Thoughts on the Market

As bitcoin has been experiencing a steep decline in the last 6 months, investors are beginning to wonder when Cryptocurrencies will finally bottom out and start the cycle anew.Digital assets, sometimes known as cryptocurrency, are a digital representation of a value that function as a medium of exchange, a unit of account, or a store of value, but generally do not have legal tender status. Digital assets have no intrinsic value and there is no investment underlying digital assets. The value of digital assets is derived by market forces of supply and demand, and is therefore more volatile than traditional currencies’ value. Investing in digital assets is risky, and transacting in digital assets carries various risks, including but not limited to fraud, theft, market volatility, market manipulation, and cybersecurity failures—such as the risk of hacking, theft, programming bugs, and accidental loss. Additionally, there is no guarantee that any entity that currently accepts digital assets as payment will do so in the future. The volatility and unpredictability of the price of digital assets may lead to significant and immediate losses. It may not be possible to liquidate a digital assets position in a timely manner at a reasonable price.Regulation of digital assets continues to develop globally and, as such, federal, state, or foreign governments may restrict the use and exchange of any or all digital assets, further contributing to their volatility. Digital assets stored online are not insured and do not have the same protections or safeguards of bank deposits in the US or other jurisdictions. Digital assets can be exchanged for US dollars or other currencies, but are not generally backed nor supported by any government or central bank.Before purchasing, investors should note that risks applicable to one digital asset may not be the same risks applicable to other forms of digital assets. Markets and exchanges for digital assets are not currently regulated in the same manner and do not provide the customer protections available in equities, fixed income, options, futures, commodities or foreign exchange markets.Morgan Stanley and its affiliates do business that may relate to some of the digital assets or other related products discussed in Morgan Stanley Research. These could include market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking.-----Transcript-----Welcome to Thoughts on the Market. I'm Sheena Shah, Lead Cryptocurrency Strategist for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, today I address the question everyone seems to be asking about the crypto cycle: when will crypto prices find a bottom? It's Thursday, August 11th, at 5 p.m. in London. After a 75% peak to trough fall in bitcoin's price between November 2021 and June this year, it seems like almost everyone in the market is asking the same question. When will crypto prices find the bottom? We will discuss three topics related to this question; the pace of new bitcoin creation, past bitcoin cycles and dollar liquidity. What can bitcoin's creation tell us about where we are in the crypto cycle? Bitcoin's relatively short history means there is little available data, and yet the data is quite rich. In its short 12 year history, bitcoin has experienced at least 10 bull and bear cycles. Bitcoin creation follows a 4 year cycle. Within these 4 year cycles, price action has so far followed three distinct phases. First, there is a rapid and almost exponential rise in price. Second, at a peak in price, a bear market follows. And third, prices move sideways, eventually leading into a new bull market. The question for investors today is, is bitcoin's price moving out of the second phase and into the third? Only time will tell. There have only been three of these halving cycles in the past, and so it is difficult to conclude that these cycles will repeat in the future. What about past bear markets? The 75% peak to trough fall in bitcoin's price and this cycle is currently faring better than previous cycles, in which the falls after peaks in 2011, 2013 and 2017 ranged between 85 and 95%. There is, therefore, speculation about whether this cycle has further to drop. Previous cycles have shed similar characteristics. In the bull runs there was speculation about the potential of a particular part of the crypto ecosystem. In 2011, it was the excitement about Bitcoin and the development of ecosystem technologies like exchanges and wallets. In 2020 to 2021, this cycle, there were NFTs, DeFi and the rising dominance of the institutional investor. In previous cycles, the bear runs were triggered by regulatory clampdowns or a dominant exchange being hacked. In 2013, a crackdown in China led to the world's largest exchange at that time, BTC China, stopping customer deposits. In this cycle, the liquidity tap dried up as inflation concerns gripped the market. Central bank liquidity and government stimulus fueled the speculation driven 2020-2022 crypto cycle. For this reason, day to day crypto traders are focusing on what the U.S. Federal Reserve plans to do with its interest rates and availability of dollars. To find a bottom, there are two liquidity related factors to look out for. First, market expectations that central banks will continue to tighten the money supply, turn into expectations that central banks will resume monetary expansion. Second, crypto companies increase appetite to build crypto leverage again. Both of these would increase liquidity and drive a new cycle of speculation. Which brings us back to the question about the bottom of the crypto cycle that almost everyone is asking: are we there yet? To answer that question, look at bitcoin creation, past cycles and above all, liquidity. Thanks for listening. If you enjoyed Thoughts on the Market, share this and other episodes with a friend or colleague today. 

