"Are You Ready For Greed?" Morgan Stanley Asks

Tyler Durden's picture

“And some things that should not have been forgotten, were lost” - The Lord of the Rings

 

"Are you ready for greed?" asks Morgan Stanley's Andrew Sheets in his Sunday Start note, in which he compares the current market situation to the early days of 2007, when the first harbingers of the financial crisis emerged (recall "10 Years Ago Today, The Financial Crisis Started With An Announcement By HSBC") and when early warnings that it would all end in tears were roundly ignored for almost a year, all because of - you guessed it - a resurgence of greed.

"It’s happened before. As TABX cratered and credit markets wavered in early 2007, the S&P 500 went on to make new highs, not peaking until October. Greed is a powerful force. We are trying not to forget that."

Morgan Stanley notes that after the crisis, greed became an anachronism as animal spirits died along with a wholesale shift in investor mentality:

Caution became unusually acceptable, whether due to real concern or survivorship bias. Corporates slowed investment, pushing capex well below trend. Investors pulled money out of stocks, despite a rising market. Banks cut balance sheets and reduced staff. Implied volatility remained unusually elevated over realised. Conferences became filled with speakers talking about just how bad the financial future might be.

 

There was almost an ‘end of history’ feel to it: That banking and the economy have fundamentally changed. That we’ve learned from our errors. That animal spirits won’t be allowed to return. This mindset has had pros and cons: It’s starved investment under the auspices of ‘financial prudence’, a somewhat self-fulfilling prophecy which meant low growth encouraged low growth. But it also led to a more stable financial sector, the seventh-longest US expansion in history, and global equities flirting with all-time highs. That’s a debate for another Sunday.

According to the bank, however, this may be changing. At least it hopes it is:

What matters now is if this mindset changes. The passage of time, coupled with the signals of the new US administration, is raising the odds of increased aggressiveness. The return of fully fledged ‘greed’ is not our base case. But it is a serious enough possibility to weigh on our thinking and our recommendations. Further steps towards it are one of several factors that we think support a 1Q ‘sparkle’.

Here's why MS is hopeful:

Consumer confidence is the highest since 2001. Business confidence is the highest since 2004. US unemployment is 4.8%. G4 central banks continue to run exceptionally easy policy. Fiscal policy is already loosening in Japan and Europe, and is expected to loosen (significantly) in the US. It is quite a cocktail – easy credit, easy fiscal and monetary policy, high confidence and a self-professed ‘business-friendly’ US administration. Asset valuations certainly aren’t cheap. But then again, how often do greedy markets care about valuations?

So is the message here to throw caution to the wind, and just buy everything with both hands hoping others will be even greedier and allowing an easy way to offload exposure, or that with the VIX at levels that were last encountered in early 2007, and complacency pervasive, what comes next will be unpleasant?

Here is the full note from Sheets, so readers can decide for themselves (highlights ours).

Are You Ready for Greed?

 

10 years ago, almost to the day, trading launched something called TABX. A close relative of the ABX subprime indices, it aimed to provide a transparent way to both buy and sell risk on subprime-backed CDOs. But what was meant to be a tool to provide market liquidity and better risk management had the opposite effect. Prices on TABX collapsed, as investors finally had a way to express what they thought bonds were worth. Parts of the index meant to mimic AAA-rated bonds paying 0.50% per year lost 20% within hours. Now confined to financial infamy, TABX did provide transparency for subprime: An AAA-rated bond, in theory, should lose about 3bp/year. TABX suggested the losses on ‘AAA’ ABS CDOs could be 1000x that.

 

Such severe miscalculations shaped the crisis and the decade to come. 2008-09 didn’t just batter the economy, or the markets, or faith in institutions. It changed mindsets.

 

Caution became unusually acceptable, whether due to real concern or survivorship bias. Corporates slowed investment, pushing capex well below trend. Investors pulled money out of stocks, despite a rising market. Banks cut balance sheets and reduced staff. Implied volatility remained unusually elevated over realised. Conferences became filled with speakers talking about just how bad the financial future might be.

 

There was almost an ‘end of history’ feel to it: That banking and the economy have fundamentally changed. That we’ve learned from our errors. That animal spirits won’t be allowed to return. This mindset has had pros and cons: It’s starved investment under the auspices of ‘financial prudence’, a somewhat self-fulfilling prophecy which meant low growth encouraged low growth. But it also led to a more stable financial sector, the seventh-longest US expansion in history, and global equities flirting with all-time highs. That’s a debate for another Sunday.

