Thoughts on the Market

The forecast for inflation still appears hot for both consumers and corporates, but when it comes earnings and economic growth, the outlook looks a bit chilly.

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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 25th at 11:30 a.m. in New York. So, let's get after it.

Over the past few weeks, we've discussed the increasing probability for a colder winter, but a later start than previously expected. In other words, our "fire and ice" narrative remains very much intact, but timing is a bit more uncertain for the ice portion. Having said that, with inflation running hot in both consumer and corporate channels, the Fed is expected to formally announce its tapering schedule at next week's meeting with perhaps a more hawkish tone to convince markets they are on the job. In other words, the fire portion of our narrative—higher rates driven by a less accommodative fed spurring multiple compression—is very much in gear and a focus for investors.

With so much attention on rising inflation now from both investors and the Fed, we shift our attention to the ice portion of our narrative - meaning the ongoing macro growth slowdown and when we can expect it to bottom and reverse course. As regular listeners know, we've been expecting a material slowdown in both economic and earnings growth amid a mid-cycle transition. The good news is, so does the consensus, with third quarter economic growth forecast coming down sharply. While consensus’ fourth quarter GDP forecasts have declined too, it expects growth to reaccelerate from here. This is due to the fact that most have blamed the Delta variant, China's crackdown on real estate or power outages around the world for the economic disappointment in third quarter. The assumption is that all three will get better as we move into year end and 2022.

Needless to say, we're not so sure about that assumption, mainly because we think the more important driver of the slowdown has been the mid-cycle transition to slowing growth from post-recession peak growth, an adjustment that's not finished. In our view, would be intellectually inconsistent to think that the mid-cycle transition slowdown won't be worse than normal given the greater than normal amplitude of this entire economic cycle so far. We can't help but recall our position over a year ago when we argued for much faster growth driven by greater operating leverage than normal for earnings. This was directly a result of the record fiscal stimulus that effectively served as government subsidies for corporations. Today, we simply find ourselves in the exact opposite side of the argument relative to consensus, but for the same reasons. Since we believe consensus missed that insight last year, it seems plausible it could be missing it this time on the other side.

In short, we think the gross slowdown will be worse and last longer than expected as the payback in demand arrives early next year with a sharp year over year decline in personal disposable income. While many have argued the large increase in personal savings will allow consumption to remain well above trend, it looks to us like personal savings have already been depleted to pre-COVID levels. The run up in stock, real estate and crypto asset prices do provide an additional buffer to savings, however, much of that wealth is concentrated in the upper quartile of the population. At the lower end of the income spectrum, consumer confidence has fallen sharply the past few months, and it's not just due to the Delta variant. Instead, surveys suggest many consumers are worried again about their finances, with inflation increasing at double digit percentages in necessities like food, energy, shelter and health care.

Bottom line, the fundamental picture for stocks is deteriorating as the Fed begins to tighten monetary policy and growth slows further into next year. However, asset prices remain elevated as the upper income cohort of retail investors continues to plow money into these same investments. With seasonal trends positive this time of year, institutional investors are forced to chase prices higher. If our analysis is correct, we think this can continue into Thanksgiving, but not much longer. Manage your risk accordingly.

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The market’s long term trajectory for oil suggests a decline in prices, but the 'why' matters, and the transition toward more green energy may imply a different outcome.

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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, October 22nd at 2:00 p.m. in London.

The price of energy has surged this year. While the S&P 500 is up an impressive 21% year to date, that pales in comparison to a broad index of energy commodities - things like oil and natural gas - which are up almost 80%. I wanted to talk today about some of the broader implications of this move and importantly, the somewhat surprising message from future price expectations.

Let's actually start with those expectations. While the price for oil is up sharply this year, future prices currently imply a pretty significant decline in the price of oil over the next one, two and three years. Buying a barrel of oil costs about $84 today. But if you want to buy a barrel for delivery in a year's time, the price is $76, a full 10% lower. And for those of you looking ahead to Christmas 2023, that same barrel of oil costs $70, 17% below current levels.

Those implied declines in the future price of oil are historically large. If current oil prices simply move sideways over the next year, buying oil 10% below current levels in a year's time will return, well, 10%. That's more than double the return for U.S. high yield bonds, and one reason commodity investors care so much about the shape of these prices over time. Indeed, it's a way for investors to make a pretty healthy return, in this case 10%, in a scenario where the day-to-day price of oil doesn't really move.

This dynamic that we see today, where future oil prices are lower than current levels, is called 'backwardation'. And while it matters for commodity investors, it can also have broader implications for how we interpret the economic outlook.

When oil prices are rising like they are today, one of the single biggest economic questions is whether this rise is mostly coming from increased demand or more limited oil supply. The price impact may be the same between these two dynamics, but the underlying drivers are very, very different. According to the work by my colleague Chetan Ahya, Morgan Stanley's chief Asia economist, higher demand suggests underlying activity is strengthening and higher oil prices are easier to afford. Limited oil supply, in contrast, works more like a tax and can be more economically disruptive.

So how do we know which one of these it is?

Well, there are a lot of things that investors can look at, but the shape of oil prices over time, what we've just been discussing, can be a really useful way to quantify this question. Short term oil prices, we'd argue, tend to be influenced more heavily by the demand for oil. If you're going to go on a long road trip, you're going to fill up at the pump today. Longer term oil prices, in contrast, tend to be more linked to supply, as the producers of that oil really do care about selling it over the next one, two, three and five years. So, if demand is strong, short-term prices should be biased higher. And if supply is more plentiful, longer-term prices tend to be biased lower. That downward shape of prices over time, that 'backwardation', is exactly what we were discussing earlier, and that's what we see today. That, in turn, suggests that the current oil price strength is being driven more by demand than supply.

I'll close, however, with the idea that the market might have this long-term trajectory of oil prices wrong. As my colleague Martijn Rats, Morgan Stanley's chief commodity strategist, has recently argued, an expectation of a green transition towards renewable energy has caused investment in new oil drilling to plummet. That should mean less supply over time, challenging the market's current assumption that oil prices will decline significantly over the next several years.

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Sustainably generated hydrogen has great promise as a fuel where electricity alone won’t suffice, but the road to its broad adoption remains complicated for investors to navigate.

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Jessica Alsford Welcome to Thoughts on the Market. I'm Jessica Alsford, Global Head of Sustainability Research at Morgan Stanley.

Ed Stanley And I'm Ed Stanley, Head of Thematic Research at Morgan Stanley.

Jessica Alsford And today on the podcast, we're going to be talking about the investment implications of hydrogen. It's Thursday, October the 21st at 3:00 p.m. in London.

Jessica Alsford So Ed, hydrogen has been something we've been looking at for some time, given its potential role in a low carbon economy. So why is it that the debates around green hydrogen seem to have intensified over the last 6 to 12 months?

Ed Stanley Great question. Massive, centralized support and road mapping in the form of the European Hydrogen Strategy and the US Infrastructure Bill simultaneously thrust hydrogen to center stage around the world.

Ed Stanley But the froth has come and gone to some extent from most of these hydrogen names. And so now it's a really interesting time to be relooking at the space from a stock picking perspective. The number of dedicated hydrogen thematic funds is really beginning to accelerate as well. We've reached 10 hydrogen funds in Europe from only 1 two years ago, and many of the pure play equities that these funds are or will be buying are pretty illiquid, which we expect will lead to further volatility in due course for single name equities. The electrolyzer stocks are up to two thirds of their highs, so the reason why now is that as the market froth subsides, we're beginning to see these thematic alpha opportunities all the way along the supply chain in hydrogen.

Jessica Alsford Now, projections by the Hydrogen Council suggest that green hydrogen could enable a global emissions reduction of around 6 gigatons by 2050 - so almost 10% of current global emissions. It also has the potential for unlocking something like 30 million jobs and $2.5T of associated revenues. And yet, despite this huge potential, it does feel that we're still at a very early stage. So why is that? What are some of the challenges around the wider adoption of green hydrogen?

Ed Stanley That's right, and I don't think you can fault the ambition. The Hydrogen Council, as you mentioned, is over 200 member companies and they have a clearly defined goal and they're pulling in the same direction. And increasingly, governments are also walking the talk. I guess, though, when you ask our analysts what the greatest hindrances are, if I had to boil them down to two factors, it would be these: first, the lack of standards, and that really means we have dual investment and thus potentially wasted investment going on as each stakeholder has their own vested interests on whether to use PEM or alkaline electrolysis, for example; or whether to retrofit existing pipe networks or to rebuild from scratch. So, a lack of agreement on these dichotomies is a risk of diluting the early stage growth and investment.

Ed Stanley And the second is much simpler, actually, it’s economics. Costs for renewable energy, predominantly wind and solar, that feed these very power hungry upstream electrolyzers have fallen substantially in cost - over 90% decline in 10 years. But it still requires cost per unit breakthroughs across the rest of the supply chain; from ammonia, for example, or redesigning jet engines to make it viable, particularly for publicly listed companies to make the necessary investments. Ultimately, we should probably expect very generous subsidies for some time if we are to hit that 6 gigatons value, you mentioned.

Jessica Alsford So there are challenges, but also clearly opportunities as well. Where do you think the most value can be created and how should investors participate in this market?

Ed Stanley Again, our analysts obviously have their own single stock preferences, of course. But if I were to take a step back and look at the supply chain holistically, it's a question of relative risk reward. For example, upstream, some electrolyzer names have over 100% upside in our view, but that has to be taken in the context of an ongoing debate, as I mentioned, into which electrolyzer technology will become the industry standard, and so at risk potentially putting all your eggs in one basket. At the other end of the spectrum, downstream, rail and aviation has potential, but with extremely long time horizons, which risk compounding forecasting errors several decades away.

Ed Stanley So in my mind, some of the best plays are midstream - the chemical names, for example, with best-in-class green ammonia platforms. And you can see that in their excellent intellectual property positioning relative to the rest of the supply chain. Other subsectors include the inspection companies, which will benefit to the tune of 0.5% to 1% of all global hydrogen capex being spent on safety testing. And that's irrespective of which technology or country is the first to roll out. And we don't believe some of those fundamentals are being priced in. So given there's a still very high degree of uncertainty as this technology rolls out, our preference is for midstream and particularly technology and country agnostic companies.

Ed Stanley On that note, hydrogen is obviously only one of a handful of decarbonization tools. So, what else do you think has promise in the decarbonization outlook?

Jessica Alsford Yes, you're right, Ed. And if we are to achieve a net zero scenario by 2050 and achieve the Paris Agreement, then we need to deploy a range of different strategies. Now one of them may be renewables from a power generation perspective. Solar wind is already economically viable, and we expect to see a huge amount of roll out of renewable power capacity over the coming decades. Elsewhere, we need to see electrification of certain types of energy. The great example being on the auto side as you see movement from the combustion engine to electric vehicles. And though again, although adoption rates are still very low, the stimulus has been set. The policy is outlined to really incentivize this drive from the combustion engine to an EV. So, we're very confident it is only a matter of time before you see that greater adoption of EVs globally.

Jessica Alsford Then we come on to some of the more innovative technologies. I think CCS - carbon capture and storage - is a great example of this. Just a few years ago, it was really viewed quite negatively as essentially CCS allows you to still use fossil fuels, whether that be in power generation or in industrial processes like steel and cement manufacturing. But I think now there is a greater acceptance that in some situations we're not going to be completely able to remove all fossil fuels, and so by using CCS technology, you can allow coal/gas to be used, but without emissions as a result of that. And so, I do think that CCS is a really interesting technology to also watch alongside hydrogen as an enabler of a low carbon economy.

Ed Stanley That's very clear. And I guess the timing is very opportune to speak to you today because COP26 is approaching. And so, I'm keen to find out from you, what do you think we will see from the world leaders or even corporates in terms of decarbonization pledges? And what impact could that have ultimately on the market for hydrogen longer term?

Jessica Alsford Absolutely. So COP26 starts on the 31st of October in Glasgow. It has been delayed since last year because of the pandemic. Two things that I'd particularly point to is, first of all, we would expect many world leaders to step up and announce more ambitious carbon reduction targets. Not everyone currently has a 2050 net zero ambition. And we also now need to see that shorter term trajectory about how are we're going to get there at the right pace of decarbonization as well. So, 2030 reduction targets is also something that we'll be looking for at COP.

Jessica Alsford The second area I'd point to is then in terms of global carbon markets. So, the EU has been leading the way for a long time in terms of establishing a very broad and effective carbon market through the Emission Trading Scheme. However, in order to really, again accelerate the transition to a low carbon economy, we need to see a broader adoption of higher carbon taxes, higher carbon prices globally. And why is this important for hydrogen? Well, one of the ways I think that you can really incentivize adoption of hydrogen is to make the higher carbon incumbent alternatives more expensive, and you can do that by pricing carbon at a much higher level.

Jessica Alsford So I think the combination of more ambitious carbon reduction targets and more acceptance of the need for higher carbon taxes could be two positive catalysts for hydrogen at COP26.

Jessica Alsford Ed, thanks for taking the time to talk today.

Ed Stanley Great speaking with you, Jess.

Jessica Alsford As a reminder, if you enjoy Thoughts on the Market, please do take a moment to rate and reviews on the Apple Podcasts app. It helps more people to find the show.

The bipartisan infrastructure and ‘Build Back Better’ plans remain in legislative limbo, but what could their passage mean for markets?

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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy 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 Wednesday, October 20th at 11:00 a.m. in New York.

We spend a lot of time here thinking through exactly how and when Congress will manage to raise the debt ceiling, keep the government open and pass a multitrillion dollar package of spending offset by tax hikes. To be clear, we continue to think it will do all of the above. But for this week, let's deal with DC's policy choices in classic Morgan Stanley Research fashion... by focusing on tangible market impacts.

Let's start with new government spending, which can be a positive catalyst in equity sectors such as construction and clean tech: in our view, a conservative estimate is that Congress approves $2.5T over 10 years between both the bipartisan infrastructure and build back better plans. While that amount might fall short of the numbers you might have heard thrown around, it should get your attention. For example, the bipartisan infrastructure framework, which would make up about $500B of this total, would nearly double the US's current baseline infrastructure spend. Our colleagues think this would catalyze an infrastructure ‘supercycle’ where factors like a surge in cement demand could lead to a positive rerating of stocks in the construction sector. Additionally, the framework could include $500B in new spending and tax credits aimed at clean energy production. That means a substantial ramp in demand for clean tech companies, which our colleague Steven Byrd sees as a clear bullish catalyst for that sector.

As for corporate taxes - yes, DC is likely to push them higher. Yet for now, we don't see this as more than a near-term challenge that shouldn't get in the way of the positive medium-term outcomes for the equity sectors we've highlighted. As Mike Wilson and the Equity Strategy Team have argued, enacting higher taxes could bring down forward guidance, something investors may not yet be pricing in, given current valuations. In the near term, that may prompt U.S. equity indices to price in a greater chance of a sustained economic slowdown. But such weakness would likely be more of a correction than a bear market signal, as we expect the total fiscal package would ultimately be GDP supportive. Likely incorporating more spending than taxes, our economists expect it to boost net aggregate demand and support the view that the US can continue to grow at a brisk pace in 2022.

So, of course, we'll be tracking these policy paths into year end, but it's important to keep an eye on why they matter from a market perspective. We'll stay focused on what's going on, and what you can do about it in your portfolio.

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.

Moves toward scale and consolidation show promise for what is already a burgeoning content industry. 

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Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley Research.

Ben Swinburne And I'm Ben Swinburne, Equity Analyst covering Media, Entertainment, Advertising and the cable/satellite industries.

Andrew Sheets And today on the podcast will be going a bit meta, as the kids say, as we talk about some interesting upside for podcasting and advertising. It's Tuesday, October 19th at 2pm in London.

Ben Swinburne [00:00:25] And 9am in New York.

Andrew Sheets So, Ben, you recently wrote a research report titled, a bit surprisingly, “Mic'd Up. Is Podcasting the Next Big Thing?” I say surprisingly, because podcasting has been around for quite a while now. So why do you think that it's now where it's actually going to be it's time to shine?