The Senate just passed the Inflation Reduction Act which seeks to fight inflation on a variety of fronts, but the most pressing question is, will the IRA actually impact inflation?-----Transcript-----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Head of U.S. Public Policy Research and Municipal Strategy. Ellen Zentner: And I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Michael Zezas: And on this special episode of Thoughts on the Market, we'll discuss the Inflation Reduction Act, or IRA, with a focus on its impact on the U.S. economic outlook. It's Wednesday, August 10th, at noon in New York. Michael Zezas: So, Ellen, the Senate just passed the Democrats Inflation Reduction Act on a party line vote. And we know this has been a long awaited centerpiece to President Biden's agenda. But let me start with one of the more pressing questions here; from your perspective, does the Inflation Reduction Act reduce inflation? Or maybe more specifically, does it reduce inflation in a way that impacts how the Fed looks at inflation and how markets look at inflation? Ellen Zentner: So for it to impact the Fed today and how the markets are looking at inflation, it really has to show very near term effects here, where the IRA focuses more on longer term effects on inflation. So today we've got recent inflation report that came out this week showing that inflation moved lower, so softened. Especially showing the effects of those lower energy prices, which everyone notices because you go and gas up at the pump and so, you know right away what inflation is doing. And that's led to some more optimism from households. That at least gives the Fed some comfort, right, that they're doing the right thing here, raising rates and helping to bring inflation down. But there's a good deal more work for the Fed to do, and we think they raise rates by another 50 basis points at their September meeting. The rates market also took note of some of the inflation metrics of late that are looking a little bit better. But still, it's not definitive for markets what the Fed will do. We need a couple of more data points over the next few months. So the IRA is just a completely separate issue right now for the Fed and markets because that's going to be in the longer run impact. Michael Zezas: So the bill is constructed to actually pay down the federal government deficit by about $300 billion over 10 years, and conventional wisdom is that when you're reducing deficits, you're helping to calm inflation. Is that still the case here? Ellen Zentner: So it's still the case in general because it means less government debt that has to be issued. But let's put it in perspective, $300 billion deficit reduction spread over ten years is 30 billion a year in an economy that's greater than 20 trillion. And so it's very difficult to see. Michael Zezas: Okay, so the Inflation Reduction Act seems like it helps over the long term, but probably not a game changer in the short term. Ellen Zentner: That's right. Michael Zezas: Let's talk about some of the more specific elements within the bill and their potential impact on inflation over the longer term. So, for example, the IRA extends Affordable Care Act subsidies. It also allows Medicare to negotiate prices for prescription drugs, or at least some prescription drugs, for the first time. How do you view the impacts of those provisions? Ellen Zentner: So these are really the provisions that get at the meat of impacting inflation over the longer run. And I'll focus in on health care costs here. So specifically, drug prices have been quite high. Being able to lower drug prices helps lower income households, that helps older cohorts, and the cost of medical services gets a very large weight in overall consumer inflation and it gets a large weight because we spend so much on it. The other thing I'd note here, though, is that since it allows Medicare to negotiate prices for some drugs for the first time, well, that word negotiate is key here. It takes time to negotiate price changes, and that's why this bill is more something that affects longer run inflation rather than near term. Michael Zezas: Right. So bottom line, for market participants, this Inflation Reduction Act might ultimately deliver on its name. But if you want to understand what the Fed is going to do in the short term and how it might impact the rates markets, better off paying attention to incoming data over the next few months. It's also fair to say there's other market effects to watch emanating from the IRA, namely corporate tax effects and spending on clean energy. Those are two topics we're going to get into in podcasts over the next couple of weeks. Michael Zezas: Ellen, thanks for taking the time to talk. Ellen Zentner: Great speaking with you, Michael. Michael Zezas: As a reminder, 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.

