high CapEx businesses, high moat businesses where trillions and trillions of capital will need to be redeployed with regulatory oversight, environmental planning, supply chain, industrialization, standards setting and of course, taxpayer involvement along the way. Ed Stanley: It's a fascinating point, which we touched on in some of our other research around the innovation stack and how building technology on top of other layers of technology accelerates the disruption. I'm keen to understand from an investability perspective, what time horizons do you think we could expect some of these breakthroughs in? And where are the tailwinds coming from? Adam Jonas: Right now, of course his efforts in EVs are well known. What I think is less appreciated is changing how manufacturing is done. Elon wants to make a car, ideally out of a single piece of injected molded aluminum in a 12,000 ton giga press. To really make a fuselage of a car and take the parts count down dramatically. And he wants to inject into this fuselage his structural battery pack, his 4680 battery battery pack. And so changing how vehicles are made and designing the battery into the car is something that really excites us in terms of finally getting that price of EVs down. So the other thing I would highlight that makes us very excited is his tunneling technology, we would watch that. And so we pay attention to Los Angeles and Las Vegas and Austin, Texas and San Antonio and Fort Lauderdale, Miami. These city, city pairs in states where we think Elon Musk can yield influence and we think this could be really the next big thing in infrastructure, not in a 2 to 3 year period, but certainly in a 5 to 10 year period with investment being attracted and relevant right now. Ed Stanley: Well, that's a fantastic synopsis. Plenty to whet the appetite on moonshots of the next 5 to 10 years. Adam, thanks very much for taking the time to talk. Adam Jonas: Great speaking with you, Ed. Ed Stanley: And thanks for listening. If you enjoyed Thoughts on the Market, please leave a review on Apple Podcasts and share the podcast with a friend or a colleague today.0 comments0
- Michael Zezas: Why Isnât Fed Hiking Impacting Inflation?Though the Fed continues to raise interest rates, inflation is still high year over year, so why havenât rate hikes begun to bring inflation down yet? -- Transcript -- Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, September 21st at 10 a.m. in New York. The Fed continues to hike interest rates, but inflation is still running hot in the U.S. as demonstrated by last week's 8.3% year over year growth in the Consumer Price Index. When and how the Fed will eventually succeed in dampening inflation is an important consideration for markets, but investors should also focus on another question. Why hasn't fed hiking worked to bring down inflation yet? Well, there's a strong case to be made that the U.S. economy is less sensitive to changes in interest rates today than it has been in the past. In total, about 90% of all household debt today is fixed rate, meaning that as the Fed hikes rates and market rates rise, consumersâ debts don't cost them more to service. If they did, then rising interest rates would dampen economic growth by dampening aggregate demand. Those higher rates would in theory crimp consumption, as households direct less of their money toward buying goods and services and more toward paying their debts. That, in turn, would ease inflation. Understanding this dynamic is important for investors in a few ways. Take the housing market, for example. After the housing crisis that touched off the global financial crisis in 2008 and 2009, adjustable rate mortgages only now make up a small fraction of all mortgages. Sure, higher mortgage rates means buying a new home is effectively more expensive, but with so many more mortgages in the U.S. carrying a fixed rate and issued to individuals with higher credit scores, the cost of owning a home to current owners hasn't changed. That means there's little incentive for homeowners to sell and or reduce the asking price for their home. Hence, our housing strategists expect home sales to decline meaningfully, but you may not see a lot of price deterioration in the aggregate. The bond market is another place we see this dynamic on display. Our interest rate strategy team expects you'll see the yield curve continue to flatten and invert, with shorter maturity yields rising faster than longer ones. Why? Because shorter maturities typically track the Fed funds rate, which the Fed has clearly stated will continue going higher until there's clear evidence of inflation deceleration, which could take longer given the economy's lessened sensitivity to rising rates. For bond investors, the bottom line is you should consider something that historically has been pretty unusual - longer maturities might perform better even as rates go higher. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.0 comments0
- Robin Xing: Can Chinaâs Economy Stabilize Global Growth?As the global economic outlook turns toward a slowdown in growth, some investors may look to China for stability, but, when they do, what will they find? -- Transcript -- Welcome to Thoughts on the Market. I'm Robin Xing, Morgan Stanley's Chief China Economist. Along with my colleagues, bringing you a variety of perspectives, today I will discuss whether China can stabilize global growth amid recession fears. It's Tuesday, September 20th at 9 AM in Hong Kong. The global economic outlook is dimming, and my colleagues have already discussed their expectations for slowdown in developed market economies driven by surging prices and aggressive monetary policy tightening. In this context, investors are likely to turn their attention to China, perhaps hoping it can once again stabilize global growth as it did after the 2008 global financial crisis. China's economy, however, appears to be fragile. While it has bottomed after the contraction due to Shanghai lockdown in the second quarter, it is still modeling not yet through. And we forecast a below consensus 2.8% GDP growth this year, and only a modest rebound to slightly above 5% in 2023. To date, China has deployed the monetary policy easing and the infrastructure investment spending. But these steps have not got a lot of traction because of two key hurdles; continuing COVID restrictions and the trouble in its housing market. We see growth rebounding in next year, but that recovery depends heavily on policy addressing these two key hurdles. Hence, we look for a more concerted policy response in the housing market, and a clearer path towards reopening post the upcoming 20th Party Congress in October. First, to limit the fallout from the housing sector, Beijing will likely ramp up policy support. It is true that China's aging population has pushed the housing market into a structural downward trajectory, but the pace of the recent collapse vastly exceeds that trend. The choke point is homebuyers lack of confidence in developers ability to deliver the pre-sold house, which shrinks new home sales and puts more stress on developers liquidity. We think that Beijing will provide additional funding and intervention to ensure contracted home construction is completed. This, combined with more home purchases, stimulus and the liquidity support to surviving developers could break the negative feedback loop. Second, we expect a gradual exit from COVID-zero next spring. With the more transmissive Omicron, the rolling lockdowns in China are taking their toll on consumption and even posing challenges to supply chains. The renewed lockdowns in several major cities and the recent slowdown in vaccination progress suggest that COVID-zero would not end swiftly after the Party Congress in October. But the key metrics to watch by then will be, first, the pace of vaccination, second, wider adoption of domestic covid treatment and finally shift in public opinion from fearing the virus to a more balanced assessment. Provided that policy can address these two hurdles I just described, China's economic recovery should firm up from second quarter 2023 onwards, with growth of slightly above 5% for next year are our numbers. But even with this rebound, the positives spill over to the rest of the world is unlikely to be on par with history. Construction activities might improve with the stabilizing property sector, which is a familiar driver of Chinese imports. But the key driver will be a turnaround in domestic private consumption, particularly of services, so that demand pull from other economies will be somewhat muted. Thus, while we doubt that China would tip the global economy into recession, neither do we see China at its salvation. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.0 comments0
- Seth Carpenter: Tracking the Coming SlowdownFrom Europe, to China, to the U.S., global economies are facing unique challenges as the brewing storm of recession risks seem to still indicate a slowdown ahead. -- Transcript -- Welcome to Thoughts on the Market. I'm Seth Carpenter, Global Chief Economist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the rising risks of global recession and what might be ahead. It's Thursday, September 22nd at 10 a.m. in New York. About a year ago, I wrote about the brewing storm of recession risks around the world. Some downbeat economics news has come in since then, but the worst of the global slowdown is ahead of us, not behind us. We have an outright recession as our baseline forecast in the euro area and the U.K. The Chinese economy is on the brink with such weak growth that whether we have a global recession or not might just turn out to be a semantic distinction. First, Europe. It's hardly out of consensus at this point to call for a recession there, but we have been forecasting a recession since the start of the summer. The energy crisis caused by the Russian invasion of Ukraine has created a cost shock that is now effectively locked into the outlook for the next couple of quarters. Consumer bills will stay high, sapping purchasing power, fiscal deficits will take a hit and industries are already rationing energy use. For the UK, leaving Europe has not left behind the energy crisis across the channel. And the UK is also suffering from structural changes to its labor supply and trade relationships, and that's dragging down growth beyond these cyclical movements. That said, new leadership in Parliament is pointing to a huge fiscal stimulus that will mitigate the pain to households and reduce the depth of the recession. Now turning to China, markets have looked at China as a possible buoy for global growth, but this time any such hope really needs to be tempered, China's economy is in a fragile position. In our forecasts growth this year will be about 2.75%, below consensus and well below the potential growth of the economy. And then we think there'll be a rebound in growth next year, we're only looking for a modest 5.25% next year. Those sorts of numbers are not the real game changers people hope for. So far, the fiscal and monetary policy that has been deployed has not got a lot of traction. There are two key restraints on the Chinese economy right now; trouble in the housing market and continuing COVID restrictions. After the party Congress in mid-October things should probably start to change, but we're not expecting a quick fix. Right now construction and delivery of new homes is not getting done, so the cash flow is drying up, creating an adverse feedback loop. So far, the PBOC has rolled out about 200 billion renminbi bank loans to support this delivery, and we expect more intervention and funding over time. So as easy as it is to be gloomy on the outlook, a catastrophic collapse in housing doesn't seem likely. As for COVID, we are now expecting only a gradual exit from COVID zero next spring. The key metrics to watch will be the pace of vaccinations and wider adoption of domestic COVID treatments and a shift in public opinion. In particular, we think getting the over 60 population to at least an 80% booster vaccination rate next spring will flag the removal of restrictions. If there is a silver lining, it's that we still think the U.S. avoids a near-term recession. Despite notching a technical recession in the first half of the year, the U.S. outlook is somewhat brighter. For the first half of the year nonfarm payrolls averaged almost 450,000 per month, that's hardly the stuff of nightmares. But we don't want to be too cheerful. From the Fed's perspective, the economy has to slow to bring down inflation. They are raising interest rates expressly to slow the economy. So far, the housing market has clearly turned, but payrolls have only slowed a bit, and the moderation in wage inflation is probably not as much as the Fed is looking for. To date, we have not seen much slowing in consumer durables, so the economy remains beyond its speed limit and the Fed will keep hiking. How much? Well, depends on how strong the economy stays. So there really isn't much upside, only downside. The Fed is committed to hiking until the demand pressures driving inflation back off, so one way or another, the economy is going to slow. Thanks for listening. If you enjoy this show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.0 comments0
- Andrew Sheets: The Case for CreditWhile credit and equities have both suffered this year, economic conditions in the U.S. and Emerging Markets may lead to credit having a bit more stability in the coming months. -- Transcript -- Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, September 16th, at 3 p.m. in London. Year-to-date, both credit and equities have suffered. Looking ahead, we think credit is better positioned in both the U.S. and emerging markets, given the outlook for growth, policy and relative valuations. Conventional wisdom can change quickly in markets. Two months ago, there was widespread concern that the United States was already in a recession, given weak readings of quarterly GDP and some of the lowest levels of consumer confidence since the 2009 financial crisis. That weakness drove hope over July and August. Maybe the Federal Reserve had raised interest rates enough. Maybe it was nearly done. But the data since points to an American economy that continues to trundle along. The labor market continues to look extremely healthy, with about 315,000 jobs added last month and over 3.5 million jobs added year-to-date. Manufacturing activity has expanded every month this year. And consumer spending remains solid, one of the reasons core inflation remains elevated. In short, if the U.S. economy is going to slow down, that risk lies ahead of us, not behind us. And as long as the data remains solid and core inflation remains elevated, the Federal Reserve will face pressure to air on the side of caution and keep raising rates to tamp down on inflationary pressure. For investors this backdrop, where economic activity is still solid but might slow in the future, where inflation is high and the central bank is hiking, and where the labor market is tight and the yield curve is inverted, is what's commonly referred to as a "late cycle" environment. It's a set of conditions that has historically been challenging for future returns overall, but it's often been worse for equities relative to credit over the following 12 months, as the former is more sensitive to a potential slowdown in growth that hasn't happened yet. In addition to the economic conditions, relative valuations have also moved in favor of credit markets relative to equities. In the US, 1 to 5 year corporate bonds now yield about 4.9%, rapidly nearing the current earnings yield of the S&P 500 at about 5.9%. Despite just a 1% difference in yield, those short dated bonds have about one fifth of the volatility of stocks over the last 30 days. We hold a similar view on Emerging Markets. The sovereign debt index yields about 7.7%, just 1% less than the earnings yield of the MSCI Emerging Market Equity Index. Not only is EM sovereign debt less volatile than EM equities, but it has more exposure to the countries our analysts think provide the better risk reward. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you.0 comments0