Ben Swinburne You're right. Podcasting has been around probably for at least 15 years, but what we're really seeing is a significant increase in engagement by consumers, investment by platforms and content creators jumping into this space. We think we're at a point now where the business model, at least from an advertiser ROI point of view, has been proven out. You know, advertisers are paying $20-$25 CPMs, or cost per thousand listeners, to access a podcast audience, particularly through host-read ads, that's as high as linear television. And that just shows you that advertising on podcasting works for advertisers. So, what the   industry needs from here is significant growth in adoption, which we believe is going to come given the investment we're seeing in content. Wrapping it all up, we think the industry can grow at a 30% CAGR through 2025 and become a $6-7 billion market globally, which is meaningful for the companies that are in this space.

Andrew Sheets So to kind of put those numbers in context, if I have a podcast that has 4,000 regular listeners, you know, if I'm getting paid by an advertiser $25 per thousand, that'd be about $100 for that $4,000 advertising block. Is that a good way to kind of think about those numbers.

Ben Swinburne Per spot, yes. And then obviously, it's a question for you on your podcast, how many ads you want to run per hour.

Andrew Sheets Podcasting is now charging, was it similar advertising rates as local television? Did I hear that correctly?

Ben Swinburne You did. You did.

Andrew Sheets Would you say though, investors believe in that? Because you cover a wide range of media companies in your equity coverage here at Morgan Stanley, how is the market pricing that advertising opportunity? And do you think the market believes that podcasting can be this major advertising vehicle?

Ben Swinburne I think the market's skeptical, frankly. Part of that is because as we talked about earlier, podcasting is not new as a media. But also because even at 15-years-old with a lot of excitement around it, it's a very small market. You know, estimates range from a billion dollars to maybe $2 billion in 2020 of global ad revenue on podcasting. That is a low single digit percentage of the global ad market. it's just been a very slow rise in monetization. And I think the market is skeptical that it can really break out from here.

Andrew Sheets So I imagine another area where the market might be skeptical is a lot of people have been stuck inside as a result of the pandemic. They've been listening to more podcasts. But as things normalize, maybe that listening trend will shift. Can you just kind of give us some numbers around, what percentage of the U.S. population listens to podcasts and do you think that that engagement will decline or rise as we look ahead over the next couple of years?

Ben Swinburne In 2020, the reach of podcasting in the U.S. accelerated to 25% of the population. If we think about that level of adoption, in a lot of other instances, Andrew, that's a part of the S curve where we start to really see the adoption rate accelerate. In other words, you're going from sort of early adopter to mass market. So that's our expectation here. We actually saw that in streaming music years ago. So, we're optimistic that we're going to see that from here. And frankly, when I look at the investment, the amount of money companies are pouring into content and monetization technology, I'd be really surprised if we don't see it accelerate. The other thing I would add is that even though podcasts consumption held up well in 2020, it was still negatively impacted by the pandemic. People were not commuting, not going to the gym, not going to work. All of that reduced the amount of time people were consuming audio content on their phones. So that is still the primary use case for all audio consumption but including podcasts. So we have started to see already improving data in the last several months on audio consumption as people have started to go back to work and go to school and hit the gym again.

Andrew Sheets So then, Ben, can you talk a little bit more about what's been happening on the merger and acquisition front in podcasting? And how this media is getting reshaped by some of the changes that we've seen?

Ben Swinburne Absolutely. Yeah, it's a very active market. You can sort of break down the M&A into two broad areas: content and sort of advertising technology. If you think about the media business, in the sort of the pre-internet days, you had media producers and media distributors, it's a pretty simple value chain. The internet, by its nature, but also because it's much less regulated, has created an environment for more vertical integration. Podcasting is rapidly moving in that direction, with distributors buying up podcast IP and creators rapidly. Now, that can probably only go so far because, like music, podcasting is a business built on ubiquitous distribution. So, where we've seen exclusives, they just haven't really worked, and that makes sense from an advertising monetization point of view. On the monetization front, there is a lot of work left to do. I mean, we're still looking at a very, while attractive media for advertisers, pretty old school in the way the ad products actually work. Now this is starting to change. We're seeing more things like advanced measurement, attribution, programmatic buying-- all wonky things us media people like to talk about. But the most popular ad format in podcasting is host-read ads. It's Bill Simmons reading a promo code to go to a website and buy a product. You know, this is like Howard Stern 25 years ago. So, from that point of view, it's still early days.

Andrew Sheets So, to kind of put some numbers around that, I mean, could you give us a sense of how much is currently being spent on podcast advertising versus other types of advertising that are out there?

Ben Swinburne Oh, yeah, absolutely. I mean, the video market is $100 billion in the United States. Between linear television and streaming video, the radio, traditional radio market in the United States is sort of $15 to $18 billion. And as I mentioned before, podcasting, we think will probably be around 2 billion this year.

Andrew Sheets Got it. So, it's still even as ubiquitous as it's starting to seem. It's still very small, still very nascent relative to some of these much bigger areas where companies are already spending a whole lot of money.

Ben Swinburne That's right.

Andrew Sheets So, Ben, you cover a large number of the largest entertainment and media companies. What do you think is going to be their strategy for podcasting going forward? And do you see this as more of a US opportunity, a global opportunity or something in the middle?

Ben Swinburne We think the strategy going forward is primarily one that monetizes podcasting through advertising. And to be successful in that, you're going to need a significant content offering. But also, importantly, a scaled and advanced technology platform. And so, we're seeing companies that are going after this opportunity really invest aggressively in both. In terms of U.S. versus global, we definitely see it as a global opportunity. However, if we think about the TAM for podcast advertising, radio is the obvious one. Radio is very much a U.S. marketplace. A lot of radio outside the U.S., think of BBC One in the U.K., is in fact ad free. So, the global radio advertising opportunity skews very much U.S. That's why it's so important that podcasting can attract digital advertisers or buyers of digital advertising - those that might buy search or display ads - that opens up podcasting to a much larger opportunity and global.

Andrew Sheets And Ben, I was hoping you could also talk a little bit about what are the demographics of podcast listeners and how does that impact the advertising landscape?

Ben Swinburne So as you can probably guess, particularly since we're in the early adopter phase of podcasting, it does skew, sort of technology savvy, educated and often higher income from an audience point of view. That's part of why advertisers are so attracted to the space and why the ad rates are so high. Clearly, the long-term bull case is widespread adoption now as reach goes from 25% of the population to hopefully 50% and 75%, by definition the audience is going to look much more representative of the overall population, which will bring with it, you know, lower income or advertising targets that have lower propensity to spend. So that will get reflected in ad rates and probably different kinds of ad products. But ultimately, even if that puts some downward pressure on ad rates, we think the growth in engagement will more than offset that, creating a nice growth story over time.

Andrew Sheets Ben, I thought you made a really interesting point about just the types of advertising that are most effective here, you know, often, host read, often funny are very engaging. I mean, is there a good precedent in advertising for something that feels that personal? And, is there any other, implications for that just about how advertising feels and sounds, more broadly going forward?

Ben Swinburne It's a great point, and it's a good news, bad news situation, I think, for the industry. The good news is that host read ads are incredibly effective. The demand outstrips supply, frankly, and the more widespread, highly popular podcasts that can be developed, the more opportunities there will be for monetization. The bad news is that to really scale the business host read ads are just it's hard to scale them. You can only have so many in an hour. And if you want to start really doing sophisticated, digitally driven ad buys and ad provisioning, you've got to automate all that. And doing host read ads in an automated fashion across the long tail of millions of podcasts really can't be done. The industry now is working on lots of technology and ad products to try to create an ad product or an ad unit that is hopefully not as effective as host read, but more effective than traditional radio.

Andrew Sheets So, Ben as somebody whose father back in the day used to sell advertising for a radio station. What do you think are the questions that companies who want to advertise in a podcast should be asking to try to maximize that effectiveness?

Ben Swinburne Well, a lot of the measurement in attribution technology today remains pretty early stage, frankly. Most of the podcast business historically has been measured by downloads. But just because you download a podcast doesn't mean you listen to it. And frankly, nobody really downloads podcasts anymore because they're all streamed. That just gives you an example of a key area like measurement that needs to evolve. You can go even beyond that when you think about multichannel attribution. For example, let's say I listen to a podcast ad and then I go online and I buy that product. How does the advertiser know that I went to buy that product because I heard that ad? Those things are all happening at a pretty sophisticated level online in general today. But podcasting is not plugged into that ecosystem in a real way yet.

Andrew Sheets And finally, Ben, you know, based on your work and your forecasts, what do you think the next five years hold for the podcasting industry?

Ben Swinburne We expect to see continued substantial investment in podcasting content, monetization technology and also personalization and curation. I think one of the challenges that consumers have, as I mentioned earlier is there's well over two million podcasts in a lot of these major platforms, so figuring out what to listen to is challenging. Sampling a song which might be 3 or 4 minutes long is a commitment. Sampling a 30/45 minute podcast is a whole different situation. And so those companies that can help consumers find what they want to listen to, that could be a huge advantage in the marketplace. And I'd say, much like we've seen in streaming video, we think we'll see an explosion of compelling podcast content across genres and across countries. There is so much talent out there which, when combined with the global growth and connectivity and connected devices, means we will all be plugged in all of the time, hopefully feeding our minds and hearts with information and stories from around the world.

Andrew Sheets Fantastic. I think that's a great place to leave it. Ben, great chatting with you.

Ben Swinburne Great speaking with you, Andrew.

Andrew Sheets 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.

With supply chain pressures and rising costs still weighing on markets, retail investors continue to see long term value.

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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 18th at 11:30 a.m. in New York. So let's get after it.

Last week, we noted it may take a bit longer for the Ice portion of our Fire and Ice narrative to play out. More specifically, we cited the potential for markets to look through the near-term supply bottlenecks and shortages as temporary. With the Biden administration directing substantial resources toward addressing the problem, that conclusion is even easier to make. Second, the budget reconciliation process has been pushed out and is unlikely to be resolved until later this year. This delays the negative earnings revisions from higher taxes we think have yet to be incorporated into 2022 consensus forecasts. In short, while earnings revisions' breadth is falling from extreme levels, it isn't falling fast enough to cause a deeper correction in the broader index, at least not yet.

Perhaps most importantly for the broader index is the fact that retail continues to be a major buyer of the dip. We highlighted a few weeks ago that the correction in September was taking longer to recover than the prior dips this year. In fact, both the primary uptrend and the 50-day moving average had finally been breached on significant volume. Could it be that the retail investor had finally run out of dry powder or willingness to buy the dip?

Fast forward to today, and the answer to that question is a definitive “no”. Instead, our data show retail investors remain steadfast in their commitment to buying equities, particularly on down days. Until these flows subside or reverse, the index will remain supported even as the fundamental picture deteriorates. As already noted, earnings revision breadth is rolling over. Some of this is due to higher cost and supply shortages, which investors seem increasingly willing to look through as temporary.

We remain more skeptical as the data also supports sustained supply chain pressures, rising costs and the potential for weaker demand than anticipated next year. Last week, our economics team published its latest Business Conditions Index survey, which showed further material deterioration. While most of this decline is due to supply issues, rather than demand, we're not sure it will matter that much in the end if earnings estimates have to come down one way or the other.

As part of our mid-cycle transition call, we have been expecting business confidence to cool. We think it's important to note that our survey suggests it's not just manufacturing businesses that are struggling with cost and supply issues. Service businesses are also showing material deterioration in confidence to manage these pressures. Whether and when it proves to be a concern for equity markets remains unknown, but we think it will matter between now and January. Until proven one way or the other, the seasonal path of least resistance for equity markets is flat to higher.

Similar to our Business Conditions Index, consumer confidence surveys have also fallen sharply. Like business managers, the consumer appears to be more concerned with rising costs rather than income. Yet, the retail investor continues to aggressively buy the dip. This jibes with the conclusion other investors are making -- that demand remains robust, and we just need to get through these supply bottlenecks and price spikes. One other possible explanation is that individuals are worried about inflation for the first time in decades, and they know it's not temporary. Stocks offer protection against that rise to some degree, and so we may be finally witnessing the great rotation from bonds to stocks that has been predicted for years. While we have some sympathy for that view in the longer term, the near-term remains challenged by the deteriorating fundamentals in our view. In short, we'd like to see both business and consumer confidence improve before signaling the all clear on supply and demand trends.

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.

Consumer saving is up, way up. But whether investors put this money into the markets may have more to do with how much wealth is already in play.

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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, October 15th at 2:00 p.m. in London.

Over the course of the pandemic, strong government support and some of the difficulties of spending money as usual, led to a large surge in consumer savings. This was a global trend, seen from the U.S. to Europe to China. For markets, one of the most bullish arguments out there is that these savings can still come into the market. In sports terms, there's cash sitting on the sidelines waiting to come into the game.

But we think this story is more complicated. Yes, there are a lot of savings out there by almost every measure that we look at. But to continue with the analogy, while investors may have cash sitting on the sidelines, they also have a lot of wealth already on the field.

To put some numbers around this, the amount of cash currently held in US Money Market funds is about 20% of gross domestic product relative to a 30-year average of 15%. But total household wealth, that is the value of all the homes, stocks, bonds, businesses and stamp collections, is now about 590% of GDP, 170pp higher than its average over that same 30-year period. So, yes, overall Americans are holding more cash than normal, but they also have more, a lot more, of everything else.

Meanwhile, that everything else is riskier. Stocks, which generally represent the most volatile asset that most households hold has been a growing share of this overall wealth. U.S. households now hold more stocks relative to their other assets than at any time in history. It's possible that people decide to put more money into the market, but many may decide that they already have a reasonable amount of exposure as it is.

Indeed, this echoes the comments of someone with real world insights into this dynamic: Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. Recently on this podcast, Lisa mentioned similar dynamics within the over $4T of assets managed by Morgan Stanley's Wealth Management Group - cash holdings were still ample, but exposure to the equity market for investors was historically high, as market gains have boosted the value of these stock holdings.

For investors, we think this has two important implications.

First, we think the figures above suggest that many investors actually do have quite a bit of exposure to the market already relative to history. That exposure could rise But while it's always more fun to imagine a market that has to rise because everybody needs to be more invested, we just don't think that that is what the household data really suggests.

Second, that high exposure means that fundamentals, rather than more risk taking, may be more important to getting the market to move higher. Strong earnings growth has been an under-appreciated boost to markets this year and will be important for further strength. Third quarter earnings season, which is now beginning, will be an especially important element to watch around the world.

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.

Last week, over 130 countries announced an agreement to overhaul international tax rules. The changes may seem high-level, but should investors pay closer attention?

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Michael Zezas Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley.

Todd Castagno And I'm Todd Castagno, Head of Global Valuation, Accounting and Tax within Morgan Stanley Research.

Michael Zezas And on this edition of the podcast, we'll be talking about recent developments around a major overhaul of international tax rules and what it means for investors. It's Thursday, October 14th at 10 a.m. in New York.

Michael Zezas So, Todd, I really wanted to talk with you after last week's announcement by more than 130 countries about an agreement to undertake a major overhaul of international tax rules. Central to the agreement appears to be a change in how companies are taxed and a new 15% global minimum tax rate. So, investors might see a headline like this and think it's one of those things that sounds important, but maybe a bit too high level to matter. But you think investors should pay attention to this.

Todd Castagno Right, it's big news. There are really two key motives driving what is referred to as a two-pillar global tax agreement, and this motivation provides really important context. So let's start with pillar one. There's a growing desire from certain countries to change who gets to tax the largest and most profitable corporates. So Michael, in a modern marketplace, companies can engage and transact with consumers in countries where they may not have much or any physical presence. So the first pillar of this agreement proposes to reallocate profits of the largest and most profitable companies to where they transact with customers. Then there is desire to stop what's often referred to as the 'race to zero' in terms of corporate tax rates. So under pillar two of the agreement, countries will need to adopt a 15% minimum tax rate structure on corporate foreign income. So why should investors care? A few reasons: Not to overstate the obvious, but tax rates are likely going up for multinationals if this is implemented. There are also important geopolitical dynamics. These changes have the potential to significantly change where corporates invest. And countries have been increasingly imposing unilateral taxes, particularly on digital services. Those taxes are complicating trade relationships. Pillar one seeks to remove those taxes so trade dynamics may actually improve.

Michael Zezas OK, so assuming these guidelines are implemented globally, what's your expectation about which industries overall could see the most headwinds?