As lending standards tighten and banks get ready to make some tough choices, how will the housing market fare if loan growth slows? Co-Heads of U.S. Securitized Products Research Jim Egan and Jay Bacow discuss.-----Transcript-----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jim Egan: And I'm Jim Egan, the other Co-Head of U.S. Securitized Products Research. Jay Bacow: And on this episode of the podcast, we'll be discussing how tightening lending standards could impact housing activity. It's Tuesday, August 9th, at 11 a.m. in New York. Jim Egan: Now Jay, you published a high level report last week with Vishy Tirupattur, who is the Head of Fixed Income Research here at Morgan Stanley, on the coming capital crunch. Basically, rising capital pressures will mean that banks will have to make tough choices in their lending books. Is that about right? Jay Bacow: Yeah, that's it. Basically, we don't think that markets have really appreciated the impact of the combination of how rising rates caused losses on banks portfolios, the regulatory changes and the results of the stress test capital buffers. All of these things are going to require banks to look at the composition of not just the assets that they own, but their business models in general. Our large cap banking analyst Betsy Graseck thinks that banks are going to look at things differently to come up with different solutions depending on the bank, but in general across the industry, expects lending standards to tighten for this year and in 2023, and for loan growth to slow. So, Jim, if banks are going to tighten lending standards then what does that mean for housing activity? Jim Egan: I think, especially if we look at home sales, that's a negative for sales volumes and home sales are already falling. We've talked about affordability deterioration on this podcast a few times now, not just the fact of where affordability is in the housing market, but how rapidly it's deteriorating. If lending standards are going to tighten on top of those affordability pressures, then that just argues for potentially an even more substantial decrease in sales volumes going forward, and we're already seeing this in the data. Through the first half of the year new home sales are down 14% versus the first half of 2021. Purchase applications, that's our highest frequency data point that we have, they're getting progressively weaker each month. They were down 17% year over year in June, 19% year over year in July. Existing home sales, and that's referencing a much larger volume of sales then new home sales, they're down a comparatively strong 8% year to date. But with all of the dynamics that we're discussing, we believe that they're going to see a much more precipitous drop in the second half of the year. We have it down over 15% year over year versus 2021. Now, that's because of affordability pressures. It's because of the potential for tightening lending standards. It's also because of the lock in effect from a rate perspective. Jay Bacow: On that lock in effect, with just 2% of the market having incentive to refinance, lenders are sitting there and saying, well, what do we do in this environment where we can't just give people a rate refi? Now, you mentioned the purchase activity, that's obviously one area, but Black Knight just reported another quarterly record of untapped equity in the housing market, and consumers would love to be able to tap that. The problem is when you do a cash out refinance, you end up increasing the rate on your entire mortgage. And homeowners don't want to do that. So they'd love to do something like a home equity line of credit or second lien where they're getting charged the higher rate on just the equity they take out. But the problem is it's harder to originate those in an environment where lending standards are tightening, particularly given the capital allocation against those type of loans can be onerous. Jim Egan: Right. And the level of conversations around an increase in kind of the second lien or the hill market have certainly been picking up over the past weeks and months, both on the originator side, on the investor side, as people look to find ways to access that record amount of equity that you mentioned in the housing market. Jay Bacow: Thinking about trying, people are still trying to sell houses and you just commented on the housing activity, but what about the prices they're selling at? Some of the recent data was pretty surprising. Jim Egan: The most recent month of data, I think the point that has raised the most eyebrows was the average or median price of new home sales saw a pretty significant month over month decrease. We continue to see month over month increases in the median and average price of existing home sales at. When we think about average and median prices, there's a mix shift issue there. So month over month, depending on the types of homes that sell things can move. What we actually forecast, the repeat sales index Case-Shiller, we're starting to see a slowdown in growth. The past two months have been consecutive deceleration in the pace of home price growth. I think the thing that we'd highlight most is the growing geographic pervasiveness of the slowdown. Two months ago, 11 of the Case-Shiller 20 city index was showing a deceleration month over month. This past month, it was 16. Now, all 20 cities continue to show home price growth, but again, 16 are showing that pace slowdown. There is some regional specificity to this, the cities that continue to accelerate largely in Florida, Miami and Tampa to name two. Jay Bacow: Okay. So that's what we've seen. What do we expect to see on a go forward basis? Jim Egan: We talked about our expectations for sales a few minutes ago. I think the one thing that we do want to highlight is on the starts front, we think that single unit starts are going to start to decrease over the course of the back half of this year. There's a couple of reasons for that. We talked about affordability pressures, another dynamic that's been playing out in the space is that there's been a backlog not just of housing starts, but before those starts to get the completion units under construction has swollen back to 2004 levels, starts themselves are only at 1997 levels. We do think that that is going to kind of disincentivize starts going forward. We're already starting to see it a little bit in the underlying data, trailing 12 month single unit starts had plateaued for largely a year. They've been down the past two months, we think that they're going to continue to fall in the back half of this year. It's already playing through from a sentiment perspective, homebuilder confidence is down 39% from its peak in November of 2020, and that's being driven by their perception of traffic on their sites as well as their perception of future sales conditions. So we do think that starts are going to fall because a number of these dynamics. And we think that home price growth is going to remain positive and we've highlighted this on this podcast before, but the pace is going to start slowing pretty materially in the back half of this year. The most recent print was 19.7%, down from over 20%, but we think it gets all the way to 9% by December 2022, 3% by December 2023. So continued home price growth, but the pace is going to slow pretty materially. Jim Egan: Jay, thanks for taking the time to talk. Jay Bacow: Jim. Always a pleasure. Jim Egan: 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. 