 

What matters now is if this mindset changes. The passage of time, coupled with the signals of the new US administration, is raising the odds of increased aggressiveness. The return of fully fledged ‘greed’ is not our base case. But it is a serious enough possibility to weigh on our thinking and our recommendations. Further steps towards it are one of several factors that we think support a 1Q ‘sparkle’.

 

The path to greed seems surprisingly straightforward. Economic data, for the first time in years, are strong in the US, UK, Europe and China, and improving in Japan and broader EM. Inflation is rising (eurozone HICP is 1.8%Y), but not yet concerning (core HICP is 0.9%Y). Global earnings growth has turned positive again after 10 quarters of declines and credit is widely and cheaply available, with US credit markets seeing the most issuance ever in 2016 and European corporate bonds yielding 0.9%. Consumer confidence is the highest since 2001. Business confidence is the highest since 2004. US unemployment is 4.8%. G4 central banks continue to run exceptionally easy policy. Fiscal policy is already loosening in Japan and Europe, and is expected to loosen (significantly) in the US.

 

It is quite a cocktail – easy credit, easy fiscal and monetary policy, high confidence and a self-professed ‘business-friendly’ US administration. Asset valuations certainly aren’t cheap. But then again, how often do greedy markets care about valuations?

 

In short, we think a scenario where retail investors, corporates and financials all get much more optimistic at the same time needs to be respected, even if it’s not our base case outcome. Our preferred way to express that view is to own upside optionality on US and Japanese equities, where we think low volatility levels are underpricing a ‘greedy’ tail, and the possibility that such a scenario could see higher markets and higher volatility. It’s happened before. As TABX cratered and credit markets wavered in early 2007, the S&P 500 went on to make new highs, not peaking until October. Greed is a powerful force. We are trying not to forget that.

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Squid-puppets a-go-go's picture

You gotta love that Late-Cycle optimism from MS.  Worked out for them so well back in 08.

The taxpayer.... not so much

Stuck on Zero's picture

I'm greedy. I feel like piling in on naked shorts on bundled options on countercyclical risk pools backed by arbitraged debentures. 

flaminratzazz's picture

Yep, the fvkin shoeshine boy is picking stocks again

Never One Roach's picture

Greed is what drives thoese Seattle tech companies to destroy America in order to keep their cheap ha-b labor.

Yog Soggoth's picture

Yeah, well I am related to Joe, and I got a different version of that story. The shoeshine boy was right, and the reason he was right was because he heard it directly from the horses mouth while doing his job. Joe probably would not have been given that information without tipping.  Here is the other story for those unfamiliar with what we are talking about here,  Fortune Magazine, When Shoeshine Boys Talk Stocks Who wrote that? HMMNNN. Remember to always tip 15% to 20% and more for performance + bonuses folks.

buzzsaw99's picture

so btfd then? thanks for the update.

flaminratzazz's picture

yep.. another ground breaking article.

we must repeat the propaganda so it will sink in..

they are killing the girl tonight old man

 

 

Incubus's picture

don't give a shit what the markets look like.  I'm not married to a stock.  I can make money, regardless.

Hugh G. Rection's picture

Greed never went away, it was just overshadowed by fear. 

MASTER OF UNIVERSE's picture

Debt = $20 Trillion

Dark Pool Derivatives Universe = $2 Quadrillion

Federal Unsecured Liabilities = $200 Trillion

European Union Breakup

Baltic Dry Index

BIG Oil per barrel implosion still on a trajectory of Economic Hegelian Death Spiral

BIG Box Retail Implosion

Debt : GDP Ratio in EU & America & Japan

De-Americanization of Global Markets

Too-BIG-to-fail increased leverage under TrumpO the AssClown

Corporate Tax Breaks

QE Infinity & Beyond

Deutsche Bank

Rothschild Bank

Snowflakes & Deplorables

#BlackLivesMatter

Goldman Sachs-of-SHIT

Gubbermint Sachs-of-SHIT

Unsustainable Utility Costs

$14 Trillion in Corporate Welfare over the next decade

----------------------------------------------------------------

Total: Abject Poverty & Joo Greed

----------------------------------------------------------------

Tax: Climate Change & Carbon Credits = $0.00

----------------------------------------------------------------

REVOLUTION = Priceless

MASTER OF UNIVERSE's picture

I grew up in North York in Toronto in the 1960s. In around 1967 there was a massive locust infestation that seemed to me to be of Biblical proportion at the time because they were all over Toronto in every nook & cranny. Since the 60s I have never seen locust infestations even once. I always wondered where all those locusts could have come from back in the day?