Todd Castagno Well, it's an interesting question. Not all sectors and industries will be impacted equally. According to our analysis, technology hardware, media services, pharmaceuticals and broader health care appear most exposed to both pillars.

Michael Zezas OK, so the concept is that some industries' tax burdens are going to be affected more than others. Can you walk us through a specific example?

Todd Castagno Yes. Technology hardware appears predominately exposed to both pillars. Why is that? Manufacturing and IP are centrally located, and the industry currently benefits significantly from tax incentives, which often drive a very low tax rate. This illustrates a potential political tension, as countries are currently motivated to provide more tax and R&D incentives given the current supply constraints. So, it'll be interesting to see how countries attempt to incentivize under a new minimum tax rate system.

Michael Zezas OK, so last question here. Just because countries have agreed to pursue these tax changes doesn't mean these changes are imminent. They obviously require countries to go back and change their own laws. And regular listeners may know that our base case is that the US could soon raise corporate taxes, including a potential hike in the global minimum tax rate to 15%. So, how much do the current tax changes proposed in the U.S. already reflect this international tax agreement?

Todd Castagno So what's notable is pillar two really emerged as a function of the tax bill passed under the prior U.S. administration. Today, the U.S. is the only country with a minimum tax remotely similar to what's being proposed under pillar two. However, there are both rate and structural differences. Our base case is 15% in line with the agreement. But Michael, as you know, Congress and administration have proposed higher rates. What's also important is the structure. So, today's U.S. system applies a minimum rate on aggregate foreign income. What's notable about Pillar two is it would apply that rate on a country-by-country basis. So, what that means is many companies may be exposed to a new minimum tax rate structure versus what's in the U.S. today.

Todd Castagno But before we close, Michael, taking all this into account, what could this mean for markets moving forward? Do we think these changes are already in the price?

Michael Zezas You know, it's an important question that really defies having a simple answer. In the view of our Equity Strategy Team, the impact of these tax changes to U.S. companies bottom lines probably isn't fully appreciated yet and could cause some short-term market weakness. But beyond that, these tax changes are part of a broader fiscal package that spends more than it taxes. And so that should continue to support robust economic growth into 2022. So that makes the medium-term outlook rosier for risk assets.

Michael Zezas Todd, thanks for taking the time to talk today.

Todd Castagno Great talking 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.

With supply chain delays in air, ocean and trucking on the minds of investors worldwide, what could it mean for the labor market and consumers headed into the holiday season?

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Ellen Zentner Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research.

Ravi Shanker And I'm Ravi Shanker, Equity Analyst covering the North American transportation industry.

Ellen Zentner And on this episode of the podcast, we'll be talking transportation - specifically the role of freight in tangled supply chains. It's Wednesday, October 13th at 10:00 a.m. in New York.

Ellen Zentner So, Ravi, many listeners have likely heard recent news stories about cargo ships stuck off the California coast waiting to unload cargo into clogged ports or overworked truck drivers struggling to keep up. And there's a very human labor story here, a business story and an economic story all rolled together, and you and your team are at the center of it. So, I really wanted to talk with you to give listeners some clarity on this. Maybe we can start first with the shipping. You know, talk to us about ocean and air. You know, where are we now?

Ravi Shanker So, this is a very complicated problem. And like most complicated problems, there isn't an easy explanation for exactly what's going on and also not an easy solution. What's happening in ocean is a combination of many issues. You obviously have a surge in demand coming out of Asia to the rest of the world because of catch up following the pandemic and low inventory levels. In addition to that, you've had some structural problems. For instance, the giant Panamax container ships that they started using in recent years have created a bit of a boom-and-bust situations at the ports - dropping off far too many containers that can be processed, and then there's like a lull and then many more containers show up. So that's a bit of an issue. Third, there's obviously issues with labor availability of the ports themselves, given the pandemic and other reasons.

Ravi Shanker And lastly, as we’ll touch on in a second, there is a shortage of rail and truck capacity to evacuate these containers out of the ports. And it's a combination of all of these, plus the air freight situation. Keep in mind that kind of one of the statistics that has come out post the pandemic is that roughly 65% of global air freight moves in the in the belly of a passenger plane rather than a dedicated air freighter. And a lot of these passenger planes obviously have been grounded because of the pandemic over the last 18 months. This has eliminated a lot of the airfreight capacity. Some of that has spilled over into ocean. And so, all of this has kind of created a cascading problem, and that's kind of where we are right now.

Ellen Zentner So let me ask a follow up there. You know, in terms of international air flights, it looks like international travel is picking up. But when would you expect it to be back to normal levels?

Ravi Shanker So I think that actually happens at some point in 2022. So, we also cover the airlines and we saw a significant amount of pent-up demand in U.S. domestic air traffic when people started getting vaccinated and when mobility restrictions were dropped. We think something very similar will happen on the international side when international restrictions are dropped, and we're already starting to see some of that take place. Whether that fixes the ocean problem completely or not is something we need to wait and watch for.

Ellen Zentner So, you know, once we get goods here, we have to move them around. And I know I've heard you say before just how much of it has to move on the back of a truck. So, let's talk about the trucking industry. You know, there's been some structural and labor issues there, but that's even before the pandemic, right?

Ravi Shanker That is even before the pandemic. Kind of, you and I collaborated to write a pretty in-depth piece as early as December 2019. We revisited that last year. There are a bunch of new regulations that have gone into place in the trucking industry over the last few years. It's no coincidence that we've had two of the tightest truck markets in history in the last three years. And these factors, whether it's the ELD mandate in 2018, the Driver Drug and Alcohol Clearinghouse in 2020, some of the insurance issues that the industry has seen over the last year; those have really created a structural tightness in the trucking industry. The pandemic made things a lot worse. Obviously, it pushed some driver capacity temporarily, maybe even permanently out of the marketplace. The driving schools were largely closed for the last 18 months, and so that limited the influx of new drivers into the space. And so, some of this pressure will ease, but we think a lot of the driver and the insurance issues that we're seeing in the trucking side the last 18 months are structural and not cyclical.

Ellen Zentner So, Ravi, it certainly does seem like the labor supply issues could stretch on for longer. If we think about demographic trends in the U.S., it does appear that generations Y and Z are really leaning away from trucking jobs and toward gig economy like jobs. Some call them new generation jobs. When you think something like driverless trucks would be in place in a way that could alleviate some of those issues, or is that so far off on the horizon?

Ravi Shanker We've been writing about driverless trucks since 2015, even longer than that, and we are now getting to a point where we think this can be quite real on somewhat of an investable time horizon. We think the first level for autonomous trucks will be ready for commercial use by the end of 2023 or early 2024. And we actually expect to see some very clear demonstrations of the viability of the technology and the commercial deployment of the technology within the next few months, actually. So, we think autonomous trucks can be a solution to fill that gap for the driver shortage if the demographics kind of are going to be against us for a while, and that could start happening pretty soon.

Ravi Shanker With the outlook in mind on the supply chain disruptions you've seen so far and what's currently taking place, Ellen, how does that inform how you look at the inventory cycle and your forecast for inflation for the overall economy?

Ellen Zentner It's been very complicated as, you know, about as complicated as you having to cover freight. You know, I think about the relationship that we have with our equity analysts across the firm, you know, these conversations I have with you are extremely important because it gives me a view of when can we get goods to where they need to go.

Ellen Zentner So the inventory cycle has been delayed. There are many sectors that are running below normal inventory to sales ratios. And so, we do need production to pick up globally and we can see that exports globally are picking up. So, if I think of building a composite view of, you know, you saying air could be normalized first half of the year, but say certainly by the middle of the year. Trucking is probably going to continue to be a drag for a bit, but when I think about what you say about ocean, it sounds like all together by the middle of the year, things should start to look and move more normally. So, you're going to have a lot of inventory building that happens next year, that should have happened this year. And ironically, that's going to really add to growth, to GDP growth next year.

Ellen Zentner Now all of this taking longer to normalize means that inflation pressures due to supply chain bottlenecks and COVID related pressures are going to remain higher for longer. All that's going to start to get alleviated around the middle of the year, but it means that we have to wait longer. And so that's how I'm thinking about it in terms of the inventory cycle and inflation. You know, it's going to support inventory building next year, but it's going to keep inflation elevated for longer.

Ravi Shanker Right. So, looks like light at the end of the tunnel by middle of next year, but a tricky few months still to navigate. Obviously, the biggest thing to look forward to in the next couple of months, I think, is its holiday season. And I know that in the transportation and supply chain world, everyone is working overtime to make sure that Christmas isn't canceled. What do you think Christmas season means for retailers and the broader economy?

Ellen Zentner Yes, I think our retail team is pretty constructive on the consumer, as are we. Buying power from consumers is very strong. That's helped by labor income, continued government support, as well as some of the savings, excess savings that we have available to pull from. But the goods have to be there as well. We know that shelves are going to be lighter. Let's put it this way, this season than normal. You know, I've heard media reports crying out, you know, do your holiday shopping now. I've heard reports of big retailers using their own ships to transport goods here, although you would sit there and tell them “Yeah, but who's going to unload it for you when it gets here?"

Ellen Zentner But all in all, it doesn't sound like from our retail analysts, it's a bad set up for retail. I mean, one thing that I would think about as an economist is if you've got fewer goods through the holiday season with strong consumer demand, which we expect, well then you certainly don't have to go through a big markdown season on the other side of the holiday, which is going to support prices for longer after that. So, I think that's all an interesting combination.

Ellen Zentner Well, I think this was a really interesting conversation, Ravi, and I think it starts to tie in some of the themes and what everyone's really focused on. It certainly has far-reaching effects across the broad economy and the global economy. So, thank you so much for taking time to talk today, Ravi.

Ravi Shanker Well, thanks for having me on. It's great talking with you as well, Ellen. And I think if there was one major takeaway for our listeners from this podcast, it is please shop early this holiday season.

Ellen Zentner Shop early, shop often. That's what I do.

Ellen Zentner 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.

Investors appear nervous about the economic outlook as 3rd quarter earnings season approaches. Are stagflation concerns justified… or perhaps overdone?

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Welcome to Thoughts on the Market. I'm Graham Secker, Morgan Stanley's Chief European Equity Strategist. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about why we think the current stagflation concerns in Europe are likely overdone. It's Tuesday, October the 12th, at 2:00pm in London.

In early September, we argued that investors should reengage with cyclical value stocks ahead of a likely stabilization in macro sentiment and in anticipation of higher bond yields. At this time, the former catalyst is yet to occur, however the latter has prompted a sharp bounce in value stocks, which we think has further to run - this would be in line with our bond strategists target of 1.8% on US 10-year yields by the end of this year. Interestingly, the rally in European value so far has been concentrated in the more disrupted names where specific catalysts have boosted performance - such as the rising oil price lifting energy stocks and higher bond yields boosting financials. In contrast, the more traditional cyclical sectors have been modest underperformers, suggesting to us that investors still remain nervous about the global economic outlook.

In recent weeks, this nervousness has taken on a stagflationary tone, with equity and bond prices both falling. In particular, the extent and speed of the rise in interest rates and commodity prices, especially gas and oil, has provoked incremental concerns around the outlook for corporate margins, household disposable incomes and the risk of demand destruction. These concerns are unlikely to dissipate overnight, however we think there is a good chance that stagflationary fears and supply chain issues will start to ease through the fourth quarter, which should allow cyclical shares to rally alongside the value names.

If we are wrong and stagflation concerns grow further from here, then we'd expect to see consumer confidence fall sharply, yield curves start to flatten, and defensives outperform. So far, none of these are happening, even in the UK where stagflation concerns are most acute, and the Bank of England is sounding hawkish on the potential for future rate hikes.

Away from the economic data, the other major concern weighing on European investors just here is the upcoming third quarter reporting season, which will start in the next couple of weeks. After three consecutive quarters of record profit beats, we expect a more modest outturn this time, however one that is still more good than bad. In contrast, we think investors are more cautious, especially around the ability of companies to protect their margins by passing on higher input costs to their end customers.

While some businesses will no doubt struggle in this regard, we believe that the majority of companies will be able to manage the situation well enough to avoid a margin squeeze. Rising input costs are a problem when top line growth is modest and corporate pricing power weak - however, this is definitively not the case today. For example, the latest CBI survey of UK manufacturers show total order volumes and average selling prices at 40-year highs.

At the current time, equity markets still feel fragile and could remain volatile for a few more weeks yet. However, as we move through the fourth quarter, we'd expect an OK earnings season, coupled with evidence that the worst of the third quarter dip in the US and China economies are behind us, to ultimately send European equity markets higher into year end. Our key sector preferences remain unchanged at this time. We like the more value-oriented sectors such as financials, commodities and autos, and are more cautious on expensive stocks in an environment where higher interest rates start to encourage investors to become more valuation sensitive going forward.

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.

As the weather chills and we head towards the end of the mid-cycle transition, the S&P 500 continues to avoid a correction. How long until equities markets cool off?

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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 11th at 11:30 a.m. in New York. So, let's get after it.

With the turning of the calendar from summer to fall, we are treated with the best weather of the year - cool nights, warm days and clear skies. In contrast, the S&P 500 has become much more volatile and choppy than the steady pattern it enjoyed for most of the year. This makes sense as it's just catching up to the rotations and rolling corrections that have been going on under the surface. While the average stock has already experienced a 10-20% correction this year, the S&P 500 has avoided it, at least so far.

In our view, the S&P 500's more erratic behavior since the beginning of September coincided with the Fed's more aggressive pivot towards tapering of asset purchases. It also fits neatly with our mid-cycle transition narrative. In short, our Fire and Ice thesis is playing out. Rates are moving higher, both real and nominal, and that is weighing disproportionately on the Nasdaq and consequently the S&P 500, which is heavily weighted to these longer duration stocks. This is how the mid-cycle transition typically ends - multiples compressed for the quality stocks that lead during most of the transition. Once that de-rating is finished, we can move forward again in the bull market with improving breadth.

With the Fire outcome clearly playing out over the last month due to a more hawkish Fed and higher rates, the downside risk from here will depend on how much earnings growth cools off. Decelerating growth is normal during the mid-cycle transition. However, this time the deceleration in growth may be greater than normal, especially for earnings. First, the amplitude of this cycle has been much larger than average. The recession was the fastest and steepest on record. Meanwhile, the V-shaped recovery that followed was also a record in terms of speed and acceleration. Finally, as we argued last year, operating leverage would surprise on the upside in this recovery due to the unprecedented government support that acted like a direct subsidy to corporations.

Fast forward to today, and there is little doubt companies over earned in the first half of 2021. Furthermore, our analysis suggests those record earnings and margins have been extrapolated into forecasts, which is now a risk for stocks. The good news is that many stocks have already performed poorly over the past six months as the market recognized this risk. Valuations have come down in many cases, even though we see further valuation risk at the index level. The bad news is that earnings revisions and growth may actually decline for many companies. The primary culprits for these declines are threefold: payback in demand, rising costs, supply chain issues and taxes.

At the end of the day, forward earnings estimates will only outright decline if management teams reduce guidance, and most will resist it until they are forced to do it. We suspect many will blame costs and even sales shortfalls on supply constraints rather than demand, thereby giving investors an excuse to look through it. As for taxes, we continue to think what ultimately passes will amount to an approximate 5% hit to 2022 S&P 500 EPS forecasts. However, the delay in the infrastructure bill to later this year has likely delayed these adjustments to earnings.

The bottom line is that we are getting more confident earnings estimates will need to come down over the next several months, but we are uncertain about the timing. It could very well be right now as the third quarter earnings season brings enough margin pressure and supply chain disruption that companies decide to lower the bar. Conversely, it may take another few months to play out. Either way, we think the risk/reward still skews negatively over the next three months, even though the exact timing of cooler weather is unclear. Bottom line, one should stay more defensive in equity positioning until the winter arrives.

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.

Investor worries over growth and inflation have revived the term stagflation—but with growth indicators historically solid, is it an accurate description?

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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, October 8th at 2:00 p.m. in London.

Near where I live in London, service stations are out of petrol - or to my fellow Americans, the gas stations are out of gas. In Europe, natural gas prices have roughly tripled in the last three months. Year-over-year, Consumer Price Inflation has risen 5.3% in the United States, 5.8% in Poland, 7.4% in Russia, and 9.7% in Brazil. It's not hard to see why one term seems to come up again and again in our conversations with investors: stagflation.