While inflation remains high and the battle to bring it down is top of mind, there may be some opportunities in technologies that could help bring down inflation in some sectors.-----Transcript-----Welcome to Thoughts on the Market. I'm Josh Pokrzywinski, Morgan Stanley's U.S. Electrical Equipment and Multi-Industry Analyst. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about deflationary opportunities in this high inflation environment. It's Monday, August 8th, at 4 p.m. in New York. As most listeners no doubt know, the battle to bring down inflation is the topic of 2022. But today I want to talk about inflation from a slightly different perspective, and that's how automation and productivity enhancing technologies could actually help bring down inflation in areas such as labor, supply chain procurement and energy. And while these technologies require capital investment, something that's often difficult when the economy is uncertain, we believe structural changes in demographics, energy policy and security, and an aging capital base make technologies focused on cost reductions and productivity actually more valuable. So for investors focusing on stocks that enable productivity and cost reduction through automation, efficiency, or their own declining cost curves while maintaining strong barriers to entry and attractive equity risk/reward, is something to consider. To dig into this, the U.S. Equity Strategy Team and equity analysts across the spectrum at Morgan Stanley Research created a deflation enabler shopping list. And that list is composed of stocks that produce tangible cost savings for their customers, where costs themselves are rising due to inflation, such as labor and energy, or scarcity, for example semiconductors or materials. In many cases, the cost of the product itself has also come down through technology or economies of scale, benefitting the purchaser and therefore adoption on both lower cost to implement and higher cost avoidance through use. So where should investors look? Although there are a number of deflationary companies across areas such as automation and semiconductors, we identified three major deflationary technologies which permeate across sectors and which are at long term inflection points in their importance for both enterprise and consumer. The first is artificial intelligence or AI. AI is proving relentless and increasingly deflationary. In biotech, AI could shorten development timelines, lower R&D spend and improve probability of success. The second is clean energy. My colleague Stephen Burd, who covers clean energy and utilities, has pointed out that against the backdrop of inflationary fossil fuels and utility bills, companies with deflationary clean energy technologies and high barriers to entry will be able to grow rapidly and generate increasing margins. And finally, mass energy storage and mobility. Although the cost of batteries have been falling for some time, competition in the space has led to heightened investment. In addition, ambitious top down government emissions goals have facilitated an exponential uplift in demand for batteries and their component raw materials. Although supply chains for batteries remain immature, battery storage technology is only beginning to have profound effects on society mobility, inclusivity and ultimately climate. As investment by automakers rises along with generous European subsidies aimed at staying competitive with U.S. and Chinese investment, the supply chain and innovation in new battery technologies such as solid state mean that the price should continue to fall as innovation and demand rise. This is extended beyond the personal vehicle market, with the cost savings and efficiency improvements driving profound changes and improvements in the range and cost of heavy duty and long haul trucking EV, and ultimately autonomous, markets. To sum up, in an inflationary world we believe companies that have developed deflationary products and services will become increasingly valuable, as long as they have significant barriers to entry with respect to those products and services. 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.

The current market pricing can tell investors a lot about what the market believes is coming next, but the future is uncertain and investors may not always agree with market expectations. Chief Cross-Asset Strategist Andrew Sheets explains.--- 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, August 5th, at 2 p.m. in London.Trying to predict where financial markets will go is difficult. The future, as they say, is uncertain, and even the most talented investors and forecasters will frequently struggle to get these predictions right.A different form of this question, however, might be easier. What do markets assume will happen? After all, these assumptions are the result of thousands of different actors, most of which are trying very hard to make accurate predictions about future market prices because a lot of money is on the line. Not only is there a lot of information in those assumptions, but understanding them are table stakes for a lot of investment strategy. After all, if our view only matches what is already expected by the market to happen, it is simply much less meaningful.Let's start with central banks, where current market pricing can tell us quite a bit. Markets expect the Fed to raise rates by another 100 basis points between now and February to about three and a half percent. And then from there, the Fed is expected to reverse course, reducing rates by about half a percent by the end of 2023. Meanwhile, the European Central Bank is expected to raise rates steadily from a current level of 0 to 1.1% over the next 12 months.Morgan Stanley's economists see it differently in both regions. In the U.S., we think the Fed will take rates a little higher than markets expect by year end and then leave them higher for longer than markets currently imply. In the U.S., we think the Fed will take rates higher than markets expect by year end and then leave them higher for longer than is currently implied. In Europe, it's the opposite. We think the ECB will raise rates more slowly than markets imply. The idea that the Fed may do more than expected while the ECB does less is one reason we forecast the US dollar to strengthen further against the euro.A rich set of future expectations also exists in the commodity market. For example, markets expect oil prices to be about 10% lower in 12 months time. Gasoline is priced to be about 15% lower between now and the end of the year. The price of gold, in contrast, is expected to be about 3% more expensive over the next 12 months.I’d stress that these predictions are not some sort of cheat code for the market. The fact that oil is priced to decline 10% doesn't mean that you can make 10% today by selling oil. Rather, it means that foreign investor, a 10% decline in oil, or a 3% rise in gold will simply mean you break even over the next 12 months.Again, all of this pricing informs our views. We forecast oil to decline less and gold to decline more than market prices imply. Meanwhile, Morgan Stanley equity analysts can work backwards looking at what these commodity expectations would mean for the companies that produce them. We won't get into that here, but it's yet another way that we can take advantage of information the market is already giving us.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.

