Morgan Stanley: The Central-Bank-Inspired "Omnishambles" Is Closer Than Most Think

Tyler Durden's picture

It seems more likely to Morgan Stanley's Gerard Minack that central bankers may win the battle: sustaining recovery in developed economies with extraordinarily loose monetary policy. For a while this would go hand-in-hand with better equity performance. The battle is against a crisis caused by too loose monetary policy, elevated debt and mis-priced risk. Ironically, he notes, central bankers may overcome these problems by running even looser monetary policy, encouraging a new round of levering up, and fresh mis-pricing of risk. However, winning the battle isn't winning the war. If central bankers do win this round, the next downturn could be, in Minack's view, an omnishambles.

It has not been clear to me that central bankers could single-handedly sustain recovery. Fiscal stimulus helped recovery, but its withdrawal contributed to renewed recession in Europe and the UK. Markets now assume that fiscal tightening in the US will not end the same way that it did elsewhere. My economic colleagues also see better times ahead. In short, it may be that extraordinarily loose money policy will work.

This, on a medium-term view, worries me:

First, monetary policy will have succeeded, in part, by driving interest rates to all-time lows. It is not just policy rates at extreme lows: more importantly, the average effective rate paid on debt is exceptionally low. Exhibit 1 shows the average effective interest paid on the entire stock of (public and private) debt in the US.



Second, one measure of policy ‘success’ seems to be rising leverage. It is important to have a functioning credit system. But it’s not clear to me that it’s a good thing to have leverage rise. That is now happening in the US: aggregate non-financial debt/GDP increased in the December quarter, the first rise in four years. The US had been an exception for having seen any decline in leverage in this cycle. Aggregate (non-financial) leverage in the major developed economies is already at all-time highs (Exhibit 2).




Third, there are growing signs that risk is (again) being mis-priced. For example, high yield credit yields are now at all-time lows (Exhibit 3). If the central banks win the battle I suspect the mis-pricing of risk will become more widespread.



In short, it seems more likely that central bankers may add another leg to the credit super-cycle. The super-cycle was 30 years where total leverage ratcheted higher and interest rates ratcheted lower. There were shorter cycles in interest rates, but it was a sequence of lower lows and lower highs through the past 30 years. Exhibit 4 shows US Federal funds target rate.

The trend decline in policy rates led to a trend decline in sovereign borrowing costs (Exhibit 5 shows G7 long-end yields in real and nominal terms). The decline in risk-free rates has over time reduced the effective rate paid by other borrowers. Hence the decline in the average effective interest rate paid by all borrowers, shown in Exhibit 1 (which is for US debt).


The super-cycle will end when policy-makers exhaust their ability to provide cash-flow relief to under-pressure borrowers, ending the trend to rising leverage. I had thought that the crisis of 2008-09 would do this. I now think I may have been wrong. An important test in my view is that ability of the US to cope with fiscal tightening. If low rates and rising leverage offset fiscal tightening, then it seems a new credit leg will have started.

The downside is that in the next downturn – whenever it comes – central banks will find it even more difficult to provide cash-flow relief to borrowers. Borrowers, at that stage, will likely be even more leveraged than now (or in 2008 – financials probably will be exceptions) but paying an effective average interest rate significantly below the average in 2008.

The key question for investors in this scenario is when (and how) this cycle may end. In many respects, this would be a repeat of the TMT bubble aftermath. The question would be whether we are now 2003, with 3-4 good years to go, or 2006, with the cycle end not imminent but not that far over the horizon. I’m not sure: history tends to rhyme, not repeat (Exhibit 6). My hunch, however, is that this cycle is already closer to 2006 than 2003. I’ll explain in another note what I’m looking to as warning that another 2008 is possible.


Source: Morgan Stanley

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Prison Justice's picture

New highs!  New highs!  That's all you need to know.

madbraz's picture

Last chart is purposedly wrong to justify the claim that it's either 2003 or 2006. We are in the last stage, we are in late 2007.

The chart should show current stage SPX at 1560, not 1200.

derek_vineyard's picture

forecasting the future has little to do with the past---i can prove any outcome with historical charts

kaiserhoff's picture

This is a great companion piece to Bass's article yesterday.

He was cagey about exactly what he is doing, and I don't trade forex, but the gist is, he was buying in $5 billion chunks, 1 year, well out of the money options on the JPY (yen) for ONE BASIS POINT.

Manhattan Island will never tip over from holding too many smart bankers.

NotApplicable's picture

Omnishambles = Muddle through = the best outcome they can hope for.

dmger14's picture

I read an article by Mish or someone else stating that, though Bass may be absolutely right on his bet, there is no way in hell he will actually get paid the $500 billion if he is. 

outamyeffinway's picture

So who was it criticizing QB Asset mgmt earlier?

kaiserhoff's picture

Quite possible.

When you break the bank, you are only one of many unsecured creditors.

But if you have the largest claim, you are well positioned to pick up whatever tasty bits you might find on the table.

In any case, wouldn't it be nice...?

MillionDollarBonus_'s picture

The fact that everybody thinks that stocks are about to collapse means that that stocks are definitely NOT in a bubble. The S&P is still way below my first price target of 2000.