Stagflation, broadly, is the idea that you get very weak growth, but also higher inflation together. Yet it's equally hard to miss in these conversations that while this term is widely cited, it's often ill defined. If stagflation means the 1970s, a time of wage price spirals and high unemployment, this clearly isn't it. Unemployment is falling around the world, and inflation markets imply pressures will moderate over time, rather than spiral higher.

Market pricing is also very different. Over the last 100 years, the 1970s represented an all-time high in nominal interest rates and an all-time low in equity valuations. Today, it's the opposite. We're near a record low in yields and a record high in those valuations.

Instead, what if we say that stagflation is a period where inflation expectations are rising, and growth is slowing? That's an easier, broader definition to apply, but even that hasn't really been happening.

In the U.S., market expectations for inflation are roughly where they were in early June. U.S. economic data remains solid. The economic data is a little bit more mixed in Europe, but even here, growth indicators generally remain historically strong.

So this clearly isn't a simple story, but we do think there are three takeaways for investors.

First, recall that stagflation was also a very hot market topic in 2004/2005. Growth and markets had bounced back sharply in 2003, but by mid 2004, the rate of change on that growth had started to slow. And then energy prices rose.

By spring 2005, the market started to worry that it could be the worst of both worlds. In April of that year, U.S. consumer price inflation hit 3.5% while measures of growth stalled. Stagflation graced the cover of the Economist magazine and the editorial pages in the New York Times. Equity valuations fell throughout 2004/2005 even as earnings rose, consistent with the current forecast that my colleague Michael Wilson and our U.S. Equity Strategy team.

The second important point is that inflation is already showing up and impacting monetary policy. In just the last three weeks, central banks have increased interest rates by +25bp in New Zealand, +25bp in Russia, +50bp and Peru, +50bp in Poland, +75bp in the Czech Republic and +100bp in Brazil. That's a lot of activity. And all of this is keeping my colleagues busy and also creating opportunity in these markets.

Third, while stagflation means different things to different people, past periods of rising inflation and slowing growth have often had one thing in common: higher energy prices. As such, we think some of the best cross-asset hedges for stagflation lie in the energy space.

The market is very focused on stagflation; it just hasn't quite decided what that term really means. The 1970s are a long way away from our expectations or market pricing. Scenarios of slower growth and rising inflation clash with our economic forecasts of, well, the opposite. And recent moves in inflation expectations and other growth indicators don't fit this story as nicely as one would otherwise think.

Instead, we think investors should focus on three things: 2005 is an interesting and rather recent example of a stagflation scare after a mid-cycle transition. Inflation is impacting central banks, creating movement and opportunity. And finally, the energy sector provides a potentially useful hedge against scenarios where the current disruption is more persistent. Now, with that out of the way, I'm off to find some petrol.

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.

Affordability pressures continue to mount as housing supply tightens. How long will home prices continue setting records and what could it mean for credit availability?

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James Egan Welcome to Thoughts on the Market. I'm James 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 here.

James Egan And on this edition of the podcast, we'll be talking about continued growth in the housing market and the current state of supply. It's Thursday, October 7th at 10:00 a.m. in New York.

Jay Bacow So, Jim, last time we were on this podcast, it seemed like we were seeing record home prices. However, every month since, we've continued to break those records. What's going on? When do we expect to see home prices start to turn?

James Egan The most recent print - and so we're talking about Case-Shiller National here that we got in September, it referenced July; 19.7% year over year growth. We're rounding to 20%. Now, we've set new records each of the last few months, but if we remove this specific chapter in history, the prior record from the early 2000s was a little bit over 14%. So, we're well north of anywhere we've been.

Jay Bacow All right. But if we are at a record right now, I thought previously you had talked about things slowing down. So, what's going on there?

James Egan So, when we talk about the view for home prices, right? We talk about demand, we talk about supply, we talk about affordability, and we talk about mortgage credit availability. And one of the things we highlighted the last time we were on this podcast was that affordability. Those pressures that were building up there were going to lead to a slowdown in home price growth in the second half. The most recent print, as I said, September - references July - technically, we're in the second half of the year. We do think as we move through the third quarter and really as we get into the fourth quarter is when you're going to start to see those affordability pressures take hold.

James Egan Most notably, mortgage rates - look, they haven't increased dramatically from all-time lows in January, but they're still off of those lows. Most importantly, they're not setting new lows. And that means they're not acting as a release valve for this increase in home prices. And we're seeing that manifest itself in terms of growing affordability pressures. The monthly payment on the median priced home is up over $200 since January - that's over a 20% increase. On top of that, when we look at consumers attitudes towards buying homes, they're at the lowest point they've been now since the early 1980s, far lower than they were at any point during the global financial crisis earlier this century. But affordability pressures are just one piece of the puzzle here. There are other aspects that might be keeping home prices elevated.

Jay Bacow When I’m thinking about home prices, you know, obviously one of the factors is going to be supply; that’s Economics 101. We’ve talked beforehand about how we’re not building enough homes. Is that just the biggest factor here?

James Egan I do think that we can’t ignore supply. I mean, when we think about this growth we’ve seen in home prices, the most consistent or persistent part of that narrative has been a shortage in supply.

James Egan Now there are a lot of ways that we can go about attempting to size the shortage in supply in the housing market. But two of the things we looked at recently were kind of net supply versus net demand, but also the vacancy rate. So, if we start with that first calculation, we look at net supply in terms of the total amount of single unit completions added to the market every year, the total amount of multi-unit completions added to the market every year, and we control for a small obsolescence rate. Some of the housing stock does come out of use every single year. And we compare that net supply to net demand or household formations.

James Egan And you know what? Going back to the early 1980s, those two metrics track each other pretty well. That relationship really fell apart post the global financial crisis. From 2009 to 2019 net demand has exceeded net supply by a total, a cumulative total of 5 million units. Now that’s just one way to size the shortage from purely a building perspective. Another way is to look at vacancy rates. Owner vacancy rates right now are tied for the lowest they’ve been since the Housing Vacancy Survey started getting published in the 1950s. If we were to raise owner vacancy rates to their average level of the past 40 years, that would take over 1.5 million units. So, from a building perspective, we’re anywhere from a 1.5 to 5 million units short.

Jay Bacow Alright but new home sales will obviously change the amount of absolute supply. But then there’s also existing home sales – now somebody’s gotta buy a home, someone’s going to sell that home. That’s also gotta be part of that calculation. How do I think about the interplay between new home sales and existing home sales on the supply front?

James Egan I mean, you hit the nail on the head there, right? We talk about new builds in terms of a supply perspective, but they're just one piece of the puzzle here. We have to think about existing inventories. We talk about shadow inventories as well with respect to things like foreclosures that play a role in supply, that play a role in housing activity, that play a role in home prices. But it's not just new inventory that's short, existing inventory is short as well. If we look at the number of single unit homes available for sale, we have that data going back to the 1980s and it's never been lower than it is right now. It would take, depending on how we measure it, 1.1 to 1.5 million additional existing units being listed for sale to bring that number back to long run averages.

James Egan So supply is really tight across the board. Now, the pace at which that supply is tightening, that has slowed down. We're not seeing the same year over year decreases that we were seeing in 2020. So, we are starting to see a little bit of a plateau there. We do think that you're going to start to see supply increasing a little bit. But these incredible tights from a supply perspective we think are playing a pretty substantial role in keeping home prices this elevated despite the growing affordability pressures that we've noted both earlier and on previous podcasts.

Jay Bacow All right. So we addressed supply, we addressed demand, we addressed affordability. The last pillar is credit availability.

James Egan Yes, we think that credit availability kind of plays two roles in both supporting the healthy foundation of the housing market here, but also important for the trajectory of the housing market going forward. Credit availability itself. We were easing, from a lending standard perspective, on the margins from 2013 through 2020 - February of 2020 specifically. Then we gave up six years’ worth of easing over the course of the next six months. Lending standards have started to ease a little bit from here, but we're starting from a very conservative place, if you will. That starting point means that we think that delinquencies foreclosures will remain controlled. But the fact that we believe we're going to see easing from here also means that we can see more demand than we otherwise would materialize despite the fact that we're seeing these affordability pressures.

James Egan Both of those are positive, but there are reasons to think that we'll see credit easing from here, one of which being the level we're coming from, another being how mortgages are performed. But a big factor here is also what we're hearing out of the administration down in D.C. But Jay, can you kind of walk through what we're seeing from these various FHFA announcements, what the implications could be here?

Jay Bacow When we look at the FHFA announcements, there's been a series of them and it's not just FHFA, it's also been from HUD and Ginnie Mae. And they're all aligned with what we believe are the current administration's goals to increase access to homeownership and reduce some of the affordability pressures. And one of the ways that they've done that is they've allowed the GSEs to increase capital via producing more loans that are either for investors and none are occupied where the guarantee fee is accretive to their business via warehousing more cash window loans, along with changing the regulatory relief for doing credit risk transfer deals. And we think the GSEs are going to take this capital and with this capital, they're going to expand the credit box, perhaps in the form of LLPA changes or G-Fee reductions, which will make it both cheaper for homeowners to get a mortgage and perhaps shift the credit box a little bit wider, particularly on the lower end of the credit box. Doing this will help align the affordability pressures and lack of access to homeownership with the current administration's goals.

James Egan So, when we think about everything we've talked about on this podcast, from supply to credit availability, what that means for home prices moving forward; look, affordability pressures are real, and they've been building. But a tight supply environment, even if we're seeing it ease a little bit and credit availability easing from here, both of those things should work to keep home prices growing. We think they contribute to the healthy foundation. The pace of growth it will slow from almost 20% today. It'll slow into the end of the year. We think throughout 2022 it continues to slow but remains in the mid-single digits from a growth perspective.

James Egan So, Jay, thanks for taking the time.

Jay Bacow Always a pleasure. Thanks, Jim.

James Egan 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.

Discussions in D.C. over the infrastructure framework, budget reconciliation bill and debt ceiling could impact more than just politics. What could it mean for stocks and bond yields?

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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy 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 US public policy and financial markets. It's Wednesday, October 6th at 10:30 a.m. in New York.

When we checked in last week, the debate was all about fiscal policy. Would Democrats go small and just focus on passing the bipartisan infrastructure framework, or BIF? Or go big, linking the BIF to the bigger plan to expand the social safety net, environmental spending and the tax base. The difference matters, as a small approach could halt the increase in bond yields we've seen in recent weeks, whereas a big approach could keep them moving higher.

In short, it looks like the Democrats are at least going to continue to try and go big, as was our expectation. No votes were taken last week as it became obvious that there wasn't enough support for the small approach, which wouldn't fly with a bloc of progressives in the Democratic party. So, despite moderates' demands for a BIF vote by week's end, Democrats were forced to extend negotiations with a new soft deadline for action of October 31st. That reinforced to us the link between both pieces of legislation. So, in our view, we're still headed toward a multitrillion dollar package being enacted in the fourth quarter, which should boost deficits, medium term growth expectations, and therefore bond yields along with it.

But in the meantime, the rise in bond yields could take a break as Washington, D.C. deals with the debt ceiling. The Treasury Department says the ceiling must be raised or suspended by October 18th, less than two weeks from today, or else the U.S. could face default and an economic crisis. Republicans and Democrats continue to be at odds over how to avoid this. Without getting into the weeds on this too much, just know that at this point, neither party is showing an inclination to resolving this in a timely manner. That could create substantial uncertainty and it's one of the reasons that our U.S. equity team continues to expect stock prices could remain volatile in the near term.

So stay tuned - DC's influence on markets is sure to be felt through the end of the year.

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.

New data on an oral antiviral treatment could have significant impact on the COVID treatment landscape. What’s next for treatments, booster shots and child vaccines.

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Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, chief cross asset strategist for Morgan Stanley Research.

Matthew Harrison And I'm Matthew Harrison, Biotechnology Analyst.

Andrew Sheets And on this special edition of the podcast, we'll be talking about several new developments in the fight against COVID 19. It's Tuesday, October 5th at 3 p.m. in London,

Matthew Harrison and it's 10:00 a.m. in New York

Andrew Sheets So Matt. I really wanted to catch up with you today because there are a number of different storylines involving COVID 19 going on at the moment, from child vaccines to the situation with booster shots. But I suppose the headline story that's getting the most attention is data released last Friday on Merck's new oral COVID treatment pill Molnupiravir or I think I said that right. I'm sure I didn't. So maybe let's start there. What is this treatment and why does it matter?

Matthew Harrison Yes. Thanks, Andrew. So Molnupiravir is an oral antiviral against COVID. The way it works is that it stops the virus from replicating effectively, and that reduces the amount of virus in someone's body. It was studied here in patients that were recently diagnosed with COVID 19. And it cut the rate of hospitalization in those patients by 50%. So those that didn't get treated with the drug went to hospital at a rate of 14%, and those that did get treated went to hospital rate of 7%. I think the thing I would want to highlight is that this is something you obviously take after you get infection and vaccines remain the primary way to prevent infection.

Andrew Sheets So this is kind of one of the things I felt that was so fascinating when that news was announced. Because on the one hand, this seems like very good news, another treatment that appears highly effective against COVID 19. And yet the market reaction was actually to really punish many of the makers of the current COVID vaccines, so how much do you think this could influence the COVID treatment landscape? And do you think the market or people might be overreacting to some of the impact on whether or not people will still get vaccines or vaccines will remain important?

Matthew Harrison Vaccines, their primary measure is prevention. Right? This is a drug to treat people once you get disease. But the hope is, and the way we get out of the pandemic, is still by vaccinating everybody to prevent disease from happening and disease from spreading. So, I think of this drug, along with antibodies as drugs that you use to treat people who either have breakthrough infections or those that aren't vaccinated. But you also have antibodies for people that are at higher risk, patients that might not be compliant with taking oral drugs. Or, you know, a whole another segment of the market that we haven't talked about is those that need to be protected either because they can't get a good response to the vaccine, because they're perhaps immunocompromised or otherwise, and those that need some sort of preventative treatment. Where Merck is studying this pill as a preventative treatment, but the antibodies are already authorized as preventative treatments. So, there's a different section of the landscape, I would say, for each of these drugs.

Andrew Sheets So, Matt, what impact do these potentially positive results on a pill mean for vaccine hesitancy in the outlook for vaccinations?

Matthew Harrison I think that's one of the things that the market is is struggling a lot with, and I think that's part of the reason you saw many of the vaccine stocks under pressure, right? There's definitely one segment of the market that thinks, if you have effective treatments, especially easy to use treatments like orals, that could give people another reason who don't want to have the vaccine to say, "Look, even if I do get sick, I do have an easy to take treatment." And so, on the margin, right, it may impact vaccination uptake, though the flip side is what I would say is I think what we're seeing in the U.S. is at least that you're seeing broad vaccination mandates and you and you are seeing those mandates lead to increases in vaccination, especially employer based mandates. And so, there are other factors driving vaccine uptake.

Andrew Sheets So I think it's safe to say we care about the numbers here on this Thoughts of the Market podcast. Could you just run through the various costs of different treatments if we're thinking about vaccines, you know, potential thoughts on where an oral pill could be and then the antibody treatments, which are obviously another form of treatment that we're seeing being used. Just to give people some sense of how much the relative cost of each one of those things is.

Matthew Harrison Yes, so vaccines per shot in the U.S., depending on manufacturer, run between $16.50 And $19.50 in the U.S. So a course of vaccination, let's say costs on average about $40. There are some administration fees and otherwise, but direct to drug costs. Merck has signed a contract with the US government for $1.2 Billion for 1.7 Million courses, so that runs about $700 per course for the oral right now. And then the U.S. government also has contracts with a variety of manufacturers for antibodies, which run about $2100 per course. So treatments are more expensive than vaccination and then usually with treatments, there are other associated medical costs which I didn't cover, and I don't have a great estimate for. But obviously, as those patients that might be getting treatments because they're also hospitalized, those costs are more significant.

Andrew Sheets So I want to jump next to the topic of child vaccinations. Last week, Pfizer and BioNTech announced that they had submitted data to the Food and Drug Administration that their coronavirus vaccine is safe and effective in children ages 5-11. What do you think? Is the timeline ahead for the next steps here?

