Trader on the floor of the New York Stock Exchange, June 1, 2022.
The transition from the economic conditions that followed the 2008 financial crisis and what comes next will take “12, 18, 24 months” to unfold, according to Beck, who wire Last week at a financial conference in New York.
“It’s an extraordinary moment; we have our first pandemic in 100 years. We have our first invasion of Europe in 75 years. And we have our first worldwide inflation in 40 years,” Beck said. “When you look at the combination of pandemic, war, and inflation, it points to a paradigm shift, the end of 15 years of financial repression and the next era.”
Top Wall Street executives issued dire warnings about the economy last week, led by c. B. Morgan Chase Executive Director Jimmy Damonwho said that “the hurricane is right there, on the road, Coming on our wayThis feeling echoed. Goldman Sachs President John Waldron described the overlap of “system shocks” as unprecedented. Even Regional Bank CEO Bill Demchak said he thought a recession was happening no escape.
Rather than sounding alarms, Beck – a three-decade Morgan Stanley veteran who leads the company’s merchandising and banking division – gave some historical context as well as his impression of what the turbulent period ahead might look like.
Markets will be dominated by two forces – inflation anxiety, or “fire”, and recession, or “ice,” said Beck, who is considered the front-runner to eventually succeed CEO James Gorman.
“We’re going to have these periods when it’s terribly fiery, and other periods when it’s cold, and customers need to navigate around that,” Beck said.
For Wall Street banks, some businesses will thrive, while others may go out of business. For years after the financial crisis, fixed income traders I dealt with artificially quiet markets, which gives them a little work. Now, as central banks around the world start to deal with inflation, government bond and currency traders will be more active, according to Beck.
The uncertainty of the period has, at least for the time being, reduced merger activity, as companies navigate the unknown. JPMorgan said last month that investment banking fees for the second quarter have fallen 45% so far, while trading returns are up as much as 20%.
“The banking calendar has calmed down a bit because people are trying to figure out if we’re going to clear up this paradigm shift sooner or later,” Beck said.
Ted Beck, Morgan Stanley
Source: Morgan Stanley
In the short term, if economic growth continues and inflation subsides in the second half of the year, Goldilocks will Narrative It will take hold, and markets will strengthen, he said. (For the importance of this, Dimon, noting the impact of the Ukraine war on food and fuel prices and the Federal Reserve’s move to shrink its balance sheet, sounded Pessimist That this scenario will end.)
But the push and pull between inflation and stagnation fears will not be resolved overnight. The post-2008 era is often referred to as the “financial .” period respressionA theory in which policy makers keep interest rates low to provide cheap debt financing to countries and companies.
“The fifteen years of financial repression don’t just go to the next step in three or six months… We’re going to have this conversation for the next 12, 18 or 24 months,” Beck said.
Low or even negative interest rates were the hallmark of the previous era, along with measures to pump money into the system including bond-buying programs known collectively as quantitative easing. These steps penalized savers and encouraged rampant borrowing.
By draining risk from the global financial system for years, central banks have forced investors to take more risk to earn the return. Companies were unprofitable stay afloat Through easy access to cheap debt. Thousands of startups have thrived in recent years with a mandate that burns money and grows at any cost.
That’s over because central banks are prioritizing the fight against hyperinflation. Their efforts will impact everyone from credit card borrowers to aspiring billionaires who run Silicon Valley startups. Investors have been into venture capital guidance Startups to conserve cash and achieve actual profitability. Interest rates on many online savings accounts are close to 1%.
But such transitions can be bumpy. Some observers are concerned about Black Swan-type events in the plumbing of the financial system, including the explosion of what one hedge fund manager called the “greatest credit bubble of human history.”
From the ashes of this transitional period, Beck said, a new business cycle will emerge.
“This paradigm shift at some point will bring a new cycle,” he said. “It’s been a long time since we’ve had to think about what the world will look like with real interest rates and a real cost of capital that will distinguish the winning companies from the losing ones, and stock gain from stock loss.”
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