- U.S. Public Policy: The Impact of Student Loan ForgivenessThe White House recently announced a student loan forgiveness program, prompting questions about implementation, economic implications, and whether the program will have an impact on consumer spending. Sarah Wolfe of the U.S. Economics team and Arianna Salvatore of the U.S. Public Policy team discuss. -- Transcript -- Sarah Wolfe: Welcome to Thoughts on the Market. I'm Sarah Wolfe from Morgan Stanley's U.S. Economics Team. Ariana Salvatore: And I'm Ariana Salvatore from Morgan Stanley's U.S. Public Policy Research Team. Sarah Wolfe: And on this episode of the podcast, we'll focus on student loans, in particular the recent student loan forgiveness program, and we'll dig into the impact on consumers and the economy. It's Thursday, September 15th, at 12 p.m. in New York. Sarah Wolfe: So, Ariana, the White House recently announced plans to forgive individuals up to $20,000 in federal student loans and extend the moratorium on interest payments. However, there was some confusion earlier in the year as both President Biden and Speaker Pelosi expressed doubts about the president's authority to cancel student debt. So is this something that requires an act of Congress, or can the president really do it alone? Ariana Salvatore: As you mentioned, prior to the announcement, there was some unresolved questions out there surrounding the legality of canceling student debt. In revealing the program, the administration cited authority from a 2003 law called the 'Heroes Act' that gives the executive the power to reduce or eliminate student debt during a national emergency, âwhen significant actions with potentially far reaching consequences are often requiredâ. That being said, don't expect it to go over quietly. Reporting indicates that some Republican attorneys general are looking to bring legal challenges to the plan, which could present a risk to execution. But let's put questions about implementation aside for a second. What does reduced student debt impact more, longer term planning or immediate spending? And how do you quantify the impact on consumer spending? Sarah Wolfe: Thanks, Ariana. I'd like to just take a step back for a second before I talk about the economic impact, just so we could size up the program a bit. We estimate that there's going to be $330 to $390 billion in debt directly forgiven as part of this program. However, we estimate that the fiscal multiplier is actually quite small. So every dollar of debt that's forgiven that's going to get spent and put back into the economy, is really estimated at only 0.1. This is really small when you consider the fiscal multiplier of the COVID stimulus programs. So for example, the stimulus checks, supplemental unemployment benefits, that had a fiscal multiplier of 0.5 to 0.9. So it was much larger. The reason for this is because our survey work shows that people who have their student debt forgiven don't actually change their immediate spending patterns. Instead, it really impacts longer term planning. We're talking about paying down other debts, planning for retirement, perhaps buying a house or having a child earlier, and so there's not really an immediate spending impact on the economy. What does have a larger fiscal multiplier is forbearance coming to an end. Prior to COVID, people were on average paying $260 a month in student loan payments. That's been on hold for two and a half years. So when that resumes again in January, it's likely going to be less than $260 a month because of the loan forgiveness and other measures passed by the White House to limit loan payments per month. However, that's an immediate impact to discretionary income, and as a result, we're going to see a lot of households adjust their spending in the near term to make these new loan payments. Arianna, speaking of student loan forbearance, which I mentioned is set to end at the end of this year after a number of extensions, the White House is hoping that forgiveness is going to kick in right when forbearance comes to an end. Can we actually count on the timing working out like this? Ariana Salvatore: So there's definitely a risk that the program is delayed because of normal implementation hurdles, right. Things like determining eligibility for cancellation among millions of borrowers. The Department of Education memo that was released following the announcement says that 8 million borrowers may be eligible to receive relief automatically because relevant income data is already available. However, the department is also in the process of creating an application so borrowers can apply for forgiveness on their own, but that hasn't gone live yet. The DOE said it would be ready no later than when the pause on federal student loan repayments expires at the end of this year. Unfortunately, there's no real way to know when exactly that will be. Sarah Wolfe: So let me just get this clear. The Department of Education only has the information on 8 million student loan borrowers right now. So they're going to need to gather the information for the remaining borrowers up to 43 million in order to start this forgiveness program. Ariana Salvatore: Yeah, exactly. And that's why we tend to see large scale government programs like this take a little bit of time to ramp up rollout and have impacts on the economy. So in the event that all of those eligible to take advantage of the forgiveness program actually do so, let's focus in on the macroeconomic impacts. In this high inflation environment, wouldn't student loan forgiveness also have an additional inflationary effect? Sarah Wolfe: Definitely at face value, student loan forgiveness is inflationary. However, as I mentioned earlier, because it doesn't impact near-term spending decisions and is more about longer term planning, the inflationary impact, I think, is less than people would think. It's estimated to only add 0.1 to 0.5 percentage points to inflation 12 months following the cancellation. However, the forbearance program, as I mentioned, since that's going to have more of an immediate impact on spending decisions, that's going to have a deflationary impact. And it's estimated that forbearance programs are going to shave 0.2 percentage points off inflation over the 12 months following forbearance starting again. And so if you think about forgiveness being inflationary and forbearance being disinflationary, it's likely that forbearance is going to outweigh some of the inflationary impact, if not all of it, from forgiveness. Ariana Salvatore: Okay, so bringing it back to a more micro level. Last question for you here, Sarah. What are the implications for consumer credit and consumer ABS? Sarah Wolfe: We think that student loan payments restarting in January pose quite a bit of risk to consumer credit quality. Although we're seeing consumer credit quality today is very healthy and delinquencies are low, we are starting to see delinquencies rise for subprime borrowers in recent months. Also, if we dig into the data and look at how student loan borrowers have been paying down their student loans over the last 2.5 years versus those who haven't been, the credit quality for those who have not been is much worse than those who have been. That leads us to believe that come January, when everybody needs to start paying down their student loans, that in particular these more subprime, lower income borrowers are really going to struggle and it's going to deteriorate credit quality. Sarah Wolfe: Well, Ariana, thanks for taking the time to talk. Ariana Salvatore: Great speaking with you, Sarah. Sarah Wolfe: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.0 comments0