Matthew Harrison Yes, right, so they have submitted preliminary data, but they have not submitted the final request for an emergency use authorization. The expectation here is that there will be some back and forth between Pfizer and the regulator to finalize the exact package of data after the FDA has reviewed the initial data. That will then trigger the final submission where they ask for the request for emergency use authorization. Most of us think that would occur sometime, let's say, in the next couple of weeks. And then historically right, the FDA, once they receive that final package, takes on order of two to three weeks to approve the EUA authorization. So, I think this ranges from maybe the earliest in late October towards sometime into early November.

Andrew Sheets Matt, I also wanted to cover the issue of booster shots, which is the other kind of large development in the fight against COVID 19, and I think there's been a little bit of confusion on the topic. So, you know, what's the latest in terms of who is eligible for a booster in the U.S. and what the CDC is recommending?

Matthew Harrison Originally the FDA had asked their external advisory committee whether or not boosters should be made available for everyone where the original vaccine was authorized, so that would be those 16 and up. The advisory committee then asked to narrow that slightly and specifically what the advisory committee asked was: those 65 years or older, as well as those at high risk, either because of underlying medical conditions or because of occupational hazard. So that would include, hospital workers or workers who are otherwise frontline workers in a high-risk scenario. The CDC has a separate committee called ACIP, which a few days later looked into this as well, and they had voted essentially for those at high medical risk and those 65 years and older. But they had said they were somewhat uncomfortable, and it was a very close vote to be clear, about those at increased occupational risk. After that meeting, the CDC themselves or the director of the CDC said that they believe the booster shot should be made available for all of those groups and essentially overrode the committee on the last piece around occupational risk. So right now, its 65 older, immunocompromised, those at high medical risk and those at high occupational risk.

Andrew Sheets So Matt, the final thing I wanted to ask you about is one of the most positive things that seems to have come out of this this terrible pandemic is mRNA vaccination technology. It seems to be a type of medical technology that has really exceeded expectations for how quickly and how effectively a vaccine could be rolled out.

Andrew Sheets So Matt, if you think about this technology looking ahead, what do you think are the applications that potentially could go beyond COVID? And also, at what point do you think some of these vaccinations might need to be updated and how difficult will that be?

Matthew Harrison So in terms of applications and next steps for RNA, there's a wide variety of disease areas that they're looking at. But in general, the technology is being used to make missing proteins in your body, which occurs a lot with rare genetic diseases. To potentially help various tissues that may need certain proteins or enzymes to help them heal. And also looking at ways that you could, for example, with oncology patients that you could tell the body's own immune system for key flags or markers of the tumors versus normal tissue so that you could redirect the immune system to specifically go after the cancerous tumor. In terms of needing a updated COVID vaccine. I think that all depends on the variant outlook. Currently, what we see is just giving another dose of the current vaccine provides very good protection against Delta. And so, I think as we look out on the outlook, right, it's about if Delta combines with something else, then maybe there is the potential for an update. But the manufacturers are well primed for that, and that process is a couple months process, probably if they had to do that. So, they can adapt quickly.

Andrew Sheets Something important to keep an eye on. As always, Matt, it's been great talking with you.

Matthew Harrison Thanks, Andrew.

Andrew Sheets 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.

After 16 years, German Chancellor Angela Merkel is stepping down. While the full implications for Europe remain unclear, some contours of the post-Merkel government are now taking shape.

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Welcome to Thoughts on the Market. I am Reza Moghadam, Morgan Stanley's Chief Economic Advisor. Along with my colleagues, we bring you a variety of market perspectives. Today, I'll be talking about the implications of the recent German elections and how investors should view the road ahead after a government is formed. It's Monday, October 4, at 2pm in London.

After 16 years as German Chancellor, Mrs. Merkel is stepping down. In the run up to the recent elections, there was considerable anxiety in European capitals. Angela Merkel, after all, has been the steady hand that has guided not only Germany's but also Europe's response through numerous crises.

These anxieties have not been entirely laid to rest by the results of last week's election. For the first time since 1950s, forming a government would require a coalition of at least three - rather than the traditional two - political parties, which raises concerns about cohesion of the new government.

However, there are reasons to be optimistic about broad continuity - that a centrist, pro-European and pro-business coalition would eventually emerge in Berlin.

There are perhaps two key issues of importance for investors as discussions get underway. First, who will succeed Mrs. Merkel? And second, what would be the exact composition of the coalition and, therefore, its policies?

The candidate most likely to succeed Mrs. Merkel is Olaf Scholz, whose Social Democratic Party narrowly topped the polls. Mr. Schulz is continuity incarnate. He has been Germany's Finance Minister and vice chancellor under Mrs. Merkel. He brings strong pro-European credentials, especially having played a role in ensuring Germany's support for the European Recovery Fund, which is Europe's main vehicle for providing support for the hardest hit countries during the pandemic. Mr. Schulz has also been a very strong proponent of EU banking and capital markets unions.

Is there an alternative to Mr. Schulz? Yes, the candidate who led the election campaign for Mrs. Merkel's center right Christian Democrats, Armin Laschet. However, given the poor election results for Christian Democrats and Mr. Laschet's much less favorable public standing, a German government led by Mr. Laschet is unlikely. But it is worth noting that Mr. Schulz and Mr. Laschet are both centrist politicians and not that far apart on key policies.

Now let me turn to the second important issue for markets: who are the likely coalition partners for Mr. Schulz or, for that matter, Mr. Laschet?

Here, the electoral mathematics are very clear. The Green Party and the pro-business Free Democrats are highly likely to be in the next government.

The Greens have one key demand: €50B (or 1.5% of GDP) per year in new investment to reach net zero carbon emissions by 2050. Investment in Germany has been constrained by self-imposed austerity, and increasing investment of that magnitude is likely to underpin growth and innovation and set a benchmark for other European countries.

What about the Free Democrats? They are against tax increases and fiscally conservative, but pro green investment. Therefore, they would want to ensure that any fiscal plans are business friendly, and any deficit financing limited.

In summary, the contours of the post-Merkel German government are becoming clearer.

There will likely be continuity through Mr. Schulz, or perhaps Mr. Laschet. There Is likely to be a strong green investment agenda, and the presence of the Free Democrats ensures support for Mr. Schulz's brand of fiscal moderation and prudence. It is also very clear that while continuing to take a cautious line on fiscal policy, the next German chancellor and government are likely to put a high premium on European solidarity.

The process for forming a new government in Germany will likely take time as it requires drawing up a detailed policy agreement that respects the red lines of each political party. But the new government should be in place by the end of this year, just in time for the German presidency of the G7 in 2022.

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.

On part two of this special episode, Lisa Shalett and Andrew Sheets dive into meme stocks and individual investor trading advantages… and pitfalls.

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Andrew Sheets Welcome to Thoughts of the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley Research.

Lisa Shalett And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.

Andrew Sheets And today on part 2 of the podcast, I’ll be continuing my discussion with Lisa on the retail investing landscape and the impact on markets. It's Friday, October 1st, at 2p.m. in London.

Lisa Shalett And it's 9:00 a.m. here in New York City.

Andrew Sheets So, Lisa, over the last 12 months, we've seen a real boom in the amount of activity in the stock market from these so-called retail investors. And, you know, given your perspective over several market cycles, you know, what do you think is kind of similar and different in terms of individual investor activity now versus what we've seen in the past?

Lisa Shalett So you know what's similar to episodes of retail participation that we've seen in the past? I think the first is momentum and crowding. So, as we know in prior market cycles, you know, periods like a 1999-2000 tech bubble, for example. We had a lot of enthusiasm around stocks that perhaps didn't have great profit fundamentals or whose valuation paradigms shifted to expand beyond things like profit to things like, you know, share of eyeballs and things of that nature. And we're you know, we've certainly during this market cycle with the emergence of, you know, zero commission trading platforms, you know, seen some of that type of activity where stocks seem to be moving based on other dynamics, be they momentum, be they you know, social media chatter.

Lisa Shalett Obviously, I think one of the things that is different is this role of social media. I think that this idea that a set of investors will crowd or attempt to drive the market through social media postings is an interesting one, if you will. And I think we're going to need to see how it plays out. But I think what we know is very often when we get into periods in the market where we're drawing in a large share of brand-new investors, you know, they are not particularly experienced and they, you know, seemingly have had success by dint of, you know, the benign nature of the environment, which is what we've kind of had. We've had a relatively low vol, high central bank involvement environment. We know how these parties tend to end. And since this seems to happen every couple of times in a generation, this generation of new investors, I think, you know, may be set up to, you know, quote unquote, learn the hard way. But that remains to be seen.

Andrew Sheets Lisa, I know another question that you spend a lot of time thinking about is whether or not investors should look to be active or passive in how they're trying to take exposure to markets. How are you thinking about that and kind of what type of environment do you think we're in today?

Lisa Shalett We try to take a pretty, you know, systematic and methodical and analytic approach to the active/passive decision. We want to make sure that when we're giving advice that if we think that there's idiosyncratic alpha opportunity out there above and beyond what, you know, the passive market can deliver and we're asking our clients to pay for it, that it's there and with high probability and that it exists. And so, you know, what are the environments where that tends to be true? What we have found is it tends to be environments where you have large valuation dispersions in the market, where you have high levels of controversy in terms of earnings estimate dispersion, tends to be environments where there could be policy inflection points. And so based on some of those type of variables, over the last two to three months, our models have moved us to a maximum setting towards active management. When we look at the passive index today, one of the things that, you know, we continue to point out to our clients is the extent to which the S&P 500 index, for example, has become very concentrated in a short list number of names. So, you know, we contrast that recommendation that we're making right now for a maximum stock picking or maximum active manager selection stance with, you know, perhaps where we were at the beginning of the cycle last March when policy actions are so profound in terms of driving liquidity and the stimulus was coming from the federal government. When you're in an environment where "the rising tide lifts all the boats" and performance dispersion is very narrow and you have, you know, very high breadth where, you know, almost all stocks are rising and they're rising together. Those are certainly markets that are very well played using the passive index. But that's how we make that contrast. And today we are trying to encourage our clients to move to a more active stance where they're reducing their vulnerability to some of the characteristics of the S&P 500 index that we think are fragile.

Andrew Sheets Very interesting. So, Lisa the last question I want to ask you is when you think about that retail, that individual investor, what do you think are actually the advantages that this group has, maybe underappreciated advantages? And then what do you think are kind of some of the most common pitfalls that you see and strategies to try to avoid?

Lisa Shalett Yeah, no, that's a great question. So, one of the advantages of being an individual investor is you can truly take a long-term view. At least most of our clients can. And so, they don't need to worry about, "mark to market," they don't need to worry about quarterly returns and quarterly benchmarks. They don't even need to worry about benchmarks at all, quite frankly. And that allows the individual investor to take a long view, to be patient to utilize tools like dollar cost averaging in over time and to not necessarily have to buy into the pressures of market timing.

Lisa Shalett I think the pitfalls for individual investors are you know, individual investors are just that, they are individuals. Individual investors tend to be motivated by very human behavioral finance concepts of fear and greed. And so, I think one of the things that very often we as private wealth advisors battle are emotions. And when our clients, you know, feel a degree of fear, they will do things that potentially are drastic, i.e., they will, you know, sell and take profit and incur a tax event and get out of the market. And then the challenges of market timing, as we know, are always twofold. Right? If you're going to get out, you've got to have a discipline of when to get back in. And we know that those two things: getting in and getting out, are very hard to do and do well without destroying wealth, without concretizing losses and without, you know, leaving money on the table. So, you know, I think the value of advice, as we always say, is keeping clients in that first bucket, keeping them attached to a long run, process driven plan that avoids market timing, that allows you to take the long view, that measures things in years, not quarters and months, and avoid some of the pit falls.

Andrew Sheets I think that's a great place to end it. Lisa, thanks for taking the time to talk and we hope to have you back soon.

Lisa Shalett Thank you very much, Andrew. I appreciate it.

Andrew Sheets As a reminder, if you enjoy Thoughts of the Market, please take a moment to rate and review us on the Apple Podcasts App. It helps more people find the show.

On part one of this Special Episode, Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management, discusses the new shape of retail investing and the impact on markets.

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Andrew Sheets Welcome to Thoughts of the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley Research.

Lisa Shalett And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.

Andrew Sheets And today on the podcast, we'll be discussing the retail investing landscape and the impact on markets. It's Thursday, September 30th, at 2p.m. in London.

Lisa Shalett And it's 9:00 a.m. here in New York City.

Andrew Sheets Lisa, I wanted to have you on today because the advice from our wealth management division is geared towards individual investors, what we often call retail clients instead of institutional investors. You tend to take a longer-term perspective. As chief investment officer, you're juggling the roles of market analyst, client adviser and team manager ultimately to help clients with their asset allocation and portfolio construction.

Andrew Sheets Just to take a step back here, can you just give us some context of the level of assets that Morgan Stanley Wealth Management manages and what insight that gives you potentially into different markets?

Lisa Shalett Sure. The wealth management business, especially after the most recent acquisition of E-Trade, oversees more than four trillion dollars in assets under management, which gives us a really extraordinary view over the private wealth landscape.

Andrew Sheets That’s a pretty significant stock of the market there we have to look at. I'd love to start with what you're hearing right now. How are private investors repositioning portfolios and thinking about current market conditions?

Lisa Shalett The individual investor has been incredibly important in terms of the role that they're playing in markets over the last several years as we've come out of the pandemic. What we've seen is actually pretty enthusiastic participation in in markets over the last 18 months with folks, you know, moving, towards their maximum weightings in equities. Really, I think over the last two to three months, we've begun to see some profit taking. And that motivation for some of that profit taking has as kind of come in two forms. One is folks beginning to become concerned that valuations are frothy, that perhaps the Federal Reserve's level of accommodation is going to wane and, quite frankly, that markets are up a lot. The second motivation is obviously concern about potential changes in the U.S. tax code. Our clients, the vast majority of whom manage their wealth in taxable accounts, even though there is a lot of retirement savings, many of them are pretty aggressive about managing their annual tax bill. And so, with uncertainty about whether or not cap gains taxes are going to go up in in 2022, we have seen some tax management activity that has made them a little bit more defensive in their positioning, you know, reducing some equity weights over the last couple of weeks. Importantly, our clients, I think, are different and have moved in a different direction than what we might call overall retail flow where flows into ETFs and mutual funds, as you and your team have noted, has continued to be quite robust over, you know, the last three months.

Andrew Sheets So, Lisa, that's something I'd actually like to dig into in more detail, because I think one of the biggest debates we're having in the market right now is the debate over whether it's more accurate to say there's a lot of cash on the sidelines, so to speak, that investors are still overly cautious, they have money that can be put into the market. You know, kind of versus this idea that markets are up a lot, a lot of money has already flowed in and actually investors are pretty fully invested. So, you know, as you think of the backdrop, how do you think about that debate and how do you think people should be thinking about some of the statistics they might be hearing?

Lisa Shalett So our perspective is, and we do monitor this on a month-to-month basis has been that that, you know, somewhere in the June/July time frame, you know, we saw, our clients kind of at maximum exposures to the equity market. We saw overall cash levels, had really come down. And it's only been in the last two to three weeks that we've begun to see, cash levels rebuilding. I do think that that's somewhat at odds with this thesis that there's so much more cash on the sidelines. I mean, one piece of data that we have been monitoring is margin debt and among retail individual investors, we've started to see margin debt, you know, start to creep up. And that's another indication to us that perhaps this idea that there's tons of cash on the sidelines may, in fact, not be the case, that people are, "all in and then some," you know, may be something worth exploring in the data because we're starting to see that.

Andrew Sheets So, Lisa, the other thing you mentioned at the onset was a focus on the tax environment, and that's the next thing I wanted to ask you about. You know, I imagine this is an issue that's at the top of minds of many investors. And your thoughts on both what sort of reactions we might get to different tax changes and also your advice to how individuals and family offices should navigate this environment.

Lisa Shalett Yeah, so that's a fantastic question, because in virtually every meeting, you know, that I'm doing right now, this question comes up of, you know, what should we be doing? And we usually talk to clients on two levels. One is on it in terms of their personal strategies. And what we always talk about is that they should not be making changes in anticipation of changes in the law unless they're really in need of cash over the next year or two. It's really a 12-to-18-month window. In which case we would say, you know, consult with your accountant or your tax advisor. But typically, what we say is, you know, the changes in the tax law come and go. And unless you have an imminent, you know, cash flow need, you should not be making changes simply based on tax law. The second thing that we often talk about is this idea or this mythology among our client base that changes in the tax law, you know, cause market volatility. And historically that there's just no evidence for that. And so, like so many other things there's, you know, headline risk in the days around particular news announcements. But when you really look at things on a 3-month, 6-month, you know, 12- and 24-month trailing basis on some of these things, they end up not really being the thing that drives markets.

