Trader on the floor of the NYSE, June 1, 2022.
Global markets are at the start of a fundamental shift after a nearly 15-year period characterized by low interest rates and cheap corporate debt, according to Morgan Stanley co-chairman Ted Pick.
The transition from the economic conditions that followed the 2008 financial crisis to everything that is to follow will take “12, 18, 24 months” to unfold, according to Pick, who spoke at a financial conference last week At New York.
“It’s an extraordinary time; we have our first pandemic in 100 years. We have our first invasion in Europe in 75 years. And we have our first inflation in the world in 40 years,” Pick said. “When you look at the combination, the intersection of pandemic, war, inflation, it signals a paradigm shift, the end of 15 years of financial repression and the next era to come.”
Last week, Wall Street’s top executives issued dire warnings about the economy, led by JPMorgan Chase CEO Jamie Dimon, who said a “hurricane is right out there, down the road, ahead.” . That sentiment was echoed by Goldman Sachs Chairman John Waldron, who called the overlapping “system shocks” unprecedented. Even regional bank CEO Bill Demchak said he believed a recession was inevitable.
Instead of just sounding the alarm, Pick – a three-decade veteran of Morgan Stanley who heads the company’s trading and banking division – gave historical context as well as his impression of what the tumultuous times ahead will look like. and will feel.
fire and ice
Markets will be dominated by two forces: worries about inflation, or “fire,” and recession, or “ice,” said Pick, who is seen as a frontrunner to eventually succeed CEO James Gorman.
“We’ll have these periods where it feels terribly fiery, and other periods where it feels freezing, and customers have to navigate around that,” Pick said.
For Wall Street banks, some businesses will thrive, while others may stall. For years after the financial crisis, bond traders dealt with artificially calmed markets, giving them less work. Now, as central banks around the world begin to fight inflation, traders in government bonds and currencies 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 said last month that second-quarter investment banking fees have fallen 45% so far, while trading revenue has risen 20%.
“The banking calendar has calmed down a bit because people are trying to figure out if we’re going to clear up this paradigm shift sooner or later,” Pick said.
Ted PickMorgan Stanley
Source: Morgan Stanley
In the short term, if economic growth holds and inflation subsides in the second half of the year, the “Goldilocks” narrative will prevail, strengthening markets, he said. (For what it’s worth, Dimon, citing the impact of the war in Ukraine on food and fuel prices and the Federal Reserve’s decision to shrink its balance sheet, seemed pessimistic that this scenario would materialize.)
But the back and forth between fears of inflation and recession will not be resolved overnight. Pick has repeatedly called the post-2008 era a time of “financial repression” – a theory in which policymakers keep interest rates low to provide cheap debt financing to countries and businesses.
“The 15 years of financial repression isn’t just about what’s next in three or six months…we’ll be having this conversation for the next 12, 18, 24 months,” Pick said.
“Real Interest Rates”
Low or even negative interest rates were a hallmark of the previous era, along with moves to pump money into the system, including bond-buying programs known collectively as quantitative easing. These measures penalized savers and encouraged unbridled borrowing.
By draining risk from the global financial system for years, central banks have forced investors to take on more risk to earn returns. Unprofitable companies were kept afloat by easy access to cheap debt. Thousands of start-ups have blossomed in recent years with a cash-burning growth-at-all-costs mandate.
It’s over as central banks prioritize tackling runaway inflation. The effects of their efforts will affect everyone from credit card borrowers to aspiring billionaires running Silicon Valley start-ups. Venture capitalists have told start-ups to preserve cash and aim for real profitability. Interest rates on many online savings accounts have moved closer to 1%.
But such changes could be bumpy. Some observers are concerned about Black Swan-like events in the plumbing of the financial system, including the bursting of what one hedge fund manager has called “the biggest credit bubble in human history.” .
From the ashes of this transition period, a new economic cycle will emerge, Pick said.
“This paradigm shift will at some point lead to a new cycle,” he said. “It’s been so long since we’ve had to think about what a world is like with real interest rates and a real cost of capital that will distinguish winning companies from losing companies, winning stocks from losing stocks.”