- Michael Zezas: Why the Midterm Elections MatterWith only 60 days to go until the U.S. midterm elections, investors will want to know how different outcomes could impact markets, both locally and globally. -- Transcript -- Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, September 14th, at 10 a.m. in New York. We're less than 60 days from the U.S. midterm elections and investors should pay attention. A lot has changed since we published our midterm election guide earlier this year, so here's what you need to know now. First, there's still key policies in play. Sure, Democrats have had more legislative success in recent months than many expected. By enacting corporate tax increases, a prescription drug negotiation plan, a major appropriation to clean energy transformation, and the China competition bill, Democrats took off the table many of the policy variables whose outcomes would have relied on the outcome of the election. But some key policy variables remain that matter to markets. In particular tech regulation, crypto regulation and tougher China competition measures, such as outbound investment controls, become more possible if Democrats manage to keep control of Congress. That would give them a greater opportunity to enact policies that could otherwise be held up or watered down by partisan disagreement. Second, this means there's a lot at stake for some pockets of global markets. Tech regulation would be a fundamental challenge to the U.S. Internet sector. Crypto regulation could be a key support for financial services by putting the crypto industry on the same regulatory playing field as the banks. And outbound investment controls could be a clear challenge for China equities by putting a substantial amount of foreign direct investment at risk. Finally, investors should understand these impacts aren't just hypotheticals, because, unlike earlier this year, Democrats electoral prospects have improved. Better showings in polls on key Senate races and the generic ballot have translated into prediction markets and independent models, marking Democrats as a modest favorite to keep Senate control, though they're still rated as an underdog to keep control of the House of Representatives. While it's difficult to pinpoint what's driven this change, voter discontent with the Supreme Court's Roe decision, as well as easing of some inflation pressures, may have contributed. Bottom line, the midterm election remains a market catalyst and it's coming up quickly. We'll keep tracking developments and potential market impacts and keep you informed. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.0 comments0
- Daniel Blake: The Resilience of Japanese EquitiesAs various global markets contend with high inflation, recession risks, and monetary policy tightening, Japanese equities may provide some opportunities to diversify away from other developed markets. -- Transcript -- Welcome to Thoughts on the Market. I'm Daniel Blake from Morgan Stanley's Asia and Emerging Markets Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss the resilience of Japanese equities in the face of an expected global downturn. It's Tuesday, September 13, at 8 a.m. in Singapore. As Morgan Stanley's Chief Global Economist Seth Carpenter noted in mid-August, the clouds of recession are gathering globally. In the U.S., the Fed is hiking rates and withdrawing liquidity. Europe is suffering from high inflation, looming recession and an energy shortage. And China is facing a rocky path to recovery. In this global context, the external risks for Japan are rising quickly. And yet, compared to the turbulence in the rest of the world, Japanese equities are enjoying rather calm domestic, macro and policy waters. In Japan, we see support for this cycle coming from three sources; domestic policy, the Japanese yen and capital discipline at the corporate sector. First, the monetary policy divergence between the Bank of Japan and global peers has been remarkable, and in our view justified by differences in inflation and growth backdrops. Japanese core inflation is just 1.4%, and if we strip out food and energy, inflation is a mere 0.4% year over year. And so we don't expect any tightening from the Bank of Japan or of fiscal policy over the next six months. Secondly, the Japanese yen is acting as a funding currency and a buffer for earnings, rather than the typical safe haven that historically tends to amplify earnings drawdowns in an economic downturn. And third, improving capital discipline is contributing to newfound earnings resilience and insulating the return on equity, with buybacks tracking at a record pace of „10 trillion annualized year to date. In addition to monetary and fiscal policy, Japan's more cautious approach to reducing COVID restrictions and employment focused stimulus programs have meant that the economy is in a different phase vis-a-vis other developed markets. Our expectation for Japan's economy is low but steady growth of 1.3% on average over 2022 and 2023. As for the Japanese yen, we believe that a weaker yen is still a tailwind for TOPIX earnings. As a result of policy and real rate divergence, as well as the negative terms of trade shock from higher commodity prices, the yen has fallen to fresh record lows on a real effective exchange rate basis. The impact of a historically weak currency on the overall economy is still the subject of some debate, but one of the largest transmission channels of a weaker yen into supporting domestic services and employment is through tourism activity, which has been constrained to date by COVID policies. But looking ahead, the combination of reopening and a highly competitive tourism offering should set up a very strong recovery in passenger volumes and spending, as we saw during the European summer this year. So where do all these global and domestic cross-currents leave us with respect to Japanese equities? We remain overweight on the TOPIX index versus our MSCI Asia-Pacific, ex-Japan and emerging markets coverage. We've been above consensus in forecasting an exceptional recovery in TOPIX earnings per share, but we acknowledge that to date it has been largely driven by export oriented stocks. But currently, the external environment for Asia's major exporters is weakening as a result of tighter policies, slower growth and a revision in spending from goods to services. So while this trend will impact, we think, Taiwan, Korea and Singapore more so, China and Japan will also feel the impacts given their large goods trade surpluses. But with all this said, the Japanese market still provides liquid opportunities to diversify away from the U.S. and Europe, where Morgan Stanley strategists are cautious. So while Japanese equities have historically underperformed in global downturns, the current setup leaves us more optimistic on Japan in particular, compared with other regions like the U.S. and Europe. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.0 comments0