Vooter's picture

Why is your screen name "MillionDollarBonus," and why is your avatar a dollar sign? Are you trying to tell people something? Do you have self-esteem problems?

Ghordius's picture

hey! that's monetist! care to pick up a fight with a currency of your size?

Law97's picture

Everybody here does. 


But turn on CNBC, Bloomberg, WSJ, or any other MSM source, and everybody thinks it's full steam ahead to 1600, 1700, and beyond due to the rip-roaring economic recovery. 


I wish ZH represented the mainstream....

duo's picture

When publicly traded corporations can borrow at <2% and use that money to buy their own stock back (enriching the top 0.1%), why would they invest in expanding their product lines, increaseing productivity, or  heaven forbid, R&D?

youngman's picture

It looks like a lot of the insiders are selling their stock too...

Panafrican Funktron Robot's picture

Insiders have been selling all the way up from 2009 lows.  I tend to think a lot of this is due to insiders being primarily compensated on a long term capital gains basis for tax purposes.  The counter is usually "why would they sell if they thought the stock was going to go up", but there is one really good reasons why they sell pretty much as soon as they are able:

They spend to the point where they are debt slaves too.

The people who have actual money/wealth are largely tied up in what I collectively call "rights".  Ie., supply restricted licenses, copyright/patent, resource claims, commercial real estate financing, basically, royalty check shit.  They rent their money, and they're not stupid enough to rent their money to shares of common stock.   

SilverIsKing's picture

Stocks are not in a bubble in the traditional sense.  Rather, they are supported by the FED.  What the FED is attempting to do is create a bubble in stocks but so far, they are the only ones with lungs strong enough to inflate it.

Panafrican Funktron Robot's picture

You should totally read the chart labels. 

The other thing I'm noting here is that the Fed raised rates in order to generate crashes.  Anyone here think the Fed is actually going to raise rates now or any time in the future?

johngaltfla's picture

I will only sell when the E*Trade infant tells me to do so.

FL_Conservative's picture

Fucking zombie market.  It defies all belief.

Jack Burton's picture

Believe this market! Believe unlimited money printing can elevate equity share prices. Print and print and print. 82 billion a month flooded into markets. It can jack this market up and up.

Is this real wealth creation? No. But the question is, and this is THE question, "How long can they print before they destroy the currency?"

So far, I must answer, "A hell of a lot longer than I thought."

I'll admit right here on ZH that the money printers at the Fed have made a fucking fool out of me! They have made a fool out of my portfolio designed to protect me in the 2008 crash. Many have made fortunes betting on the Fed, they were right, at least for now. Who was it who said "Don't fight the Fed?"

youngman's picture

They are also putting a big wedge in our country..the RICH are getting richer..and the POOR are getting nothing out of this printing inflation....misallocation of capital.....that is what will become the big problem in our future....the have nots will get angry at the haves....

Gamma735's picture

Already countries are signing trade aggreements where they will no longer settle accounts in US dollars.  China stopped buying our debt two years ago.  The world is beginning to dump the dollar.  The beginning of the end of the US dollar is here. 

Kirk2NCC1701's picture

"THE question, "How long can they print before they destroy the currency?"

If the USD were a currency like any other on the planet, things would look differently.  As long as it has the GRC (Global Reserve Currency) status, its behavior (strength) will be unlike any other fiat currency that goes into the usual Weimar/Zimbabwe mode.  It can absorb a lot more than any of these.  They can -- and have -- extended its longevity by having the Fed force/bully the other fiat-based CB's into similar QE games.  Thus keeping the relative differences close to the same. 

And any 'recovery' is a shell game, as the recovery affects only the employed.  Even there, its effects are totally non-linear and asymmetric.  Depending on where you are on the income scale, you may have an increasingly harder time keeping up with real inflation, or you may be "making like a bandit".

Sooner or later, when the house-of-fiat-card does cave, chances are that these fiat bandits will fall prey to new Robin Hoods.  Unless we go to war (WW3).  Until D-day, the transfer-of-wealth (Trickle Up) game will continue in all countries with fiat CB's.

Guys like Krugman think that this Trickle Up can continue indefinitely (for decades).  History and human nature will likely prove their hubris wrong.

Panafrican Funktron Robot's picture

Here's POMO for the rest of the week:

Thursday, March 14, 2013 Friday, March 15, 2013 Outright Treasury Coupon Purchases 05/15/2020 - 02/15/2023 $2.75 - $3.50 billion Friday, March 15, 2013 Monday, March 18, 2013 Outright Treasury Coupon Purchases 12/31/2017 - 11/30/2018

$4.75 - $5.75 billion

Gee, I super feel like shorting this shit, right?

<--- fellow dude that lost a lot of money under the apparently bullshit assumption that micro or macro fundamentals matter anymore

OpenThePodBayDoorHAL's picture

As The Dude would say, some new shit has come to light. This is the first time everybody is debasing at the very same time across the board so the party can continue for a lot longer than people think. Jackie Treehorn will not get his money back from Bunny for a while yet

fonzannoon's picture


"I’ll explain in another note what I’m looking to as warning that another 2008 is possible."

