MORGAN STANLEY: THIS IS NOT THE UTOPIA INVESTORS ARE PRICING IN
FT Alphaville recently posted an excellent note by Morgan Stanley describing the skew between the market and reality. MS is one of the few big banks that isn’t buying into the utopian environment for equities. In fact, they believe equity investors are ignoring several risks here – primarily the global tightening that is occurring. They were one of the few banks that actually issued a bearish fiscal 2010 outlook (see here) and have remained skeptical of the rally thus far.
Morgan’s analysts believe the equity market is pricing in a permanent utopia for risk assets – a period of high growth with permanently low rates, but in reality, they say the Fed is ready to start altering their accommodative approach:
“Clearly the markets are in a utopia-type environment; with the Fed seemingly on perma-hold and upside in growth… We are on the other side of those views. As we see it, strong growth will ultimately be met with withdrawal of liquidity, and the risk markets will not like that medicine.”
MS says equities could be at risk of substantial declines should the tide shift from the “rates on hold” camp to the “rate hikes” camp. With the VIX falling to its lowest level since Summer 2007 it certainly appears like investors are complacent and pricing in a utopian environment. Unhedged investors might find themselves in their own personal hell if an unforeseen risk should creep into the equity markets.
TPC,
Is this correct? http://www.businessinsider.com/us-rail-traffic-hits-a-speed-bump-2010-4
Every week the Fed comes out to reassure the market that rates will be kept low. Bulls are as bold as ever. The Fed’s got their back.
The Fed and Obama’s government have totally messed this whole situation up. They are throwing away our tax money to prop up the market for the short term, and just digging a larger debt burden for us to be hit with when their little scheme falls apart. Yes, traders and big banks are making money ( our tax money thrown away by the Fed), but the rest of the country is in shambles. This mess is not sustainable unless you want to live with 20% unemployment for the forseeable future. Whatever money you have made is going to be taxed away by Obama, at least that is his current plan. He like all socialists actually believes that he can micromanage the economy. Ask Hugo Chavez about how that micromanaging is working out for Venezuela.
@billw: Don’t be so silly. Venezuela is doing GREAT if you ask Chavez.
I didn’t drink the koolaid so I’m not buying the “we’re recovering” story either. Sure it’s “less bad” but “improving” we are not. A few minor points here or there, still way down. Not compared to last year or even 3 years ago the numbers look great! A lot of it is one time stuff or at such a slow uptick pace it will be a decade before we’re back to 2006 levels. If the market is pricing in a 10 year recovery we’re in for some bad times. Cause they market is up on the expectation of a rapid climb out. The GDP is up, because the federal government spending is counted in it! Otherwise we’re growing at a blistering 1-1.5% (if you remove all federal spending which is NOT growth in anything but debt and future burden).
So as I told my wife, if I have to live off of social security I will be able to retire about 4 years after I die. I just hope my skin doesn’t sluff off before then