- Graham Secker: European Equities Face Earnings ConcernsEven as the European equity market contends with inflation, a slowing economy and a climate of decreased earnings, there are positives to be found if you know where to look. --Transcript-- Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the outlook for European equity markets for the remainder of this year. It's Monday, September 12th, at 2 p.m. in London. After a brief rally in European equities earlier in the summer, reality has reasserted itself over the last month with markets unable to escape a tricky macro backdrop characterized by central banks speeding up rate hikes into what is a deepening economic slowdown. In the last couple of weeks alone, our economists have raised their forecasts for ECB rate hikes and cut their GDP numbers to signal a deeper upcoming recession. So let's dig into the investment implications of these challenges in a bit more detail. First on rates, over the last 20 years there has been a close relationship between interest rates and equity valuations, whereby higher rates lead to lower price to earnings ratios. Hence, the fact that central banks are still in the early stages of their hiking cycle suggests a high probability that PE ratios have further to fall. In addition to higher base rates, the pace of quantitative tightening is also speeding up, and our bond strategists forecast higher sovereign yields ahead. Here in Europe, they see ten year bond yields rising to 2% or more later this year, which will be consistent with a further fall in Europe's PE ratio to around 10x or so. That would imply 15% lower equity prices from here. Second, we expect the European economy to slow over the next couple of quarters and this should put pressure on corporate profits which have been resilient so far this year, thanks to strong commodity sector upgrades and a material boost from the weakness we've seen in the euro and sterling. Looking forward, our models are flagging large downside risks to consensus earnings estimates for the next 12 to 18 months and we are 16% below consensus by the end of 2023. To provide some additional context, we note that consensus expects European earnings, excluding the commodity sectors, to grow faster next year than this year. This acceleration looks odd to us when you consider that our economists see slower GDP growth in 23 than 22, and our own margin lead indicator is suggesting we could face the largest year on year drop in corporate margins since the global financial crisis. Our concern on earnings is a significant factor behind our continued preference for defensives over cyclicals. While some investors argue that the latter group are now sufficiently cheap to buy, we question the sustainability of the earnings that is underpinning the low PE ratios given the, first, we have seen very few downgrades so far. Second, margins are currently at record highs for many of these cyclical sectors. And then lastly, cyclicals tend to see larger earnings declines during downturns than the wider market. This gives rise to the old adage that investors should buy cyclicals on high PE ratios, not low ones. Consistent with this view, we have recently downgraded three cyclical sectors to underweight from our top down perspective, these being autos, capital goods and construction. We are also underweight chemicals and retailing. So what do we like instead? Sectors with more defensive characteristics, such as health care, insurance, telecoms, utilities and energy. We also like stocks that offer a high and secure cash return yield, whether that be driven by dividends, buybacks or both. To end on a positive note, the level of buyback activity in Europe has never been stronger than what we are seeing today, whether we measure it by the number of companies that are repurchasing their shares or the amounts of money they are spending to do so. In addition, we note that those European companies who have offered a healthy buyback yield over time have been consistent outperformers. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.0 comments0
- Andrew Sheets: The Complex U.K. EconomyAs the world turns to the U.K., the country faces a host of domestic and international economic challenges, but there may yet be some bright spots for investors. --Transcript-- Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape, and how we put those ideas together. It's Friday, September 9th at 2:00pm in London. Queen Elizabeth II passed away yesterday. She was the only monarch most in Britain have ever known, a steady constant over a period of enormous global change. She defined an era, and will be missed. The eyes of the world have now turned to the United Kingdom, and they do so at a time when the country is facing an unusually high level of uncertainty. The U.K. economy, which was recently surpassed in size by India, is still the worlds sixth largest. But itâs currently being buffeted by a host of economic challenges. Some are domestic, some are international, but combined they create one of the trickiest stories in the global economy. First among these challenges is inflation. Rising costs for energy have driven Consumer prices in the U.K. up 10% year-over-year, but even excluding volatile food and energy, U.K. core inflation is still over 6%. And elevated inflation is not expected to be fleeting. Market-based estimates of U.K. inflation, over the next 10 years, are the highest since 1996. Those elevated prices have driven U.K. interest rates higher, but even so, U.K. rates relative to inflation are still some of the lowest of any major economy, which makes holding the currency less attractive. That has weakened the British Pound, but since the U.K. runs a current account deficit, and imports more than it exports, imported things have become more expensive, creating even more inflationary pressure. The U.Kâs decision to leave the European Union, its largest trading partner, is another complication. By restricting the movement of labor, itâs created a negative supply shock and increased costs. And it has increased the fiction in trading abroad, especially with Europe, making it harder for U.K. exporters to take advantage of the countryâs weaker currency. The response to all this high inflation will likely be further rate hikes from the bank of England. But this has the potential to feed back into the economy unusually fast. Over here, many student loan payments are tied to the bank of England rate. And the rate on U.K. mortgages is often fixed for only 2 to 5 years, in contrast to the 30 year fixing common in the United States. That means the impact of higher interest rates into higher mortgage costs could be felt very soon. For U.K. assets, the fact that a 10 year U.K. Government bond yields less than a 6-month U.S. Treasury bill, and much less than U.K. inflation, creates poor risk/reward. The Pound could continue to weaken, given all of these myriad economic challenges. But one bright spot might be the equity market, the FTSE 100. Trading at about 9x next year earnings, and benefiting from a weaker currency as many of these companies sell product abroad, we forecast stocks in the U.K. to outperform those in the Eurozone. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. Weâd love to hear from you.0 comments0