No need to

"The AIG of the world is back - I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp - $5bn at a time.


You know why? Because it's outside of a 95% VaR, its less than one-year to maturity, so guess what the regulatory capital hit is for the bank... I'll give you a clue - it rhymes with HERO...


If the bell tolls at the end of the year, the 27-year-old kid gets a bonus... and if he blows the bank to smithereens, ugh, he got a paycheck all year.


We are right back there! The brevity of financial memory is about two years.


I wouldn't sell nuclear holocaust risk in Dallas for 1bp - you should be fired for thinking about selling something for less than 50bps.. and yet - this is happening again..."

Jack Burton's picture

fonzannoon, Indeed the 27 year old sharks are back and selling the same old shit for giant bonuses. Can you believe it!? As if 2008 never happened. Fucking amazing! The Money Printers have restored the bubble and the insanity. A kid who knows jack shit just out of college can sit at a desk and be a "Master of the Universe". This is proof positive that this whole financial recovery is a money printing HOAX!

The next crash will be epic!

NoDebt's picture

The kid behind the desk isn't calling the shots.  He's just working the phones.  Look a little higher in the organization.

Kirk2NCC1701's picture

And how does this contradict the claims that 1. "Figures lie and liars do a lot of figuring" and 2. "There's a sucker born every minute"?  Snake Oil school 101, Lesson 1.

ebworthen's picture

And 5 or 6 years ago those 27 year olds were in some Ivy League Business or MBA program being taught that consumption is all there is in life, and leverage, deriviatives, and securitization create liquidity which creates productivity and trickles down to the "little people" so it's all good.

RichardENixon's picture

In other news, the sun came up today.

Hippocratic Oaf's picture

It's a flight to anything with yield with a short maturity junk corporates.

Stocks WILL POP at some point soon.

What else is left when PM's are munipulated by the JPM crooks?

Tsar Pointless's picture

And, quite likely, the sun will come out tomorrow. Bet your bottom dollar, that.

youngman's picture

Actually scientists watching the SUN are saying it is doing some very wierd stuff.....giant solar flares is just one of the wierd things...

uno's picture

watch it Morgan,JPM will do a 'Lehman' on you

EscapeKey's picture

Right, so every successive problem can be solved by more of the same.

Thereby solving the problem, once and for all.

AynRandFan's picture

It's the "Bubble To End All Bubbles".

gjp's picture

'may add another leg to the super-cycle'?  Hasn't that ship already sailed?  Please tell me we are closer to the end of this 'leg' than the beginning, I don't think I can take another four years ...

NoDebt's picture

Man up.  You can take it.  Not like you'll be given a choice.

Where it ENDS is when there is a significant downturn WHILE the Fed is still sitting on ZIRP and printing $85B/mo. (or $185B/mo. for all I care).  When they have nothing left to lean into that headwind but the wind keeps blowing.... then it's over.  Not before.  They will ride their monetary horse until it dies underneath them.  But until then, they are still riding.

Panafrican Funktron Robot's picture

"Where it ENDS is when there is a significant downturn WHILE the Fed is still sitting on ZIRP"

I see this as less plausible than the following:

1.  World war (already in motion)

2.  A ZIM market, where it continually makes new highs, but only in nominal terms.  

Cognitive Dissonance's picture

"Don't look a gift fiat horse in the mouth." - Uncle Ben

cougar_w's picture

Any time they run something from Morgan Stanley I link to this:

"Morgan was in her 30s and slightly overweight, with unkempt straight brown hair and overlarge glasses. Stanley was younger by a few years with thinning hair, walked with a stoop, and sported a pronounced paunch that if he were a woman would make him look four months pregnant."

Feckless losers FTW.

SheepDog-One's picture

The only 'problem' ever is when an insurance policy can't cover the bank loss....then we get 'fear and panic' and threats of tanks in the streets unless another blank checkbook is turned over.

Who knows when the next 'problem' happens, next month or next year, but at all-time-highs the stage is set.

Winston Churchill's picture

The stage is set,the fat lady has finished warming up.

The show is Salome.Watch your head.

Shell Game's picture

Yep, the dominoes are lining up..  

John Williams, "I have been warning of a hyperinflation for at least seven years, but those warnings have been about a hyperinflation that was sometime in the future, generally in 2018 or 2014 timeframes mentioned above.  Now, however, along with the passage of time, circumstances have evolved and are aligned for the hyperinflation to develop in the near future, specifically, within the next two years or so, by the end of 2014.

...written in June 2012 (

CNBS will be shocked, SHOCKED!

hannah's picture

why print these idiots ramblings...the banks are fucked. there isnt a 'fix' they are dead and will collapse to nada....!

cougar_w's picture

They will not collapse to nada. That's the problem.

This is going to go on and on for a very long time. If fact I don't see any way it can ever end, except that the entire global economy implodes and leaves the banks with no toys to play with and no hosts to bleed.

kaiserhoff's picture

That's my greatest fear as well, Cougar, that there may be just enough gas left in this old buggy, literally and figuratively, to keep the crimes and the ponzi going for a very long time.

cougar_w's picture

Parasites eat slowly but continuously.