Thoughts on the Market

Experts dive into the shifting landscape of U.S. consumer confidence, tracing its evolution amid ongoing policy changes. They discuss the troubling rise in delinquency rates for auto loans and mortgages, highlighting disparities across income levels. The impact of tariffs and post-COVID financial dynamics on spending habits is also analyzed. Additionally, the challenges in the housing market, like affordability and low inventory, are explored, shedding light on their influence on consumer confidence and overall economic stability.

The discussion dives into the mounting challenges posed by tariffs and their impact on equity markets. Analysts explore potential risks, emphasizing that policy uncertainty is here to stay. Strategies for investors are shared, spotlighting ways to navigate these turbulent waters. Key factors for stock selection are highlighted, specifically on how to identify resilient companies amidst changing trade dynamics. Tariff announcements loom, suggesting further complexity in international relations.

As credit resilience declines, investors are urged to reassess portfolio quality. Recent stock market relief may be short-lived, masking deeper economic issues. Growth and inflation trends are troubling, suggesting a rough road ahead for credit. The discussion highlights the importance of being cautious in navigating these volatile markets, urging foresight as potential risks loom on the horizon. It's a call for strategic portfolio adjustments in anticipation of a challenging credit landscape.

Global trade is undergoing a significant shift as U.S. tariffs reshape international relationships, particularly with China, Colombia, Mexico, and Canada. The complexities of reciprocal tariffs complicate trade and manufacturing dynamics. Non-tariff barriers and nearshoring strategies are emerging as vital considerations. Sectors like semiconductors face unique challenges, while others, like automobiles, may adapt more readily. The podcast highlights the movement of production to Vietnam and India and the potential inflation and slower growth risks for the U.S. economy.

In this engaging discussion, Arushi Agarwal, a European Sustainability Strategist and expert in alternative proteins, sheds light on the transformative potential of fermentation technology in the food industry. She explains how fermentation can address pressing issues like food security and greenhouse gas emissions while highlighting projected market growth to $30 billion by 2030. The conversation also delves into necessary capital investments and the role of government policies in supporting alternative proteins, offering innovative solutions to our global nutrition challenges.

The podcast dives into the exciting performance of European banks, highlighting their strong standing globally. It analyzes the impact of Germany’s fiscal package and rising defense spending on market optimism. The discussion also touches on the effects of regulatory changes and the role of AI in enhancing banking efficiency. As the U.S. market faces uncertainties, Europe seems poised for a financial renaissance, making it a hotspot for investors.

The discussion kicks off with insights into recent stock market rallies and the Federal Reserve's easing of inflation concerns. Key economic indicators are examined to predict the market's rebound potential. The impact of shifting capital flows and a weaker U.S. dollar on market dynamics is analyzed. Additionally, the upcoming reciprocal tariff deadline is highlighted as a pivotal moment for negotiations rather than a definitive solution. Overall, there's a sense of optimism about the market's future trajectory.

Investors are shifting focus from U.S. markets to international opportunities due to lower growth and inflation worries. The podcast dives into the nuances of high-yield bonds, comparing the U.S. landscape with emerging markets. Analysts discuss the potential of emerging market debt and positive trends in ratings amid tariff challenges. They highlight strategies for navigating risks in U.S. retail, focusing on the disparity between specialty shops and larger department stores in the context of changing policies.

This discussion dives into the recent Federal Open Market Committee meeting, revealing revised forecasts for growth and inflation. The speakers express concerns about potential stagflation and heightened economic uncertainty. They tackle the Fed's difficult policy choices regarding interest rates amidst rising inflation. Market responses indicate a preference for rate cuts by 2026, while upcoming tariff announcements add another layer of complexity. Overall, the conversation underscores the unpredictable landscape of U.S. economic policy.