As investors watch to see if tensions between the U.S. and China will escalate, it’s important to understand the underlying competitive dynamic and how U.S. policy may have macro impacts.--- Transcript ---Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public pPolicy Research and Municipal Strategy 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 Thursday, August 4th, at 1 p.m. in New York.This week, Speaker of the House Nancy Pelosi's Asia trip had the attention of many investors as they watched to see whether her actions would escalate tensions between the U.S. and China. In our view, though, this event wasn't a potential catalyst for tensions, but rather evidence of tensions that persist between the two global powers. Hence, we think investors are better served focusing on the underlying dynamic rather than any particular event.The U.S.-China rivalry has many complicated causes, many of which we've covered on previous podcasts. But the point we want to reemphasize is this; this rivalry is going to persist. China is interested in asserting its global influence, which in ways can be at odds with how the U.S. and Europe want the international economic system to function. Nowhere is this clearer than in the policies the U.S. has adopted in recent years aimed at boosting its competitiveness with China.The latest is the enactment of the Chips Plus Bill, which allocates over $250 billion to help US industries, in particular the semiconductor industry, to devolve its supply chain reliance on China for the purposes of economic security and to protect sensitive technologies. Policies like this have more of a sectoral effect than the macro one. But the primary market impact here being a defraying of rising costs for the semiconductor industry. But investors should be aware that there's potential policy changes on the horizon that could have macro impacts. For example, Congress considered creating an outbound investment restriction mechanism in that Chips Plus bill. Such a restriction could have significantly interrupted foreign direct investment in China with substantial consequences for China equity markets.That provision didn't make it into this bill, and with little legislative time between now and the midterm elections, it's unlikely to resurface this year. That's cause some to conclude that it's likely to be years before such a provision could become enacted, particularly if Republicans take back control of one or both chambers of Congress creating a risk of gridlock.But we'd caution that's too simple of a conclusion. The concept of outbound investment restrictions enjoys bipartisan support. So we think investors should be on guard for this provision to get serious consideration in 2023. We'll, of course, track it 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. 

After the July FOMC meeting, markets took a quick dive and then made an immediate recovery, so what happened?-----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 Wednesday, August 3rd, at 1 p.m. in New York. In the weeks since the July meeting of the Federal Open Market Committee, or FOMC, rates and currency markets have made quite the round trip. Treasury yields from 2 out to10 year maturities fell by over 25 basis points in the three days that followed the meeting. And the U.S. dollar index declined by 2% over the same period. However, looking at these markets today, as I sit here recording this podcast, it's almost as if the July FOMC meeting didn't happen. 10 year Treasury yields are about where they were going into the meeting last week, and 2 year yields are a bit higher even. As for the U.S. dollar index, it's back to the range it was in ahead of the meeting. So what happened? Going into the meeting, investors thought that the Fed would deliver a 75 basis point rate hike, but recognized that there was a tail risk of a larger 100 basis point hike. And even if the tail risk didn't materialize, investors had acknowledged that the additional 25 basis points might be delivered in September instead. And that would make for the third 75 basis point hike in this cycle. In short, investors were positioned for a hawkish outcome. The FOMC statement and Chair Powell's prepared remarks didn't disappoint. The message was on par with what FOMC participants had been saying over recent weeks and months. Inflation is still top of mind, and more work is needed to bring it down to acceptable levels. If the meeting ended with Powell's prepared remarks, rates and currencies would have likely taken a different path to where they trade today. However, the meeting didn't end there, and the Q&A session of Powell's press conference struck a more dovish tone. Three messages contributed to this interpretation. First, Powell suggested that rates had achieved a neutral setting, or one that neither puts upward nor downward pressure on economic activity relative to its potential. Second, he said that because a neutral policy setting had been reached, the pace of subsequent rate hikes could soon begin to slow. And finally, he suggested that the committee's view of the peak policy rate in the cycle hadn't changed since the last FOMC meeting, even though inflation data since then continued to surprise on the higher side. The reason for this seemed to be focused on the deterioration in activity data or growth data. In many ways, investors should have expected these statements from Powell, given guidance coming from the June summary of economic projections. In addition, because Fed policy had tightened financial conditions this year, and those financial conditions helped slow economic growth, the case for a less hawkish performance might have been predictable. The data that arrived in the wake of the meeting underscored the recent themes of slower growth and higher inflation. But the Fedspeak that arrived in the wake of the data, well, it continued to focus on inflation, as it had done before the Fed met in July. Where does all of that leave the Fed on policy and us on markets? Well, the Fed's job bringing inflation down hasn't yet been accomplished, the bond market is pricing less policy tightening than the Fed is last guided towards, and downside risks to global growth are rising. As a result, we remain neutral on bond market duration, but remain bullish on the U.S. dollar, particularly against the euro. 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 find the show.