Andrew Sheets Lisa, one of the biggest questions—well, you know, certainly I'm getting but I imagine you're getting as well—is how to think about the ratio of stocks and bonds together within a portfolio. You know, there's this old rule of thumb, kind of the 60/40, 60% stocks, 40% bonds in portfolio construction. Do you think that's an outdated concept, given where yields are, given what's happening in the stock market? And how do you think investors should think about managing risk maybe differently to how they did in the past?

Lisa Shalett Yeah, look, that's a fantastic question. And it's one that we are confronted with, you know, virtually every day. And what we've really tried to do is take a step back and make a couple of points. Number one, talk about goals and objectives and really ascertain what kinds of returns are necessary over what periods of time and what portion of that return, you know, needs to be in current cash flow, you know, annualized income. And try to make the point that perhaps generating that combination of capital appreciation and an income needs to be constructed, if you will, above and beyond the more traditional categories of cash, stocks and bonds given where we are in terms of overall valuations and how rich the valuations are in both stocks and bonds, where we are in terms of cash returns after inflation, and with regards to whether or not stocks and bonds at the current moment are actually behaving in a way that, you know, you're optimizing your diversification.

Lisa Shalett So with all those considerations in mind, what we have found ourselves doing is speaking to the stock portion of returns as being comprised not only of, you know, the more traditional long-only strategies that we diversify by sector and by, you know, global regions. But we're including thinking about, you know, hedged vehicles and hedge fund vehicles as part of those equity exposures and how to manage risk. When it comes to the fixed income portion of portfolios, there's a need to be a little bit more creative in hiring managers who have a mandate that can allow them to use things like preferred shares, like bank loans, like convertible shares, like some asset backs, and maybe even including some dividend paying stocks in their income generating portion of the of the portfolio. And what that has really meant to your point about the 60-40 portfolio is that we're kind of recrafting portfolio construction across new asset class lines, really. Where we're saying, OK, what portion of your portfolio and what products and vehicles can we rely on for some equity like capital appreciation and what portion of the portfolio and what strategies can generate income. So, it's a lot more mixing and matching to actually get at goals.

Andrew Sheets Tomorrow I’ll be continuing my conversation with Lisa Shalett on retail investing and the implications for markets. As a reminder, if you enjoy Thoughts of the Market, please take a moment to rate and review us on the Apple Podcasts App. It helps more people find the show.

The eventual size of the Democratic Party’s fiscal policy legislation – for taxes and for spending – will likely impact the bond market as well as the policy landscape.

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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy 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 US public policy and financial markets. It's Wednesday, September 29th at 1:00 p.m. in New York.

It's shaping up to be one of the most consequential legislative weeks on record in the US. At stake is the size and fate of Democrats' fiscal policy ambitions, specifically their goals of a major tax increase to fund a substantial expansion of infrastructure spending and the social safety net. But intraparty disagreements on the content of these efforts have left investors wondering: what will the final package do to the U.S. fiscal outlook and, therefore, the trajectory for bond yields? Will the Democrats go big, keeping yields moving higher, or go small, potentially meaning the worst of the recent increase in bond yields is behind us?

Our current thinking is that the Democrats eventually end up going big. Why? Because neither of the two legislative vehicles they're considering are possible without the other - they're linked. Moderates, particularly in the Senate, may be happy with approving the smaller bipartisan infrastructure framework, or BIF. But progressives don't appear content with just this achievement and continue to argue they'll withhold their votes on the BIF until the whole of the party endorses a specific plan for the bigger budget reconciliation bill. This de facto linking of the two bills may mean that Democrats' planned votes this week to pass the BIF gets delayed, but it keeps the party on track for what we think would be a combined increase in spending of over $3T over 10 years, adding upwards of $1T to the deficit over the first five years. That would help keep support under the economic recovery and the upward trajectory of bond yields over the medium term. It could also mean equity markets are choppy in the near term as they digest a meaningful incoming tax hike.

But breaking that link and going small is something we have to consider too. If progressives give in and vote for the BIF without a dependable agreement on reconciliation, the moderates will be in the driver's seat on the rest of the negotiation - and already key moderate Democratic leaders have said they'd delay the timing and dilute the size of the reconciliation bill. In that case, we'd substantially mark down our expectations for the impact to deficits, as well as for the scope of tax hikes. For this outcome to become more likely, look for a public signal from the White House to persuade progressives to vote for the BIF by explicitly endorsing the strategy of voting on it before reconciliation is agreed to.

We hope this can be a guide to track how the situation develops over the next few days. And we’ll of course be paying close attention and be back next week to size it all up again.

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With incoming global growth data missing consensus expectations, emerging markets equity earnings revisions could fall back into negative territory for the first time since May 2020.

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Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Markets Equity Strategist for Morgan Stanley Research. Along with my colleagues, bringing you their perspectives, today I'll be talking about a key recent development, which is the deterioration in the global growth outlook and what it means for Asia and EM equities. It's the 29th of September at 7:30 a.m. in Hong Kong.

Incoming global growth data is starting to miss expectations by a wide margin. This appears to be mainly due to the impact of Delta-variant covid on consumer confidence, but also continued supply chain bottlenecks on the corporate sector. The Global Economic Surprise Index, i.e., the extent to which top-down global macro data beats or misses economists' expectations, has fallen in a straight line from a level of +90 in mid-June to -24 currently. It was last this low at the end of March 2020, at the beginning of the global impact of the pandemic, and before that in the second quarter of 2018, at the start of US-China tariff hikes and the imposition of non-tariff barriers to trade.

So in short, there's been a sudden downward lurch relative to expectations for global macro in relation to the narrative from consensus of a continued strong recovery, broadening out by geography, and entering a virtuous circle of rising consumption and investment. Global equity markets have wobbled recently but are still trading close to their all-time highs set in early September. We think the key to understanding what happens next is to understand the relationship between Economic Surprise data and earnings revisions. We’ve found that changes in the Global Economic Surprise index tend to have a good leading relationship for how bottom-up analyst earnings revisions evolve three months later. And that, in turn drives market performance.

And this matters because the covid recession and recovery have already witnessed exceptionally sharp movements, both in economic data - relative to consensus - and earnings estimate revisions. Indeed, they've been more extreme even than the volatility that we saw at the time of the Global Financial Crisis. So, at this level of -24 on economic surprise, our analysis suggests 12-month forward EPS expectations will likely decline by around 150bps over the next three months. That may not sound like much, but it compares with a current positive QoQ upward revision of 530bps and a peak QoQ revision of 1100bps in May of this year.

Within our coverage, some markets have already gone through the transition adjustment to slower expected earnings revisions - most notably China, where we remain cautious. Our analysis finds that strong performance and strong revisions are positively correlated and vice versa for weak performance and poor revisions. Japan, Russia and South Africa are the standouts recently for positive revisions, and they may show some resilience to the deteriorating global situation. China, Indonesia, Malaysia and Thailand have had the worst revisions and generally poor performance; but China has also been underperforming due to investors assigning a lower valuation to the market due to this year's regulatory reset. Overall, we continue to prefer Japan to EM and China.

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.

Real interest rates are on the rise in Europe and the US and central banks are responding. This may impact currency markets headed into the fall. Matt Hornbach, Global Head of Macro Strategy, explains.

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Welcome to Thoughts on the Market. I'm Matt 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 Tuesday, September 28th, at 12:30p.m. in New York.

Just like clockwork, markets have become much more interesting and volatile after Labor Day in the U.S. Investors have been confronted with several issues that have collided in a big bang after what had been a relatively quiet summer. And central bank reactions have been a key part of the story going into the fall.

To start, supply disruptions in commodity markets have led to inflation fears that have manifested themselves in higher market prices for inflation protection, mostly in Europe and the U.K. In response, the Bank of England has expressed more concern over the inflation outlook, since inflation is having a negative impact on the region's growth outlook. This combination of factors has caused real interest rates in Europe and the UK to remain extremely low and has also put downward pressure on the value of the British pound and the euro.

Meanwhile, the U.S. economy has been more insulated from the commodity price shock, and inflation protection in the U.S. was already fully valued. In other words, worries about inflation in the U.S. began to build last year and, as a result, investors had already prepared themselves for the elevated inflation prints we're experiencing in the U.S. today. This means that real interest rates in the U.S. are left marching to the beat of other drummers.

In particular, real interest rates in the U.S. have begun to respond to Federal Reserve monetary policy machinations. Last week, the Fed signaled that tapering its asset purchases could begin near term. That means the Fed will start purchasing less Treasury and agency mortgage-backed securities, leading to a decline in the amount of monetary accommodation the Fed has been providing.

The question is, is this tapering akin to tightening policy? Participants on the Federal Open Market Committee would have you believe that tapering isn't the same thing as tightening policy. And technically they would be correct. When the Fed purchases assets in the open market such that its balance sheet grows, it is easing monetary policy. It's a different form of cutting interest rates. When the Fed's balance sheet no longer grows because it has stopped purchasing assets on a net basis, it is no longer easing monetary policy. In the transition between these two states, the Fed's balance sheet continues to grow, but at a slower rate than before. In this way, the process of tapering is akin to easing policy, but by less and less each month.

But, and this is a big 'but', the process of tapering is the first step towards the process of tightening. Without the Fed tapering its asset purchases and slowing the growth of its balance sheet, rate hikes wouldn't appear on the radar screens of investors. So, the prospect of tapering this year has shown a spotlight on the prospect of rate hikes next year. And that has driven real interest rates higher in the U.S.

So, what happens now? As long as real interest rates in the U.S. rise gradually, as they have done so far this year, the overall level of interest rates in the U.S., as you can see in the Treasury market, should also rise gradually. And if U.S. interest rates rise relative to those in Europe, which already began in August and we think will continue through the balance of the year, then the value of the U.S. dollar should appreciate relative to the euro.

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Our analyst’s equity positioning models have held up well and we continue to rely on an understanding of historical cycles as we move through this mid-cycle transition. Chief Investment Officer Mike Wilson explains.

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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 27th, at 11:30a.m. in New York. So let's get after it.

Our equity strategy process has several key components. Most importantly, we focus on the fundamentals of growth and valuation to determine whether the overall market is attractive and which sectors and stocks look the best. The rate of change on growth is more important than the absolute level, and we use a market-based equity risk premium framework that works well as long as you apply the correct regime when using it. In that regard, we're an avid student of market cycles and believe historical analogs can be helpful. For example, the mid-cycle transition narrative that has worked so well this year is derived directly from our study of historical, economic and market cycles.

The final component we spend a lot of time studying is price. This is known as technical analysis. Markets aren't always efficient, but we believe they are often very good leading indicators for the fundamentals - the ultimate driver of value. This is especially true if one looks at the internal movements and relative strength of individual securities. In short, we find these internals to be much more helpful than simply looking at the major averages.

This year, we think the process has lived up to its promise, with the price action lining up nicely with the fundamental backdrop. More specifically, the large cap quality leadership since March is signaling what we believe is about to happen - decelerating growth and tightening financial conditions. The question for investors at this point is whether the price action has fully discounted those outcomes already, or not.

Speaking of price, equity markets sold off sharply last Monday on concerns about a large Chinese property developer bankruptcy. While our house view is that it likely won't lead to a major financial contagion like the Global Financial Crisis a decade ago, it will probably weigh on China growth for the next few quarters. This means that the growth deceleration we were already expecting could be a bit worse. The other reason equity markets were soft early last week had to do with concern about the Fed articulating its plan to taper asset purchases later this year, and perhaps even moving up the timing of rate hikes. On that score, the Fed did not disappoint, as they essentially told us to expect the taper to begin in December. The surprise was the speed in which they expect to be done tapering - by mid 2022. This is about a quarter sooner than the market had been anticipating and increases the odds for a rate hike in the second half of '22.

After the Fed meeting on Wednesday, equity markets rallied as bonds sold off sharply. Real 10-year yields were up 11bps in two days and are now up 31bps in just eight weeks. That's a meaningful tightening of financial conditions and it should weigh on asset price valuations, including equities. It also has big implications for what should work at the sector and style level. In short, higher real rates should mean lower equity prices. Secondarily, it may also mean value over growth and small caps over Nasdaq, even as the overall equity market goes lower. This would mean a doubly difficult investment environment, given how most are positioned.

For the past month, our strategy has been to favor a barbell of defensive quality sectors like healthcare and staples, with financials. The defensive stocks should hold up better as earnings revisions start to come under pressure from decelerating growth and higher costs, while financials can benefit from the higher interest rate environment. Last week, this barbell outperformed the broader index. On the other side of the ledger is consumer discretionary stocks, which remain vulnerable to a payback in demand from last year's over consumption. Within that bucket, we still favor services over goods where there remains some pent-up demand in our view.

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.

This week, the Fed hinted that a taper announcement in November could be in store, adding one more wrinkle into events that investors will need to navigate this fall.

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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 24th, at 2:00 p.m. in London.

The Federal Reserve, or the Fed, probably receives more attention than any other institution in today's market. At one level, that's easy to explain; it's the central bank for the world's largest economy and reserve currency, and just so happens to be buying $120B of bonds every month.

At another level, though, it feels a little excessive. Investors have woken up to the exact same interest rates and purchases from the Fed every day for more than a year. And if you look at global stock markets since May of last year, they've basically just risen in lockstep with the overall level of earnings.

Still, the Fed matters, and this week it made some consequential announcements. It suggested strongly that it would begin to slow, or taper, those bond purchases, and do so soon, ending them completely by the middle of next year. Its members increased their expectation for how much they thought interest rates would rise in 2023 and 2024. All of this was driven by ongoing improvement in the economy and signs that inflationary pressures were finally building.

One could be forgiven for thinking that the market would look at fewer purchases by the central bank, and higher interest rates, and think this was a bad thing. But markets are fickle, especially over short horizons, and stocks rose sharply both the day of and the day after the Fed's announcement. Interest rates also rose, following the lead of the Fed's shifting projections. Of those two reactions, we find those of the bond market much easier to justify.

What really matters, however, is not what these changes mean for the market over the next two days, but over the next two years. And here, three things stand out.

First, the Fed hasn't completely left the party, so to speak, but it is sliding towards the exit. Bond purchases by the Fed should still be with us for nine more months, but the signs of a different phase of central bank policy have clearly begun.

Second, this next phase, the so-called taper, is likely to be a major focus for investors. The last time the market focused on slowing Fed purchases in 2013 and 2014, equity markets generally climbed. But yields rose and gold prices sank. We see a similar impact for both bonds and gold this time around, with our interest rate strategists particularly focused on how fast the Fed will raise rates - a pace that they think the market is still underestimating.

Third, the Fed's actions are divergent from other central banks. While the Fed is shuffling towards the proverbial exit, the Bank of Japan and European Central Bank are much farther away and haven't even seemed to start moving. We think this results in a stronger dollar, relative to the Euro and the Yen, and will lead to better stock market performance in the latter regions.

A shifting Fed is just one of several events markets need to navigate over the next several weeks. We think these events remain challenging and investors will get a better opportunity to be more aggressive later in the year.

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.

Why two D.C. policy items—the bipartisan infrastructure framework and debt ceiling deliberations—could add one more complication for equities markets.

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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy 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 US public policy and financial markets. It's Thursday, September 23rd, at 10:30 a.m. in New York.

Markets this week have had a lot to focus on - from the Fed's policy decisions to fresh concerns about global growth. But expect that focus to shift next week, or possibly sooner, to events in Washington, D.C. In particular, watch out for two events that could catalyze some market volatility.