- Matthew Hornbach: How Markets Price in Quantitative TighteningThe impact of quantitative monetary policies is hard to understand, for investors and academics alike, but why are these impacts so complex and how might investors better understand the market implications? --Transcript-- Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about global macro trends and how investors can interpret these trends for rates and currency markets. It's Thursday, September 8th, at 10 a.m. in New York. QT is the talk of the town. QT stands for quantitative tightening, which is meant to contrast it with QE, or quantitative easing. QT sounds intimidating, especially when respected investors mention the term and, at the same time, ring the fire alarm on financial news networks. Unfortunately, the exact workings of QT and QE and their ultimate impact on markets aren't well understood. And that's not just a comment about the general public's understanding. It even applies to investors who have long dealt with quantitative policies and for academics who have long studied them. There are four reasons why the impact of quantitative monetary policies, as the Fed has implemented them, is hard to understand. First, different institutions take the lead in determining the impact of QE versus QT. The Fed determines the first round impact of quantitative easing, while the U.S. Treasury and mortgage originators determine the first round impact of quantitative tightening. Second, as the phrase "first round impact" implies, there are second round impacts as well. In the case of quantitative easing, the first round occurs when the Fed buys a U.S. Treasury or Agency mortgage backed security, also known as an agency MBS, from an investor. The second round occurs when that investor uses the cash from the Fed to buy something else. In the case of quantitative tightening, the first round occurs when an investor sells something in order to raise the cash that it needs. What does it need the cash for? Well, to buy a forthcoming Treasury Security or agency MBS. The second round occurs when the U.S. Treasury auctions that security or when a mortgage originator issues an agency MBS in order to raise the cash that the Fed is no longer providing. Third, QE and QT affect different markets in different ways. QE affects the Treasury and agency MBS markets directly in the first round. But in the second round, investor decisions about how to invest that cash could affect a wide variety of markets from esoteric loan products to blue chip equities. In that sense, some of the impact of QE is indirect and could affect some markets more than others. Similarly with QT, investor decisions about what to sell could affect a large number of markets, again some more than others. In addition, what the U.S. Treasury issues and what mortgage originators sell can change over time with financing needs and different market environments. Finally, markets price these different effects with different probabilities and at different times. For example, when the Fed announces a QE program, we know with near certainty that the Fed will buy Treasuries and agency MBS and generally know how much of each the Fed will buy. So investors can price in those effects relatively soon after the announcement. But we don't know, with nearly the same probability, what the sellers of those treasuries and agency MBS will do with the cash until they actually get the cash from the Fed. And that could be months after the announcement when the Fed actually buys the securities. Figuring out the effect on markets from QT is even more complicated because even though we know what the Fed will no longer buy, we don't know exactly what or how much the U.S. Treasury or mortgage originators will sell. If all of this sounds complex, believe me it is. There are no easy conclusions to draw for your investment strategies when it comes to QT. So the next time someone rings the fire alarm and yells QT, first look for where there might be smoke before running out of the building or selling all of your risky assets. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.0 comments0
- U.S. Housing: Will Housing Prices Continue to Rise?While home price appreciation appears to be slowing, and a rapid increase in supply is hitting the market, how will housing prices fare through the rest of the year and into 2023? Co-Heads of U.S. Securitized Products Research Jay Bacow and Jim Egan discuss. --Transcript Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jay Bacow: And I'm Jay Bacow. The other Co-Head of U.S. Securities Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing supply and demand in the U.S. housing market. It's Wednesday, September 7th, at 3 p.m. in New York. Jay Bacow: All right, Jim. Housing headlines have started to get a little more bleak. Home price appreciation slowed pretty materially with last week's print. Now, your call has been that activity is going to decrease, but home prices are going to keep growing. Where do we stand on that? Jim Egan: We would say that the bifurcation narrative still holds. We think housing activity metrics, and when we say housing activity we're specifically talking about home sales and housing starts, have some continued sharp declines in the months to come. But we do think that home prices are going to continue growing on a year over year basis, even despite a disappointing print that you mentioned from last week. Jay Bacow: But I have to askv, what are you looking at that gives you confidence in your home price call? Where could you be wrong given the slowdown we just saw? Jim Egan: We say a lot of fancy sounding things when we talk about the housing market, but ultimately they're just different ways of describing supply and demand. Demand is weakening. That's that drop in activity we're forecasting. But supply is also very tight and that contributes to our view that while home price growth needs to slow, it should remain positive on a year over year basis. Jay Bacow: All right, but haven't some metrics of supply been moving higher? Jim Egan: Look, we knew we were not going to be able to say that supply was historically tight forever. Existing inventories are now climbing year over year for the first time in 37 months. And another very popular metric of supply, months of supply, is effectively getting a 1-2 punch right now. Months of supply measures how much the current supply of housing listed for sale, would take to clear at current demand levels. So in a world in which supply is increasing and demand is falling, you have a numerator climbing and a denominator falling, so you're effectively supercharging months of supply, if you will. We were at a cycle low of 2.1 months of inventory, the lowest we've seen in at least three and a half decades, in January of this year. We're at 4.1 months of supply just six months later. Jay Bacow: So that number is a lot higher, but 4.1 months of supply is still really low. Isn't there some old saying that anything less than six months of supply is a seller's market? So wouldn't that be good for home prices? Jim Egan: Yes. And given recent work that we've done, we think that that saying is there for good reason. If we go back to the mid 1980s, so the Case-Shiller index that we're forecasting here that's as far back as this index goes. And every single time that months of supply has been below six, the Case-Shiller index was still appreciating six months forward. Home prices were still