World markets are at the start of a fundamental shift after a nearly 15-year period impacted by low interest rates and cheap corporate debt, according to Morgan Stanley co-President Ted Pick.
The transition to economic conditions that followed the 2008 financial crisis and whatever happens next will take “12, 18, 24 months” to unfold, according to Pick, who spoke this week at a New York financial conference.
“This is an extraordinary moment; we have our first pandemic in 100 years. We had our first annexation of Europe in 75 years. And we had our first all-global inflation in 40 years,” said Pick. “When you look at the combination, the intersection of a pandemic, war, inflation, it indicates a shift in mindset, the end of 15 years of financial repression and the next era to come.”
Wall Street zenith executives holding a financial conference this week discussed dire warnings about the economy, led by JPMorgan Chase CEO Jamie Dimon, who revealed that “a storm is out there, just down the road, coming our way.”
That sentiment was echoed by Goldman Sachs President John Waldron, who called the overlapping “shock in the system” unprecedented. Even regional bank CEO Bill Demchak said he thought a recession was inevitable.
Instead of just raising the alarm, Pick — a 3-decade veteran of Morgan Stanley leading the company’s trading & banking division — puts some historical context and impressions on for example what turbulent periods in the future will look and feel.
The market will be dominated by two forces – concerns over inflation, or “fire”, and recession, or “ice”, as Pick calls it, which is believed to be the frontrunner to eventually replace CEO James Gorman. “We’re going to have these periods where the taste buds are very fiery, & other periods where the tastes are cold, & clients need to navigate around that,” Pick said.
For Wall Street banks, exclusive businesses will boom, while others may be idle. During the years after the financial crisis, permanent income traders traded using silent markets, giving them less work. Now, as central banks around the world start to grapple with inflation, government bonds & currency traders will be more active, according to Pick.
The uncertainty of the period has, at least for now, reduced merger activity, as companies navigate the unknown. JPMorgan revealed months later that its 2Q investment banking portfolio has fallen 45% so far, ad interim trading earnings up 20%.
“The banking calendar is a bit quiet because people are trying to figure out whether we’re going to clarify this shift in mindset sooner or later,” Pick said. In the short term, if economic growth persists & inflation subsides in the second half of the year, the narrative
For what it’s worth, Dimon, citing the impact of the Ukraine war on food & fuel prices and the Federal Reserve’s move to shrink the balance sheet, seems pessimistic that this scenario will work.
But the push and pull between inflation concerns and recession won’t be resolved overnight. Select several times refers to the post-2008 era as a period of “financial repression” — a theory in which policymakers keep interest rates low to provide cheap debt financing to countries and corporations.
“15 years of financial repression doesn’t just continue to what’s going to happen next in 3 or six months we’re going to have this dialogue for the next 12, 18, 24 months,” Pick said.
Low or even negative interest rates have been a feature of previous eras, and steps to inject money into the system included a bond-buying event collectively known as quantitative easing. The move has already penalized savers and encouraged rampant borrowing.
By draining the risk of the world’s financial system over the years, central banks are forcing investors to take more risks in order to receive returns.
Unprofitable corporations permanently survive with ready access to cheap debt. Thousands of start-ups have grown in recent years using a money-burning mandate, growth using any portfolio. It ended because the central bank prioritized the battle against runaway inflation.
The impact of their efforts will touch everyone from credit card borrowers to employees of struggling companies to would-be billionaires running start-ups in Silicon Valley. Venture capital investors have instructed start-ups to save money and aim for actual profitability. Interest rates in online savings accounts are close to 1%.
But such a shift can be bumpy. The last time the Fed attempted quantitative tightening, in 2018, strange things happened to the stock, foreign exchange, & oil markets. Less than a year after their campaign began, global primary central banks lost their nerve and halted QT events amid slowing growth.
Some observers are concerned about incidents such as the Black Swan occurring on financial system channels, including the explosion of what one hedge fund manager described as “the biggest credit bubble in human history.”
Dimon sees “minimum, large volatility” as primary buyers of government bonds may not have the ability or preference to enter. Exit based on this transition period, a new business cycle will emerge, Pick term.
“This shift in the framework of thinking in terms of exclusivity will bring about a new cycle,” he said. “It’s been so long since we’ve had to consider for example whether the global use of real interest rates and the real portfolio of capital will differentiate the winning companies from the losing companies, the winning stocks from the losers.”
It is very clear that a new business cycle is about to take place and leaves the old and outdated business institutions unwilling to open themselves up to change.
Changes and developments have never been on anyone’s side except for the changes themselves, it is proper for business and technology institutions to follow the times and welcome changes.