As studies begin to show that obesity medications may save lives, will governments and insurances begin to consider them preventative primary care? And how might this create opportunity in pharmaceuticals? Head of European Pharmaceuticals Mark Purcell and Head of U.S. Pharmaceuticals Terence Flynn discuss.-----Transcript-----Mark Purcell: Welcome to Thoughts on the Market. I'm Mark Purcell, Head of Morgan Stanley's European Pharmaceuticals Team. Terence Flynn: And I'm Terence Flynn, Head of the U.S. Pharmaceuticals Team. Mark Purcell: And on this special episode of Thoughts on the Market, we'll be talking about the global obesity challenge and our outlook for the next decade. It's Tuesday, August the 2nd, and it's 1 p.m. in London. Terence Flynn: And 8 a.m. in New York. Terence Flynn: So Mark, more than 650 million people worldwide are living with obesity as we speak. The personal, social and economic costs from obesity are huge. The World Health Organization estimates that obesity is responsible for 5% of all global deaths, which impacts global GDP by around 3%. Obesity is linked to over 200 health complications from osteoarthritis, to kidney disease, to early loss of vision. So tackling the obesity epidemic would impact directly or indirectly multiple sectors of the economy. Lots to talk about today, but let's start with one of the key questions here: why are we talking about all this now? Are we at an inflection point? And is the obesity narrative changing? Mark Purcell: Yeah Terence look, there's a category of medicine called GLP-1's which have been used to treat diabetes for over a decade. GLP-1 is an appetite suppressing hormone. It works on GLP-1 receptors, you could think of these as hunger receptors, and it helps to regulate how much food our bodies feel they need to consume. Therefore, these GLP-1 medicines could become an important weapon in the fight against obesity. The latest GLP-1 medicines can help individuals who are obese lose 15 to 20% of their body weight. That is equivalent to 45 to 60% of the excess weight these individuals carry in the form of fat which accumulates around the waist and important organs in our bodies such as the liver. There is a landmark obesity study called SELECT, which has been designed to answer the following key question: does weight management save lives? An interim analysis of this SELECT study is anticipated in the next two months, and our work suggests that GLP-1 medicines could deliver a 27% reduction in the risk of heart attacks, strokes and cardiovascular deaths. We believe that governments and insurance companies will broaden the reimbursement of GLP-1 medicines in obesity if they are proven to save lives. This comes at a time when new GLP-1 medicines are becoming available with increasing levels of effectiveness. It's an exciting time in the war against obesity, and we wanted to understand the implications of the SELECT study before it reads out. Terence Flynn: So, our collaborative work suggests that obesity may be the new hypertension. What exactly do we mean by that, Mark? How do we size the global opportunity and what's the timeline here? Mark Purcell: Back in the 1960s and 1970s, hypertension was seen as a lifestyle disease caused by stress and old age. Over time, it was shown that high blood pressure could be treated, and in doing so, doctors could prevent heart attacks and save lives. A new wave of medicines were introduced to the market in the mid 1980s to treat individuals with high blood pressure and doctors found the most effective way to treat high blood pressure was to use combinations of these medicines. By the end of the 1990's, the hypertension market reached $30 billion in sales, that's equivalent to over $15 billion today adjusting for inflation. Obesity is seen by many as a lifestyle disease caused by a lack of self-control when it comes to eating too much. However, obesity is now classified as a preventable chronic disease by medical associations, just like hypertension. Specialists in the obesity field now recognize that our bodies have evolved over hundreds of thousands of years to put on weight, to