Morgan Stanley vs Mosler – Is it Different this Time?

I found these two comments pretty interesting.  The first is from Morgan Stanley’s Gerard Minack who says that the sustainability of the bull market makes sense since the last few recession scares didn’t materialize and now investors are conditioned to believe that any economic weakness and subsequent market weakness will be brief (via BI):

“This resilience is in part understandable: prior years’ mid-year setbacks typically had an overlay of systemic stress. This, for now, is pure-and-simple macro disappointment.

But the more important factor seems to be the strong consensus that any weakness will be temporary, with growth set to improve in the second half. …Despite downgrading forecast June quarter GDP (partly as payback for upgrading March quarter forecasts), second-half forecasts are little changed, and point to significant acceleration later this year.

On top of this, there’s a growing view that any near-term weakness will lead to further policy stimulus. Our team expects the ECB to ease monetary policy. More enticing – but, for now, far more speculative – is the view that the tide is turning against fiscal austerity.”

On the other hand, we have Warren Mosler of AVM and someone whose market and monetary acumen I highly respect.  He says it’s different this time:

“During the last two post 2008 double dip scares I made the point that the 9% or so deficit was too large for that to happen, and instead recommended buying the dips.

This time the deficit has been proactively cut to maybe a less than a 5% of GDP annual rate, in which case I see a meaningful chance of negative GDP.

And one that is not being discounted by a market that’s remembering that the last two double dip scares didn’t materialize.”

I still don’t see a recession on the horizon and I think that the government’s easing involvement is being increasingly offset by the private sector.  I’ve been saying this now for years and it’s been a key point in understanding the balance sheet recession.  Where the market goes in the near-term is anyone’s guess, but the economy doesn’t look like a recessionary one if you ask me…..


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  1. Agreed. Besides, I’m not sure that the deficit reduction has been as “pro-active” as Mr. Mosler suggests. Much of the deficit reduction has been “reactive” due to an improving economy.

  2. Randall Wray has been screaming about how terrible the economy is for a long time now. He’s made multiple erroneous economic calls in recent years. Why do you give the MMTers a floor here Cullen? You’re just asking for more headaches.

  3. I agree with and respect many of your commentaries and opinions, but your current appraisal seems off the mark. Considering that wages for the working and middle-class members of society are being pressed downward and are not growing and a recurring housing crisis which is not being addressed continues unabated it, the reccession may not be so apparent to those that reside in Wall Street Disneyland, but for a large majority of citizens reccession slaps them in the face every day. Open your eyes and look around. It may slap you too.

  4. I see us with a 2% of GDP deficit when you subtract out the current account deficit around 3%. If this continues we will see weakening, if not recession sometime in 2014. The lag could be longer.

    Now it is possible that private could sustain things or pick up the slack, but I am still looking for more evidence. Household credit growth is flat or declining. Household debt to GDP has been flat as well. At least it seems to have stabilized.

    Warren has also been posting a lot of other econ stats that are slowing such as factory orders.

  5. Interesting that you’ve disagreed with Warren. First MR, now calls like this. Are we seeing the apprentice take over the master? :-)

  6. Ya, the constant negativity is what really turned me off. I find the MR framework is more conducive to a positive outlook (at least at present) than certain other schools of thought.

  7. What has me puzzled is that the resource economies like Canada and Brazil are not participating in this run up. If companies are going to ramp up investment they should need extra resources and these economies should be giving some signal that the good times are back. Why are they lagging and does this mean anything?
    Today in Canada, the building permits were up vs the last month but should that not be the case each year. We are the Great White North.
    So I went to Stats Canada and they say that the permits Mar 13 vs Mar 12 shows a decline of -6.7%
    What report gives a better picture?

  8. Canada is on the verge of its own credit crunch after an aggressive run-up in household debt due to gov’t mortgage insurance and interest rates lower than appropriate given domestic conditions after the GFC. I wouldn’t look to the Canadian data as a leading indicator as it is about to move in to a housing driven slowdown despite any potential support from resource sales.

  9. If you do not focus on asset markets but unemplyment, GDP growth the economy could be samd to be pretty bad.

  10. The market and GDP. are not well correlated historically. EPS is what matters more, not GDP.

  11. They’re “lagging” because it’s all fake.
    The lagging will continue until one day inflation erupts with vengeance.

  12. This is because top line GDP and the Wall Street scoreboard more importantly are now viewed as the signals of how America is doing economically. So the top 1% (mostly) and more broadly the top 20% enjoy the stock market gains, and frankly a large proportion of economic recovery has also gone to the higher income, college educated class so they see the recovery. It is a different (not so joyous) world for the middle 60%. (The bottom 20% live in their own world and in many ways enjoy a much better standard of living than say 10 years ago with the influx of govt programs and so many more of them on permanent govt programs including disability which now includes healthcare from govt after 2 years)

  13. I think that we have been living in a easy credit induced bubble for 30-40 years now. What has so far happened is all kinds of attempts to continue inflating it. Maybe there is still more ability to inflate it further – using govt borrowing instead of private (and govt borrowing can be carried out even longer in a currency issuer country, which happens to be the country of last demand for the world) or inducing the HH sector to borrow again (e.g. student loans bubble – the major driver of the consumer credit growth).

    But total debt / GDP has a limit I believe, which is currently masked by ZIRP. The limit may not come from the mechanics of the monetary system, but from the mechanics of the real economy – QE and fiscal deficits cause for sure i) misallocation of resources; ii)the wealth inequality is rising. So we are on anything but a sustainable path, but more like in an unsustainable short-term (could be even 10-20 years) equlibrium. Maybe CR’s focus is more appropriate for daily portfolio management and market timing, but the longer term view shows you that there is a huge Black Swan lurking behind the scenes. When it happens everyone will say again “nobody could have foreseen” and I do not want to have anything to do with that camp (although they will be the wealthy and well connected – crony capitalist).

  14. MMT professors are not looking at asset markets and don’t care about them. Their concern is about labor force participation, high unemployment, and growing income inequality. From their view the economy is not improving as large portions of the workforce have remained idle.

  15. Mosler may be early. Look at interest income vs. corporate profits; government policy and the current balance of power between consumers and corporations are both tilted in favor of corporations. That might change, but there is not clear trend change yet.

  16. The MMT professors have been wrong for years. Total non-farm payrolls are almost back to their pre-recession levels. It might not be ideal, but there’s definitely been big time improvement. Permabears always lose. MMT is no different. Brighten up and stop thinking that everything is so terrible all the time just because you don’t have 100% employment.

  17. Randall has been screaming about austerity and high unemployment. On the latter he is right. The US employment picture is horrible, and very fragile.

  18. Make sure you are making a distinction between some of the pure academics and someone like Mr. Mosler. I can vouch for having read it in real time, but Warren even explicitly states that he was suggesting to buy the dips the last couple of years.

    That is one of the things that makes Warren and Cullen great: they come first from a trader’s or investor’s perspective and not first from a scholar’s.