First, keep an eye on the planned vote on the bipartisan infrastructure framework, or BIF for short. This vote, which could come as soon as Monday, is a key test for whether or not the Democrats will be able to 'go big' on fiscal policy. That's because the BIF - which would add about $550B of new spending over 10 years to the budget - was supposed to be paired with a bigger, budget reconciliation bill that could reach as high as $3.5T over 10 years. The linking of the two was meant to align the interests of moderate and progressive Democrats in Congress. But that reconciliation bill isn't ready yet for a vote alongside the BIF. So, if the smaller bill gets approved, the moderates will have gotten most of what they want and could be more demanding on the bigger bill, either stalling it or shrinking its size. At the moment, it's far from clear that the BIF can get enough votes to pass on its own, meaning the 'all or nothing' dynamic on fiscal policy remains intact. But if the BIF succeeds, that would suggest a smaller fiscal package, smaller deficit impact, and a key challenge to our view that bond yields will rise meaningfully into year end.

We'd also keep a close eye on the deliberations around raising the debt ceiling and avoiding a government shutdown. While the 'x' date - the day by which the debt ceiling needs to be raised or suspended in order to avoid a payment default on Treasuries - is likely the more impactful deadline - which our economists expect will be late October, early November - markets may be more focused on September 30th, the date by which Congress must authorize a continuing resolution for new spending, or else the government shuts down. While we ultimately expect these issues to be resolved in a manner that doesn't materially impact the US growth outlook, the path to resolution on these issues likely requires escalated uncertainty in the near term. Since Democrats have paired the continuing resolution with a debt ceiling hike, which Republicans flatly oppose on the idea that Democrats should go it alone using reconciliation, there's no clear path forward at the moment. For example, the House just passed a continuing resolution, which the Senate is unlikely to be able to carry forward given insufficient Republican support. So, headlines around a government shutdown should pick up, and with it the takes that the situation increases the risk that the debt ceiling can't be raised in a timely manner.

Taken together, these two concerns could weigh on the equity market, where our colleagues in cross-asset strategy have suggested performance could be sluggish in the near term as investors grapple with the transition from early to mid economic cycle dynamics. The shift from clear D.C. stimulus support to D.C. uncertainty could be one part of that shift.

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.

On this special episode, we address key questions around struggles in China's property sector, as well as any potential spillover into the broader economy.

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Chetan Ahya Welcome to Thoughts on the Market, I'm Chetan Ahya, Chief Asia Economist for Morgan Stanley,

Robin Xing and I'm Robin Zing Morgan Stanley's Chief China Economist.

Chetan Ahya And on this special edition of the podcast we'll be diving into the path forward for China's economy amid challenges in the property sector. It's Wednesday, September 22nd, at 7:30 a.m. in Hong Kong.

Chetan Ahya So, Robin, as many listeners likely read earlier this week, China's property market is the subject of a lot of market and media focus right now. And near-term funding pressures for some of China's property developers have led to volatility as markets weigh concerns on any ripple effect into China's economy or even the global economy. To put funding pressures in context, in dollar terms, cumulative default in China's high-yield property names this year are already higher than that combined between 2009 and 2020. Robin, I want to get into your base case for China's economy as policymakers manage the property sector outcome. But to understand the backdrop for listeners, maybe it's worthwhile to take a step back to understand China's regulatory reset and the impact it's had on the housing market.

Robin Xing So what we call China's regulatory reset is China's ongoing shift in governance priorities, which policymakers drafted last year. And it covers a number of areas, including technology, education, carbon emission, but also property developers in an effort to address the financial stability risks. So the property related financing has actually been tightening since summer 2020. You know, first with new financing rules for real estate companies--what's called the 'three red lines'--which put a leverage cap on developers, then a cap on property, long exposure for banks, and lately, very strict mortgage approval for homebuyers. In this environment, highly leveraged developers are more prone to refinancing risks. And now the question is, will there be more credit events to come? Going forward, tighter financing conditions may stay for developers, which could increase the risk of credit events.

Robin Xing So, Chetan, you have been a close watcher for China's debt and the deleveraging dynamics since 2015. First, with its industrial sectors, then it's local government. Then we fast forward to today's housing market. Now, just to gauge how much deleveraging developers still have to undergo, how are we tracking on the three red lines as laid out by regulators? As I recall, developers are required to attain the 'green category,' meeting all three requirements by end of the first half 2023.

Chetan Ahya Yeah, thanks, Robin. So, look, I think, first of all, just to appreciate the way China manages its debt challenges is it ensures that the process is taken up in an organized manner and that there are no uncontrolled defaults, which can have ramifications on the financial system as well as overall financial conditions. And property sector is no different. And on that front, our property analyst has been highlighting that out of 26 developers that we cover, only one developer still fails to meet all the three red lines and nine developers have already passed two of those red lines. The remaining 16 developers have already met all the three requirements, and most developers do target to attain green category by the end of next year. Currently, the total debt exposure of the property developers in China is around 18.4trn RMB, which is similar to the annual contract sales or annual sales of these companies, so the deleveraging pressure when you look at it in the context of the level of debt relative to sales, it does seem to be manageable for us

Chetan Ahya Having said that, Robin, and when you think about the importance of the property sector to the economy, it's quite a significant sector. Property and property related sectors account for 15% of GDP. So, if there is a problem and a developer faces a challenge in meeting its debt obligations, do you think that China can manage the ramifications?

Robin Xing Yes, we do think regulators already have a playbook based on past default cases, which included the property developers. That said, the timing of deployment is what may matter most. Potentially Beijing's first goal would be to maintain normal operations of construction projects so default happens at the holding company level and not at the project level, which could reduce spill over to the physical property market. The second goal would be to go for voluntary debt restructuring and avoid a liquidation scenario which could substantially increase the recovery rate, though both of these actions would require coordination across authorities, creditors, and the company in this scenario. We expect the property sales and the investment in China to slow and the new starts would remain weak for the remainder of the year. However, it would not be a very fast and sharp deterioration because current inventory levels for the housing market are low, with around eight months for the major tier-one/tier-two cities. So, it's much lower than previous downturns. So, the overhang on housing new starts should be much smaller. All in all, in this swift intervention and policy easing scenario, we see China's GDP to rebound modestly from the 4.7% in the third quarter in two-year CAGR terms to slightly above 5% in the fourth quarter.

Chetan Ahya So, Robin, when you think of the developments in the property market right now, in the context of the fact that the government has also been taking additional regulatory measures which have been weighing on the private business sentiment, do you think that the government can take up easing measures to ensure that this does not have a meaningful impact on the growth outlook?

Robin Xing Yes, your concerns are very legitimate. Given the importance of the property sector to China's economy, Beijing may decide to take action sooner rather than later in order to support the economy. In our base case, we are near an inflection point of policy easing. That would be led by faster fiscal spending to support infrastructure investment from September to December, complemented by another 50 basis point reserve requirement ratio cut by the People's Bank of China probably in mid to late October. We also see some easing in mortgage quotas in the fourth quarter. This altogether should drive a modest rebound in broad credit growth in the fourth quarter, marking the end of a 10-month credit growth downturn. What's more, this momentum can be amplified in early next year when the fiscal spending and the credit quota could be front loaded.

Chetan Ahya So, Robin, if I were to summarize, essentially what we are talking about is two sets of policy actions to be taken up by the government. First, to ensure that the debt restructuring is taken up in an organized and timely manner. And second is that to the extent to which there will be some negative impact on business sentiment, we're expecting the government to implement policy easing measures.

Chetan Ahya However, if the government were to delay these supportive measures, what will be the implications on your growth forecast?

Robin Xing That's certainly a scenario we hope to avoid. So basically, should policy makers fail to take actions in time to manage this restructuring and contain its spillover effect, we could see a rise in liquidity pressures on many more developers as banks cut credit lines and home buyer sentiment cools down. In this case, the fourth quarter growth could fall below 4%, far lower than the annual growth target, which was 6% for this year and probably around 5.5% for next year. In short, such delayed action, more spillover scenario would likely warrant a much bigger stimulus in earlier 2022 to meet the growth target to stabilize the job market.

Chetan Ahya Robin, thank you for taking the time.

Robin Xing It's been great speaking with you.

Chetan Ahya 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 a colleague today.

This Climate Week, we preview environmental policy proposals within the $3.5 Trillion Budget Reconciliation Bill. What will it mean for investors and the response to climate change?

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Jessica Alsford Welcome to Thoughts on the Market. I'm Jessica Alsford, global head of Sustainability Research team at Morgan Stanley.

Stephen Byrd And I'm Stephen Byrd, head of Morgan Stanley's North American Research for the Power & Utilities and Clean Energy Industries.

Jessica Alsford And on this special Climate Week episode, we'll be talking about some landmark climate and environmental policy proposals in the U.S. and the future of energy. It's Tuesday, September the 21st, at 2:00 p.m. in London.

Stephen Byrd And 9:00 a.m. in New York.

Jessica Alsford So, Stephen, earlier this month, the U.S. House of Representatives released a draft of some climate and environmental policies as part of its $3.5T budget reconciliation package. I want to dig into your takeaways, but first of all, maybe you could walk us through some of the headline proposals.

Stephen Byrd Absolutely, Jessica. This is one of the most exciting pieces of proposed legislation we've seen in the United States, at least with respect to clean energy. And I'll just highlight a handful of very important provisions that are currently in the draft. First, there's a very bold, clean electricity performance program or CEPP that would provide significant incentives for utilities and other loads of green entities to increase their renewables every year. Secondly, there would be a new tax credit for energy storage and biofuels. Third, a major extension of tax credits for wind, solar, fuel cells and carbon capture and payment levels are higher in many cases. Fourth, significant incentives for domestic manufacturing of clean energy equipment. Fifth, what we would call direct pay for tax credits, which basically provides owners with the immediate cash benefit of tax losses. That provides enhanced financing efficiency and better cash flow. Six, a nuclear power production tax credit. Seven, a major clean hydrogen tax credit. And lastly, number eight, significant capital to reduce the risk of wildfires. So very significant. Covers a lot of different areas within the entire clean energy spectrum.

Jessica Alsford Absolutely. There's a huge amount in there. I guess maybe just to pick out some key points, are there any particular technologies that you think could really incrementally benefit from this bill versus what the status quo is at the moment?

Stephen Byrd Yes, there's definitely a handful of technologies that would benefit in a very significant way. I would say. Probably first on my list is green hydrogen. The proposed payment is three dollars a kilogram - this is the subsidy amount - which is a very large amount of subsidy, in our view, would really kick start growth of green hydrogen across the board in the United States. We did a deep dive into the economics of producing green hydrogen over time, and we do think this amount of subsidy would be a huge boost to the growth of green hydrogen, would defray much of the cost producing green hydrogen. So, any company involved in green hydrogen, I think would see a significant benefit here.

Stephen Byrd Another, nuclear power, not new nuclear projects, but existing nuclear assets would receive significant financial support. That is going to serve essentially as a stabilizing force to ensure that we don't see additional shutdowns of nuclear power plants. So that's a big win. I'd say, also, energy storage gets a tax credit for the first time and demand for energy storage is already very high in the United States, but a tax credit that would essentially line up with wind and solar would, we think, provide further incentive for more rapid growth of energy storage. So those are a couple that I would highlight as significant beneficiaries from this proposed legislation.

Jessica Alsford Now, this text is the initial draft and say we should probably expect to see changes. What are you hearing in terms of these proposals and how much could actually make it into a final bill?

Stephen Byrd This is really interesting. We do think that much of this language will survive. There is one provision, a very important one, that has received pushback. That's the first on the list that I mentioned. This is the Clean Electricity Performance Program or CEPP. Senator Joe Manchin, who's quite important, as well as a few others, have pointed out concerns with the current drafting of the language, a few companies have also expressed concerns. So, we could see changes there, maybe even elimination of that provision. However, many of the other elements of this package do appear to have quite a bit of support. So solar, wind, energy storage, even green hydrogen, we think has a significant amount of support. So, we do think much of this will survive. The one that's been singled out recently is that CEPP.

Jessica Alsford Now also on climate, the Biden administration and the EU have actually jointly announced that Global Methane Pledge, which is aiming to reduce methane emissions by at least 30% from 2020 to 2030. Now, what are your thoughts on this? How significant is it for the utility sector?

Stephen Byrd Yes, Jessica, I think this cuts both ways in terms of the methane emissions goal. I think on the positive side, I think many investors, especially ESG investors, would like to see significant commitments to reducing methane emissions. And, you know, we can see why certainly methane is so much more harmful from a greenhouse gas perspective relative to CO2. So, I think many investors will applaud this. The big concern will be the cost and the customer bill impact. Right now, given the increase in natural gas prices in the United States and really globally, there is already a concern around the increase in customer bills for those customers who buy natural gas. So, this would increase the cost.

Stephen Byrd That said, utilities have a long history of being able to recover these costs. So, on the positive side, this could result in better growth in earnings per share, as well as improved ESG perception and reality in the sense of lower emissions. The key question is how are we going to manage the cost of this? And right now, that's causing quite a bit of investor concern. So, it's a bit of a mixed message. I'd say in the long term, though, a positive from a better growth perspective and lower emissions perspective.

Jessica Alsford And finally, from me in this context of the U.S. really increasing its focus on halting climate change, what are the opportunities that you think investors should be looking at?

Stephen Byrd So we do see several business models and technologies that should benefit significantly from this policy shift. I would say developers of solar, wind and energy storage will see continued strong support under this legislation. Their incentives would remain in place until the next decade. We would see a lot of benefit for fuel-cell companies and companies involved in the development and transportation of green hydrogen - that would be a major area of support. Existing nuclear power plant owners would receive quite a bit of support as well. So, we do see quite a bit of benefit within this legislation, really providing strong economic support really across the board, but a few areas such as hydrogen that do stick out. But I'd say broadly, if this legislation is passed, clean energy investors would view this as a significant benefit for the entire sector because it is so comprehensive.

Stephen Byrd Before we close, Jess, I wanted to ask you about how this might move the needle globally. Europe is clearly out in front on climate legislation, but assuming some or all of these proposals make it into a final bill, how likely is it that we could see similar government action globally?

Jessica Alsford It's a timely question, Stephen, really, because we now have COP 26 conference coming up in November. It's being held in Glasgow this year, and we're expecting over 100 world leaders to attend. So, this really should be a catalyst for seeing far more climate focused action globally. Aside from the EU and the US, all eyes are certainly going to be on China. And here, our chief China economist has been writing about a shift in regulatory priorities, so China now are thinking more about a balance between growth and sustainability. And specifically on climate, there are three pillars where we expect to see action from China. First of all, investments in technology. Secondly, carbon pricing and finally on the green financing side.

Jessica Alsford Stephen, on Climate Week, thanks for taking the time to talk.

Stephen Byrd Any time, Jess. Great speaking with you.

Jessica Alsford As a reminder, if you enjoy Thoughts on the Market, please do take a moment to rate and review us on the Apple Podcasts app. It does help more people to find the show.

Although many commentators point to the S&P 500 near all-time highs as a rationale for higher stock prices, markets may be facing a bumpy road ahead.

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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 20th, at 12:30pm in New York. So let's get after it.

For regular listeners to this podcast our mid-cycle transition narrative is probably getting fairly repetitive. A strong narrative that makes sense is worth riding until the end, and we're not there yet. However, we do think we've entered the final chapter. To recall, the mid-cycle transition began back in March. Initially, it's a more difficult time for the average stock, while the higher quality stocks and indices hold up. Over the last six months that's pretty much exactly what's happened - small caps and lower quality stocks have underperformed the S&P 500 significantly.

But now we're entering the final chapter and that's the time when the index starts to underperform the average stock. This happens because that's where investors have been hiding; and at this stage of the transition, investors can no longer hide from the reality of what the mid-cycle transition brings. First, we have a deceleration in economic and earnings momentum. On the economic front, the data has already rolled over pretty hard. While many are blaming the Delta variant for this slowdown in the economy, we think it's more about the payback in demand from a fiscal stimulus and recovery that was unsustainably strong earlier this year. Furthermore, because this recession and recovery were much sharper than normal, we should expect a greater deceleration in growth during the mid-cycle transition phase this time. Finally, due to the nature of this recession being centered around a health crisis, the fiscal support from the government was unusually strong. This led to very high operating leverage and profitability. The normalization means that we could see negative operating leverage for a few quarters as costs are layered back in just as top line growth slows. The bottom line: earnings revisions over the next few quarters will probably look relatively worse than the economic revisions of late.