climbing, six months forward. So the absolute level of inventory is in a pretty healthy place despite the recent increases. However, that rate of change is a little concerning. We've gone from 2.1 months to 4.1 months over just six months of actual time, and when we look at that rate of change historically, it actually does tend to predict falling home prices a year forward. So, absolute level of inventory leaves us confident in continued home price growth, but the rate of change of that underlying inventory calls continued home price growth in 2023 into question. Jay Bacow: So we're going to have more inventory, but the pace has been accelerating. How do we think about the pace of that increase? Jim Egan: If that pace were to continue at its current levels, that would make us really concerned about home prices next year. But we do think the pace of inventory growth is going to slow and we think that for two main reasons. The two biggest inputs into inventory are new inventories and existing. New inventories, and we've talked about this on the podcast before, we think they're about to really slow down. Homebuilder confidence is down 43% from cycle peaks in November of 2020. Part of that's the affordability deterioration we talked about earlier, but it's also because of a backlog in the building process. Single unit starts are back to 1997 levels. Units under construction, so between starts and completions, are back to 2004 levels - it is taking longer to finish those homes. And we have had a forecast that we thought that was going to lead to single unit starts slowing down, it finally has over the past two months after plateauing for almost a year. We think they're going to continue to fall pretty precipitously in the back half of this year, which should mean that new inventory stop climbing at the same pace that they've been climbing. Existing inventories also should stop their current pace of climb because of the lock in effect that we've talked about here before. Effectively, current homeowners have been able to lock in very low mortgage rates over the course of the past two years. They're not going to be incentivized to list their homes at similar rates to historical places because of that lock in effect. So for both of those reasons, we think the pace of increase in inventory is going to slow, and that's why we continue to think that home prices are going to grow on a year over year basis. They're just going to slow from 18% now, to 9% by the end of this year, to 3% by the end of 2023. Jay Bacow: Okay. So effectively the low amount of absolute supply is going to keep home prices supported. The change in the amount of supply makes us a little bit more cautious on home prices on a longer term outlook. But we think that pace of that change is going to slow down. Jay Bacow: Jim, always a pleasure talking to you. Jim Egan: Great talking to you too, Jay. Jay Bacow: And thank you for listening. If you enjoy Thoughts on the Market, please leave us a review on the Apple Podcasts app and share the podcast with a friend or colleague today.0 comments0
- Mike Wilson: Preparing for an Icy WinterWhile interest rates have already weighed on asset markets this year and growth continues to slow, the Fed seems poised to continue on its tightening path, meaning investors may need to prepare for part two of our Fire and Ice narrative. --Transcript-- Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Tuesday, September 6th, at 9 a.m. in New York. So let's get after it. At the risk of stating the obvious, 2022 has been a challenging year for stock investors of all stripes. The Russell 3000 is down approximately 18% year to date, and while growth stocks have underperformed significantly it's been no picnic for value investors either. As far as sectors only energy and utilities are up this year, and just 24% of all stocks in the Russell 3000 are in positive territory. To put that into context, in 2008, 48% of the Russell 3000 stocks were up on the year as we entered the month of September and then the bottom dropped out. Suffice it to say, this year has been historically bad for stocks. However, that is not a sufficient reason to be bullish in our view. As bad as has been for stocks, it's been even worse for bonds on a risk adjusted basis. More specifically, 20 year Treasury bonds are now down 24% year to date, and the Barclays AG Index is off by 11%. Finally, commodities have been a mixed bag too, with most commodities down on the year, despite heightened concerns about inflation. For example, the CRB RIND Index, which measures the spot prices of a wide range of commodities, is down 7% year to date. Cash, on the other hand, is no longer trash, especially if one has been able to take advantage of higher front end rates. So what's going on? In our view, asset markets are behaving right in line with the fire and ice narrative we laid out a year ago. In short, after ignoring the warning signs from inflation last year and thinking the Fed would ignore them too, asset markets quickly woke up and discounted the Fed's late but historically hawkish pivot to address the sharp rise in prices. Indeed, very rarely has the Fed tightened policy so quickly. Truth be told, as one of the more hawkish strategists on the street last December, I never would have bet the Fed would be doing multiple 75 basis point hikes this year, but here we are. And remember, don't fight the Fed. While the June low for stocks and bonds was an important one, we've consistently been in the camp that it wasn't the low for the S&P 500 in this bear market. Having said that, we are more confident it was the low for long term treasuries in view of the Fed's aggressive action that has yet to fully play out in the real economy. It may have also been the low for the average stock, given how bad the breadth was at that time and the magnitude of the decline in certain stocks. Our more pessimistic view on the major index is based on analysis that indicates all the 31% de-rating in the forward S&P 500 P/E that occurred from December was due to higher interest rates. We know this because the equity risk premium was flat during this period. Meanwhile, forward earnings estimates for the S&P 500 have come down by only 1.5%, and price earnings ratio's back up 9% from where it was. With interest rates about 25 basis points below the June highs, the equity risk premium has fallen once again to just 280 basis points. This makes little sense in a normal environment, but especially given these significant earnings cuts we think are still to come. With the Fed dashing hopes for a dovish pivot on this policy a few weeks ago, we think asset markets may be entering fire and ice part two. In contrast with part one, this time the decline in stocks will come mostly through a higher equity risk premium and lower earnings rather than higher interest rates. In fact, our earnings models are all flashing red for the S&P 500, and we have high confidence that the decline in forward S&P 500 earnings forecasts is far from over. In short, part two will be more icy than fiery, the opposite of the first half of the year. That's not to say interest rates don't matter, they do and we expect bonds to perform better than stocks in this icier scenario. Importantly, if last Thursday marked a short term low for long duration bonds, i.e. a high in yields, the S&P 500 and many stocks could get some relief again as rates come down prior to the next rounds of earnings cuts that won't begin until later this month. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.0 comments0