Our analysts Michael Cyprys and Stephen Grambling discuss prediction markets’ rising popularity and how they could disrupt the U.S. sports betting industry.----- Transcript -----Michael Cyprys: Welcome to Thoughts on the Market. I'm Mike Cyprys, Morgan Stanley's head of U.S. Brokers, Asset Managers, and Exchanges Research.Stephen Grambling: And I'm Stephen Grambling, head of U.S. Gaming, Lodging, and Leisure.Michael Cyprys: Today, we'll talk about sports betting and how prediction markets can disrupt it.It's Wednesday, March 19th at 10 am in New York.Sports betting used to be against the law in most of America, outside of Nevada. That changed in 2018, when the U.S. Supreme Court declared a federal ban on sports betting to be unconstitutional. As a result, many American states legalized sports betting. Over the last seven years, it's become even more popular and profitable. The American sports betting industry posted a record [$]13.7 billion of revenues last year. That's up from 2023's record of [$]11 billion, according to the American Gaming Association.Now, prediction markets are set to potentially disrupt this industry.Stephen, to set the stage, how is the U.S. sports betting industry currently organized and regulated?Stephen Grambling: Well, as you mentioned, Mike, with the overturning of the Professional and Amateur Sports Protection Act in 2018, legalization of sports betting turned to the states. The path to legislation varies by state with different constituents to consider – beyond even the local government. You know, Senate and Congress, but also tribal casinos, commercial casinos, sports teams, leagues, etc.We now have 38 states plus D.C. and Puerto Rico offering legal sports betting in some format, collecting billions of dollars in taxes in aggregate. At this point, the big states that are remaining are really only Texas, Florida, Georgia, and California. Each state forms its own framework across taxes, what sports can or can't bet on, and regulations around advertising. This means a separate commission for each state regulates the industry, in conjunction with state lawmakers,Michael Cyprys: I see. And what exactly are betting exchanges and how do they fit within the U.S. sports betting market?Stephen Grambling: Betting exchanges have existed for a long time in markets around the world. These are really exchanges – and are platforms – where individuals can bet directly against each other on an event outcome, rather than against a bookmaker. These exchanges match opposing bets and then take a commission on the winnings and typically offer better odds by eliminating traditional bookmaker margins.That said, the all in commission can range at two to five per cent. Whereas the spread on a traditional singles bet is about five to six per cent. So, it's relatively small. This is also known as the, the vigorish or the vig, or what the book gets to keep. Due to the need to be perfectly balanced as an exchange, these platforms, which operate in various markets, as I said around the world, are generally more akin to premarket, single bets. So single bet, or sometimes people call them straight bets, are really just betting on the outcome of a match or the over-under. They don't typically impact things like multi leg bets, also known as parlays, since there's less of a consistent betting pool.Because the type of bets are more limited than what a sports book offers, these exchanges somewhat plateaued in popularity in markets like the UK. For frame of reference, we estimate these singles bets are about $900 million in markets where it's legal for sports betting, and roughly another $800 million in states without legislation.Again, this is really just the market for people who only bet on that type of bet; that don't do both singles bets and parlays, or parlays alone.Mike, maybe turning it back to you, sports betting is a type of prediction market. But from where you sit, how would you define prediction markets more broadly, and can you give some examples?Michael Cyprys: Sure. So prediction markets are a type of marketplace where event contracts trade. Sometimes they're called forecast markets or even information markets. A core feature here is trading an outcome at an event, such as the November election, economic indicators, or even corporate events. But unlike futures contracts, event contracts have a defined risk and defined reward.Generally, they're structured as binary options, which can be easily understood. For instance, a contract could pay a dollar if the consumer price index, or CPI, exceeds say, 3 per cent in March. If an investor buys that contract for 75 cents, they could generate a 25 percent potential return if CPI comes in over 3 per cent and they collect a dollar on that contract.Now, the counterparty on the other side of that trade is the investor who sold that contract, collected the 75 cents, and they would stand to lose 25 cents potentially – if they held on to that contract, paid out the full dollar in the event that CPI came in hot.What's interesting is the price of that contract becomes the best forecast of that event happening, and so this can provide a lot of information value.Stephen Grambling: So, it sounds like you could bet on just about anything, so are these prediction markets legal?Michael Cyprys: Not only are they legal, they've been around for some time – though perhaps more esoteric in nature, in terms of where we have seen contracts and types of events traded on marketplaces. They've been geared more towards end users and farmers. For example, event contracts on the weather have been listed on a Chicago derivative exchange for over 25 years.What's new and interesting is that we're seeing new exchange upstarts enter the space. They're innovating, they're broadening access to retail investors, and they're benefiting from the confluence of a number of different trends around technology improvements – with mobile trading in recent years, the speed and access to information, the ease of account opening, broadly retail investors coming into the marketplace, and the pure simplicity and intuitive nature of event contracts.The 2024 election sparked people's interest in event contracts. And that's persisting post election. In the coming months, we do expect a large retail brokerage platform in the U.S. to really help potentially mainstream event contracts.Coming back to your legality point and question. One area of open debate, though, is around the legality of sports event contracts, where we expect regulators to provide some clarity around that in the months ahead.Stephen Grambling: Interesting, so some have also argued that the prediction markets are not just the future of trading, but for information in general. Do you think prediction markets can be a disruptive force in finance then?Michael Cyprys: Over time, potentially, yes. I do think that's going to require participation from both retail as well as institutional investors that can help fuel robust and liquid marketplace. The sheer simplicity is helpful in terms of driving retail adoption; but for institutional investors and corporates, they could look to prediction markets as a valuable hedging tool, with insurance-like properties – not to mention the information value that can be derived.Stephen, given our discussion of prediction markets and their relevance for sports betting, how are you framing the potential for risk and opportunity for the sports betting industry from the application of prediction market models?Stephen Grambling: There's a bit of a put and take wherein existing sports betting markets, that's where it's legal, the industry may face new competition. So, the incumbents will face new competition from these prediction markets being opened up. On the other hand, a new regulatory framework could also open up new states; so the states that I referenced before that are still out there that haven't been legalized, all of a sudden become fair game.Given the size of these new states, as I mentioned, folks like California, Texas, Florida; these are enormous economies, and they're roughly equal to the size of the existing markets. So, the potential upside opportunity, we think, actually outweighs the competitive risks. And we quantify this as being potentially in the hundreds of millions of dollars, an incremental EBITDA to some of the incumbents that operate in the space.Michael Cyprys: That's fascinating, Stephen. Thanks for taking the time to talk.Stephen Grambling: Great speaking with you, Mike.Michael Cyprys: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.