survive times where there is a lack of food available and a key way to fight obesity is to reset the balance of how much food our bodies think they need. With the availability of new, effective obesity medicines, we believe that obesity is on the cusp of moving into mainstream primary care management. And the obesity market is where the treatment of high blood pressure was in the mid to late 1980s. We built a detailed obesity model focusing on the key bottlenecks, patient activation, physicians engagement and payer recognition. And we believe that the obesity global sales could exceed $50 billion by the end of this decade. Terence Flynn: So Mark, what are the catalysts aligning to unlock the potential of this $50 billion obesity opportunity? Mark Purcell: We believe there are full catalysts which should begin to unlock this opportunity over the next six months. Firstly, the SELECT study, which we talked about. It could be stopped early in the next two months if GOP P1 medicines are shown overwhelmingly to save lives by reducing excess weight. Secondly, the demand for GLP-1 medicines to treat obesity was underappreciated by the pharmaceutical industry. But through the second half of this year, GLP-1 medicines, supply constraints will be addressed and we'll be able to appreciate the underlying patient demand for these important medicines. Thirdly, analysis shows that social media is already creating a recursive cycle of education, word of mouth and heightened demand for these weight loss medicines. Lastly, diabetes treatment guidelines are actively evolving to recognize important comorbidities, and we expect a greater emphasis on weight treatment goals by the end of this year. Terence Flynn: Mark, you mentioned some bottlenecks with respect to the obesity challenge. One of those was patient activation. What's the story there and how does social media play into it? Mark Purcell: Yes, great question Terence, look it's estimated that less than 10% of individuals suffering from obesity are diagnosed and actively managed by doctors. And that compares to 80 to 90% of individuals who suffer from high blood pressure, or diabetes, or high levels of cholesterol. Once patients come forward to see their doctors, 40% of them are treated with an anti-obesity medicine. And as more effective medicines become available, we just think this percentage is going to rise. Lastly, studies designed to answer the question, what benefit does 15 to 20% weight loss deliver in terms of reducing the risk of high blood pressure, diabetes, kidney disease and cardiovascular disease? Will help activate governments and insurance companies to reimburse obesity medicines. But it all starts with individuals suffering from obesity coming forward and seeking help, and this is where we expect social media to play a really important key role. Terence Flynn: To a layperson, there's significant overlap between diabetes and obesity. How do we conceptualize the obesity challenge vis a vis diabetes, Mark? Mark Purcell: Terence, you're absolutely right. There is significant overlap between diabetes and obesity and it makes it difficult and complicated to model. It's estimated that between 80 to 85% of diabetics are overweight. It's estimated that 35% of diabetics are obese and around 10% of diabetics are severely obese. GLP-1 medicines have been used to treat diabetes for over a decade, not only being extremely effective in lowering blood sugar, but also in reducing the risk of cardiovascular events like heart attacks and removing excess body weight, which is being recognized as increasingly important. This triple whammy of benefit means that the use of GLP-1 medicines is increasing rapidly, and sales in diabetes are expected to reach over $20 billion this year, compared to just over $2 billion in obesity. By the end of the decade our work suggests that the use of GLP-1 based medicines in obesity could exceed the use in diabetes by up to 50%. Terence Flynn: Mark, thanks for taking the time to talk. Mark Purcell: Great speaking with you again, Terrence. Terence Flynn: 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.