- Andrew Sheets: The State of Play in Markets GloballyThere has been a lot of market movement in recent months, so as we exit the summer, what are the market stories and valuations that investors should be aware of? --Transcript-- Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, September 2nd at 3 p.m. in London. As summer draws to a close, there is quite a bit that investors are coming back to. Here's a state of play of our global economic story, and where cross-asset valuations sit today. The global economy faces challenges, but these challenges differ by region. The U.S. economy is seeing elevated inflation and still strong growth, as evidenced by today's report that the U.S. economy added another 315,000 new jobs last month. That makes it likely that the Federal Reserve will have to air on the side of raising rates more to bring inflation down, which would further invert the U.S. yield curve and, in our view, support the U.S. dollar. Europe also has high inflation, but of a different kind. Europe's inflation isn't nearly as pronounced in so-called core elements, and it isn't showing up in wages. Instead, Europe is in the midst of a major energy crunch, that in our base case will push the economy into a mild recession. Markets expect that the European Central Bank will raise rates significantly more than the U.S. Federal Reserve over the next 12 months, but given our risks to growth we disagree, a reason we forecast a weaker euro. The economic situation in the UK is also very challenged, leaving us cautious on gilts and the UK pound. China and Japan are very different and core inflation in both countries is less than 1%. China continues to face dual uncertainties from a weakening property market and zero-covid policy, factors that lead us to think it is still a bit too soon to buy China's equity market, despite large losses this year that have driven much better valuations. We remain more optimistic on Japanese equities on a currency hedged basis, given that it remains one of the few developed market economies where the central bank is not yet tightening policy. To take a closer look at those global equity markets we enter September with the U.S. S&P 500 stock index trading at about 17x earnings. That's down from over 20x earnings at the start of the year, but it's still above average. U.S. small cap valuations, at about 11x earnings, are less extreme. Stocks in Europe, Australia, Japan, China and emerging markets all trade at about 11 to 12x forward earnings at the index level. Of all of these markets our forecasts imply the highest returns, on a currency hedged basis, in Japan. In bonds, it's important to appreciate that yields remain much higher than they were a year ago. As we discussed last week, investors can now earn about 3.3% on 6 month U.S. government treasury bills, U.S. investment grade bonds yield almost 5% and U.S. high yield yields over 8.5%. In Europe, yields on European investment grade credit and Italian 10 year bonds are pretty similar, a spread at which we think European investment grade bonds are more attractive. Markets have been moving over the summer. We hope our listeners have managed some time to rest and recharge and that this discussion has given some helpful context to where the different stories and valuations in the market currently sit. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.0 comments0
- Chetan Ahya: Why are Asiaâs Exports Deflating?As consumers around the globe scale back on goods spending, how are Asian export markets impacted and where might opportunities lie? --Transcript-- Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanly's Chief Asia Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll be focusing on the challenging landscape for Asia's exports post-COVID. It's Thursday, September 1st, at 8:30 a.m. in Hong Kong. As listeners of the show are no doubt aware, the post-COVID recovery around the world has not been uniform, and each region is facing its own specific challenges. In Asia, one of those challenges is that the Asia export engine seems to be losing steam as goods demand continues to deflate. For instance, real export growth decelerated to just an average of 3% on a year on year basis in the past six months, as compared to a peak of 30% in April 2021. Whichever way you slice and dice Asia's exports, it is evident that the underlying trends are soft everywhere. Whether by destination or by product, there is simply pervasive weakness. Let's start with product: when we look at Asia exports by product across the different categories of consumer, capital and intermediate goods exports, we are seeing a synchronized slowdown. Commodities are the only product category which is holding up, supported by trailing elevated prices. But with industrial commodity prices falling by some 30% since their March peak, we think there is every chance that commodity exports will slow significantly too in the coming months. Now let's turn to destination. Demand is slowing in 70% of Asia's export destinations. While exports to the U.S. are still holding up, we expect that the slowing in the U.S. economy plus the continued normalization in goods spending, will weigh on exports to the U.S. too. Against this backdrop of weak aggregate demand, we see more downside for Asia's exports to the U.S. in the coming months. One of the reasons why Asia's exports are deflating rapidly is because developed markets consumers are shifting back into spending on services after an outsized spending on goods earlier during the pandemic. As a case in point, US spending on goods had risen by 20% between January 2020 and March 2021. Since reaching its peak in March 21, goods spending has been on a decelerating path, declining by 5%. We expect further weakness in goods spending as the share of goods spending still has not normalized back towards pre-COVID levels. Against this backdrop, investors should look at countries where domestic demand offsets the weakness in external demand. We continue to be constructive on India, Indonesia and Philippines as they are well placed to generate domestic demand alpha. Within this group, we believe that India is the best placed economy within the region for three reasons. First, we see a key change in India's structural story. Policymakers have made a clear shift in that approach towards lifting the productive capacity of the economy and creating jobs while reducing the focus on redistribution. Second, the India economy is lifting off after a prolonged period of adjustment. The corporate sector has delivered and the balance sheet in the financial sector has also been cleaned up. This backdrop of healthy balance sheets and rising corporate confidence bodes well for the outlook for business investment. Third, against this backdrop, we are seeing unleashing of pent up demand, especially in areas like housing and consumer durables. Finally, what about China - the largest economy in Asia? Typically when export slows down, we would expect China to be able to stimulate domestic demand. But in this cycle, while easing is already underway, the recovery in domestic demand is being held back by the housing market problem and its COVID management approach. We think that China domestic demand recovery should pick up pace by early next year as the full effects of its stimulus kicks in and private confidence lifts, thanks to China's anticipated shift to a living with COVID stance. Thanks for listening. If you enjoy the show, please leave us a review on Apple podcasts, and share Thoughts on the Market with a friend or a colleague today.0 comments0
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