The other headwind for markets that comes at this stage of the mid-cycle transition is the Fed moving away from maximum accommodation. In the 1994 and 2004 versions, the Fed began hiking interest rates. In the 2011 mid-cycle transition, the Fed simply let quantitative easing expire. This time around it's the tapering of asset purchases and we think the Fed will signal that more definitively at this week's meeting. In short, financial conditions should tighten and that means higher interest rates, higher risk premiums or both. Either one means lower equity valuations, which is really the key part of the final chapter of the mid-cycle transition. Once that derating is complete, we can then move forward to the mid-cycle phase, which usually leads to a reacceleration in growth, a broadening out of stock performance and higher equity prices.

So how bad will it get? We've been suggesting a 10-15% correction in the S&P 500 is inevitable once we get to the final stage. However, given how long this has taken to play out, the drawdown could end up being closer to 20% if the growth slowdown ends up being worse than normal. In 2011, we had a 19% drawdown, so it's not unprecedented. Therefore, we continue to think investors should hunker down a bit more than normal and skew portfolios toward defensive quality rather than large cap growth quality.

Of course, markets can surprise us, which begs the question, what could change our view and allow the S&P 500 to avoid the 10-20% drawdown? First on the list is another fiscal stimulus directed right at the consumer that sustains the well above trend of demand. This could come from either U.S. or China. Second would be a Fed that completely reverses course this week and says they no longer plan to taper asset purchases this year or even next year. Both seem unlikely at this stage, but if markets become somewhat dislocated, we could then see a reaction from policymakers later this fall.

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.

We look at how soaring energy prices in Spain, gas prices in the U.S. and aluminum prices globally could all be linked to coal mines in China.

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Andrew Sheets Welcome to Thoughts on the Market, I'm Andrew Sheets, chief cross asset strategist for Morgan Stanley.

Martijn Rats And I'm Martijn Rats, Morgan Stanley's global oil strategist and head of the European energy team.

Andrew Sheets And on this special episode, we'll be talking about how soaring energy prices in Spain, gas prices in the U.S. and aluminum prices globally could all be linked to coal mines in China. It's Friday, September 17th, at 3 p.m. in London.

Andrew Sheets So, Martin, there's a pretty striking story going on globally in commodities that's been hitting close to home here in Europe. I think a good place to start is just to run through how much prices for things like coal, natural gas and aluminum have been rising this year.

Martijn Rats Thanks, Andrew. The price rally in many of these commodities has been rather extraordinary. The global consumption of coal peaked in 2013. So eight years ago. And yet we're now looking at thermal coal prices that are close to all time highs. At the start of the year, the price of thermal coal in the seaborne market was in the order of $80/ton. Now we're looking at $180/ton. With that also, the price of aluminum has risen very strongly. At the start of the year, we were around about $2000/ton. At the moment we're knocking on nearly $3000/ton. The price of natural gas both in the seaborne market traded as LNG as liquefied natural gas, but also in Europe, delivered through pipelines at several trading hubs where gas is trading. In Europe, we've seen extraordinary rallies. Typical prices have gone from in the order of $6-7 per MMBTU to $22, $23, $24 per MMBTU. And with that, then also electricity prices have increased very sharply. In Germany, in France, Spain, the U.K., electricity prices have broadly tripled from about sort of 50 euros a megawatt hour to about 150 euros per megawatt hour.

Andrew Sheets So one of the reasons I was so keen to talk to you today is that this is a really interesting and interlinked story. What's going on?

Martijn Rats I think there is a common set of factors between all of these rallies. In China, electricity demand is up, coming out of covid and also because of hot weather. Normally, China produces its majority of its electricity from coal and from hydropower, i.e. dams and rivers. But because of underinvestment and because of drought, both of these source of electricity production have really struggled this year. That meant that China had to curtail aluminum production, which is particularly electricity intensive to make. China is a big producer of aluminum globally, so that made the global aluminum price spike. At the same time, it meant that China had to look for coal in the seaborne market and also for natural gas, which is another fuel you can use for electricity production. That tightens the global market for coal and for natural gas. And then those prices spiked, particularly in Europe, because normally natural gas that is shipped around the world in LNG tankers, a lot of that ends in Europe. But this year, a far lower share of it ended in Europe. That meant that our inventories of natural gas didn't really build over the summer. We're now going into the winter with unusually low levels of natural gas inventories. Natural gas prices in Europe then spiked. And because that sets the price for electricity, then electricity prices also spiked. It's a global story that is very interconnected across regions and across commodities.

Andrew Sheets So, Martin, I know this is hard to comment on, but how do you think this resolves itself? And what do you think are the key factors to watch here going forward as we think about these interconnected commodity markets?

Martijn Rats Well, I think these rallies and particularly the sharpened sort of nature of them have really driven home three things. First of all, how interconnected the commodity markets really are. You can get, you know, drought in China and electricity prices go up in Spain. It really is that interconnected. I think the second thing that these rallies drive home is how difficult this is to forecast. As in, even three months ago, six months ago, most market participants would not have expected that in particular, commodities would have rallied so much. As we go into the energy transition, we really should use less coal. And therefore, coal markets were by and large expected to be very well supplied. Natural gas has been quite abundant, really on a global basis ever since the emergence of U.S. shale about a decade ago. And that market, too, was widely expected to remain abundant. So to see these types of price rallies really drives home how difficult it is to forecast these rallies. And frankly, for that reason, we should be open minded about, you know, these deeply held consensual views about how all of this is going to play out. The third thing I think that is worth stressing is that these rallies also show how little margin of safety there is in the broader energy system, and particularly as we do go into the energy transition with seemingly little margin of safety, that creates room for instabilities and spikes in the future as well.

Andrew Sheets And, Martin, by the energy transition, we're talking here about this idea that we're really going to be moving away from coal based production, fossil fuels, not just because they're worse for the environment, but they're increasingly less economic relative to many of these renewable technologies that are now out there.

Martijn Rats Yeah, that is exactly right. You know, to address climate change and to decarbonize, we need to move to more sustainable low carbon sources of energy. But what is currently going on is that this prospect is leading those that typically invest in the traditional fossil fuels to lower their investment levels already well in advance, whilst actually our consumption patterns are changing quite slowly. So there's a real question whether the prospect of the energy transition is impacting the supply side of energy before it impacts really the demand side of energy. And that's that could then be the source of those price squeezes and instabilities that I just mentioned.

Andrew Sheets So, Martin, meanwhile, U.S. gasoline prices have moved up to some of their highest levels since 2014. Is this related to this story and the other commodities or is something else going on here now?

Martijn Rats So far, oil is not quite wrapped up in this story quite as much. Oil still has its own standalone dynamic, more or less. And the reason for that is that have loose connections to each other. But oil is truly global. So the United States has reduced its dependance on imported oil very, very significantly over the years, but still, the American oil market is connected to the global oil market. And in the global oil market, we see recovery in demand. The oil market is simply tight and that is driving U.S. gasoline prices. So the dynamic there is different. But where these stories could converge is in terms of the impact of little investment in the future, because clearly part of the story that I just told about natural gas and coal has an element to it of low investment levels that are now showing their consequences and partly responsible for creating these squeezes. In the oil market, we are also now going through a number of years already with low investment levels. Now, there's still some slack in the system, but what is now happening to coal and natural gas could well happen to oil markets in two, three, four years from now when OPEC's spare capacity has been depleted and demand has recovered. So in that sense, U.S. gasoline prices are a different story, but they could become the same story in a few years from now.

Martijn Rats So now, Andrew, I look at it from an energy and commodity perspective, but you take a very much a macro view. What do you make of all of this?

Andrew Sheets So I think the irony here is, is that both investors or general people who want to reduce carbon based emissions and the energy companies would both prefer higher energy prices, albeit for maybe different reasons. But higher prices are one mechanism to reduce the amount of consumption of these various fossil fuels and commodities. So there is a free market element here. As these prices go up, people will use less electricity, they will use less natural gas, they will try to they will drive less. And that can have some positive environmental impacts. It can also have some negative economic impacts, as if that if that leads to less activity. If that transition has to happen a lot faster or maybe more uncomfortably than expected. I think the second thing is we do have to be on the lookout for this impact on corporate margins. When it comes to commodities and when it comes to the things you were just discussing, if you produce these things, it can be really good. And if you consume them, it can be really challenging. If prices are going up 50-100%, I don't think many people's budgets or earnings numbers account for that type of fluctuation. So, you know, this is something we're going to be watching very closely as we go into third quarter earnings and fourth quarter earnings. And also, I think investors need to be on the lookout for companies that potentially get squeezed if they are not able to pass on price increases onto the next part of the supply chain, onto their customers. And finally, I think this is a really good reminder that there's, I think, a temptation in markets often to really want to think that politics is this great explainer of everything. And I think this is a good reminder of the limitations of that. I mean, I think if you had told an investor at the start of 2020 that you would have Democratic control of the White House, the House of Representatives, the Senate, and then coal prices would go on and more than double. People would have thought that you were crazy. People would have thought that you didn't know what you were talking about. And yet that's happened. And it's happened because there's a drought in China and there's a lack of coal production for many other unrelated reasons. So I think this is just a good example that any time I think we look at markets with upcoming elections, yes, those can matter and they can matter a lot. But often other factors can also come into play. And we need to be mindful and I think kind of humble to that dynamic.

Andrew Sheets Martijn, thanks for taking the time to talk.

Martijn Rats Great speaking with you, Andrew,

Andrew Sheets 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.

Original Release on August 13th, 2021: Across numerous metrics, the current environment may be an unusually good time to borrow money. What does this mean for equities, credit and government bonds? Chief Cross-Asset Strategist Andrew Sheets explains.

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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 13th, at 4:00 p.m. in London.

Obvious things can still matter. Across a number of metrics, this is an unusually good moment to borrow money. And while the idea that interest rates are low is also something we heard a lot about over the prior decade, today we're seeing borrowing cost, ability, and need align in a pretty unique way. For investors, it supports Equities over Credit and caution on government bonds.

Let's start with those borrowing costs, which are pretty easy. Corporate bond yields in Europe are at all-time lows, while U.S. companies haven't been able to borrow this cheaply since the early 1950s. Mortgage rates from the U.S. to the Netherlands are at historic lows, and it's a similar story of cheap funding for government bonds.

But even more important is the fact that these costs are low relative to growth and inflation. If you borrow to pay for an asset—like equipment or infrastructure or a house—it’s value is probably going to be tied to the price levels and strength of the overall economy. This is why deflation and weak growth can be self-fulfilling: if the value of things falls every year, you should never borrow to buy anything, leading to less lending activity and even more deflationary pressure.

That was a fear for a lot of the last decade, when austerity and concerns around secular stagnation ruled the land. And that may have been the fear as recently as 15 months ago with the initial shock of covid. But today it looks different. Expected inflation for the next decade is now above the 20-year average in the US, and Morgan Stanley's global growth forecasts remain optimistic.

What about the ability to borrow? After all, low interest rates don't really matter if borrowers can't access or afford them. Here again, we see some encouraging signs. Bond markets are wide open for issuance, with strong year to date trends. Banks are easing lending standards in both the U.S. and Europe. And low yields mean that governments can borrow without risking debt sustainability.

So borrowing costs are low even relative to the prior decade, and the ability to borrow has improved. But is there any need? Again, we see encouraging signs and some key differences from recent history.

First, our economists see a red-hot capital expenditure cycle with a big uptick in investment spending across the public and private sector. Higher wages are another catalyst here, as they often drive a pretty normal pattern where companies invest more to improve the productivity of the workers they already have.

But another big one is the planet. If the weather this summer hasn't convinced you of a shift in the climate, the latest report from the IPCC, the UN's authority on climate change, should. Since 1970, global surface temperatures have risen faster than in any other 50-year period over the last two millennia.

Combating climate change is going to require enormous investment - perhaps $10 Trillion by 2030, according to an estimate from the IEA. But there's good news. The economics of these investments have improved dramatically, with the cost of wind and solar power declining 70-90% or more in the last decade. The cost of financing these projects has never been lower or more economical.

An attractive borrowing environment is good news for the issuers of debt - companies and governments. It's not so good for those holding these obligations. More supply means, well, more supply, one of several factors we think will push bond yields higher.

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.

Although markets have been preparing for the notion of tax hikes, a flurry of recent legislative activity may suggest where tax policy will eventually land.

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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy 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 Wednesday, September 15th, at 10:30AM in New York.

A flurry of legislative activity over the past week revealed a lot about where tax policy is likely going in the U.S. And while it’s not new news that taxes are likely going up, there are key market observations to be gleaned from the new details that have emerged.

First, as we’ve long expected, tax hikes appear to be falling short of the original White House request, reflecting the reality of what every Democrat, including moderates, could support. For example, the House Ways and Means committee’s proposals call for the corporate rate to go to 26.5%, not the 28% asked for. They also call for the highest capital gains rate to go up 5%, not the nearly 20% asked for. These numbers aren’t final, but from here we wouldn’t expect them to move higher. And that’s important for bond investors. In the short term, this means the total amount of revenue these measures can raise probably cannot offset the amount of spending being planned. That means some deficit expansion, and more bond supply could join with other macro factors, like improving growth and a fed on pace to taper, to push bond yields higher over the balance of the year.

Second, while the net fiscal package should mean deficit expansion and thus support for growth, the higher taxes could strain equity markets in the very near term. As our colleagues in cross asset strategy have pointed out, the substantial rally in U.S. stocks has left valuations stretched. Further, stocks could be sensitive to a slowing down in the goods economy as the growth cycle matures. Add new taxes to the mix, even the more modest hikes we expect, and it means that stock returns risk lagging for a bit as investors adjust to this more mixed, albeit still positive, macro outlook.

A final thought here: while we expect tax changes like these to come through, they are most certainly not a done deal. There are plenty of negotiating hurdles left to clear, and so we wouldn’t expect any finality on the debate until the 4th quarter of this year. We’ll, of course, keep you informed as the situation develops.

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.

With the summer growth scare in Europe possibly nearing an end—and relatively inexpensive valuations—cyclical stocks in Energy, Banking and Autos may be worth a fresh look.

Equities markets may be sending mixed messages on the economy and growth, but ultimately, it’s all about the earnings. Chief Investment Officer Mike Wilson explains.

Why stretched valuations, growth worries and a cavalcade of uncertain events in September and October could mean a challenging fall for U.S. stocks.

Negotiations on a number of government policy points such as taxes, fiscal spending and deficits have hit a fever pitch. Here are three potential outcomes through year-end.

Taiwan equities have been a standout among equities in 2021, but factors such as softening tech spend and slowing retail trading activity suggest challenges ahead.

Weak U.S. economic data in August has renewed concerns that a growth scare is underway. Is this a sign of things to come or just a speed bump in the expansion?

Original Release on August 30th, 2021: Although a key component of investing is getting the narrative right, perhaps a bigger component is knowing when the narrative could shift.

Original Release on August 25th, 2021: For investors, U.S. fiscal policy, tax increases and U.S.-China relations are three key items to watch as we head toward fall. We outline potential outcomes.

As summer transitions to fall, investors will be facing a host of key market events. Chief Cross-Asset Strategist Andrew Sheets covers the ones to watch.

Norway has made great strides in electric vehicle adoption over the last decade, so why has its oil consumption remained largely unchanged?

After last week’s Jackson Hole Symposium, markets cheered Fed Powell’s implied messaging on the pace of rate hikes. Did markets read it right?

Although a key component of investing is getting the narrative right, perhaps a bigger component is knowing when the narrative could change.

In a world where U.S. equities are currently less attractive, investors need options for places to put their money — this is one.

Equity investors have applied factor-driven strategies for years, but the approach has seen slow adoption in bond markets. Here’s why that may be changing.

For investors, U.S. fiscal policy, tax increases and U.S.-China relations are three key items to watch as we head toward fall. We outline potential outcomes.

Recent developments in space travel may be setting the stage for a striking new era of tech investment. Are investors paying attention?

An old adage says 'never bet against the US consumer's willingness to spend,' but new data on demand and consumption may say otherwise.

Despite a fair amount of uncertainty, global stock prices have continued to march higher. But under the surface, markets have become a bit more discerning.

As back-to-school approaches, we take a close look at school safety, child case numbers amid Delta and the path ahead for vaccines for younger children.

Last week, the U.S. Senate advanced both a budget blueprint and a $1 trillion bipartisan infrastructure bill. What can investors expect from the House of Representatives?