As the Fed continues to surprise with large and fast interest rate increases, the market must decide, has the Fed done enough? Or is the recession already here?-----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, August 1st at 11 a.m. in New York. So let's get after it. Over the past year, the Fed has come under scrutiny for their outlook on inflation, and they've even admitted themselves that they misjudged the call when they claimed inflation would be transient. In an effort to regain its credibility, the Fed has swiftly pivoted to its most hawkish policy action since the 1980s. In fact, while we may have been the most hawkish equity strategists on the street at the beginning of the year, we never expected to see this many rate hikes in 2022. Suffice it to say, it hasn't gone unnoticed by markets with both stocks and bonds off to their worst start in many decades. However, since peaking in June, 10 year Treasuries have had one of their largest rallies in history, with the yield curve inverting by as much as 33 basis points. Perhaps more importantly, market based five year inflation expectations have plunged and now sit very close to the Fed's long term target of 2%. Objectively speaking, it appears as though the bond market has quickly turned into a believer that the Fed will get inflation under control. This kind of action from the Fed is bullish for bonds, and one of the main reasons we turned bullish on bonds relative to stocks back in April. Since then, bonds have done better than stocks, even though it's been a flat ride in absolute terms. It also explains why defensively oriented stocks have dominated the leadership board and why we are sticking with it. Meanwhile, stocks have rallied with bonds and are up almost 14% from the June lows. The interpretation here is that the Fed has inflation tamed, and could soon pause its rate hikes, which is usually a good sign for stocks. However, in this particular cycle, we think the time between the last rate hike and the recession will be shorter, and perhaps after the recession starts. In technical terms, a recession has already begun with last week's second quarter GDP release. However, we don't think a true recession can be declared unless the unemployment rate rises by at least a few percentage points. Given the deterioration in profit margins and forward earnings estimates, we think that risk has risen considerably as we are seeing many hiring freezes and even layoffs in certain parts of the economy. This has been most acute in industries affected by higher costs and interest rates and where there's payback in demand from the binge in consumption during the lockdowns. In our conversations with clients over the past few weeks, we've been surprised at how many think a recession was fully priced in June. While talk of recession was rampant during that sell off, and valuations reached our target price earnings ratio of 15.4x, we do not think it properly discounted the earnings damage that will entail if we are actually in a recession right now. As we have noted in that outcome, the earnings revisions which have begun this quarter are likely far from finished in both time or level. Our estimate for S&P 500 earnings going forward in a recession scenario is $195, which is likely to be reached by the first quarter of 2023. Of course, we could still avoid a recession defined as a negative labor cycle, or it might come later next year, which means the Fed pause can happen prior to the arrival of a recession allowing for that bullish window to expand. We remain open minded to any outcome, but our analysis suggests betting on the latter two outcomes is a risky one, especially after the recent rally. The bottom line, last month's rally in stocks was powerful and has investors excited that the bear market is over and looking forward to better times. However, we think it's premature to sound the all-clear with recession and therefore earnings risk is still elevated. For these reasons, we stayed defensively oriented in our equity positioning for now and remain patient with any incremental allocations to stocks. 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 to find the show.

One of the most common standards for investment diversification, the 60:40 portfolio, has faced challenges this year with significant losses and shifting correlations between stocks and bonds. Is this the end of 60:40 allocation?---- 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, July 29th, at 2 p.m. in London.The so-called 60:40 portfolio is one of the most common forms of diversified investing, based on the idea of holding a portfolio of 60% equities and 40% high-quality bonds. In theory, the equities provide higher returns over time, while the high-quality bonds provide ballast and diversification, delivering a balanced overall portfolio. But recently, we and many others have been talking about how our estimates suggested historically low returns for this 60:40 type of approach. And frequently these estimates just didn't seem to matter. Global stocks and bonds continued to hum away nicely, delivering unusually strong returns and diversification.And then, all at once, those dour, long term return estimates appeared to come true. From January 1st through June 30th of this year, a 60:40 portfolio of U.S. equities and the aggregate bond index lost about 16% of its value, wiping out all of the portfolio's gains since September of 2020. Portfolios in Europe were a similar story. These moves raise a question: do these large losses, and the fact that they involved stock and bond prices moving in the same direction, mean that diversified portfolios of stocks and bonds are fundamentally broken in an era of tighter policy?Now, one way that 60:40 portfolios could be broken, so to speak, is that they simply can't generate reasonable returns going forward. But on our estimates, this isn't the case. Lower prices for stocks and higher yields on bonds have raised our estimate for what this type of diversified portfolio can return. Leaving those estimates now near the 20-year average.A bigger concern for investors, however, is diversification. The drawdown of 60:40 portfolios this year wasn't necessarily extreme for its magnitude—2002 and 2008 saw larger losses—but rather its uniformity, as both stocks and bonds saw unusually large declines.These fears of less diversification have been given a face, the bond equity correlation. And the story investors are afraid of goes something like this. For most of the last 20 years, bond and equity returns were negatively correlated, moving in opposite directions and diversifying each other. But since 2020, the large interventions of monetary policy into the market have caused this correlation to be positive. Stock and bond prices are now moving in the same direction. The case for diversification is over.This is a tempting story, and it is true that large central bank actions since 2020 have caused stocks and bonds to move together more frequently. But I think there's also a risk of confusing direction and magnitude. Bonds can still be good portfolio diversifiers, even if they aren't quite as good as they've been before.Even if stocks and bonds are now positively correlated, that correlation is still well below 1 to 1. That means there are still plenty of days where they don't move together, and this can matter significantly for how a portfolio behaves, and how diversification is delivered, over time.Another important case for 60:40 style diversification is volatility. Even after one of the worst declines for bond prices in the last 40 years, the trailing one-year volatility of the US aggregate bond index is about 6%. That is one third the volatility of U.S. stocks over the same period. Having 40% of a portfolio in something with one third of the volatility should dampen overall fluctuations. For all these reasons, we think the case for a 60:40 style approach to diversified investing remains.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.