 

I'll ask God to usher in the locusts for you since you seem to want to see them every few days, Archive_file. I don't know what locusts will accomplish, but I am willing to give it a try right about now. Actually, on second thought it is winter, and I'm in the midst of a heavy winter snowstorm with an accumulation of 8" [count em'] inches of heavy snowfall. Not even the squirrels are out in this weather, eh. I'll have to hold off on asking God to bring in the locusts for a number of months until summer.

Yog Soggoth's picture

I'm still not sure. I can sell this as a market product, could you box it up a little more? I am a great salesman with the right assimil'e. People want pre-packaged everything without risk. Can you do that, or do I have to hire someone else? You mispelled Pharisee for starters. 

Catullus's picture

It's the height of arrogance to suggest that greed is any more and less a part of the human condition at any one time to the next. It's a base human emotion. Like envy or love.

flaminratzazz's picture

ALL of the sins are derived from Pride. Most people don't think so, until they get to the root of the why.

It's listed first in the 7 deadly sins for a reason

brown_hornet's picture

Greed is counter balanced by fear.

Squid-puppets a-go-go's picture

dont be silly - yes it is always present, but its inherent dangers are from time to time more respected or more forgotten.This is the ebb and flow of history. Envy and love also ebb and flow, sociologically speaking.

You gonna tell me there's more love in the world now than in the early 70's?

Catullus's picture

I'm going to tell you there's no way to know that.

Squid-puppets a-go-go's picture

there is, its called history and sociology

ThanksIwillHaveAnother's picture

Today is not remotely similar to 2007.  In 2007, employment with full time jobs was doing OK, the consumer was still spending levered money, and the hood was partying.  Not so today.

Mustafa Kemal's picture

Am I ready? What kind of question is that?

Are you trying to imply that a greed to going to a whole new level? It looks like it. Im ready as Ill ever be i guess.

Atomizer's picture

Good for you Morganstanwee. 

About 2 weeks ago, noticed a trend. You text message once and then it get blocked. I yelled at Mrs Atomizer to unblock Google phone on her account. I have her password on account. Just like she has mine. 

My next door neighbor was hauled away by ambulance. I called are landscaping guy who is white and our handyman in Charleston SC. 

Told him what's happened. Sent pictures. See what Google phone is doing. I just called him. We don't to participate in joining Google Phone. 

  • That I believe is his Sister in Law that lives on Chantilly, good people 

Not knowing were they took him. Tell him I love him so much. Tell him to be strong. We expect his recovery and return back home. 

It's blocked to Neal. They use a cute red italicized font.

It says, Requested facility not subscibed, in red

  • Not knowing were they took him. Tell him I love him so much. Tell him to be strong. We expect his recovery and return back home. 

Last blocked text. Well Google phone bitch, you just created a shit storm of viral videos. Frankly, no problem when sending my photos to Neal. Why again do we need to use Google phone to communicate?   

 

Let the ass ripping begin on Google. 

 

Mustafa Kemal's picture

Yup, Im thinking of moving to DuckDuckGo

Atomizer's picture

You don't have to. Button down your computer security. The site you spoke of redirects to bing or Google based in trend popularity. I good firewall will help. 

Modifications on my last post. You reply, access denied. Final draft. 

Good for you Morganstanwee. 

About 2 weeks ago, noticed a trend. You text message once and then it get blocked. I yelled at Mrs Atomizer to unblock Google phone on her account. I have her password on account. Just like she has mine. 

My next door neighbor was hauled away by ambulance today. I called are landscaping guy who is white and our handyman in Charleston SC. 

Told him what's happened. Sent pictures. See what Google phone is doing. I just called him. We don't to participate in joining Google Phone. 

  • That I believe is his Sister in Law that lives on Chantilly, good people 

It's blocked to Neal..(text). They use a cute red italicized font.

It says, Requested facility not subscibed, in red

  • Not knowing were they took him. Tell him I love him so much. Tell him to be strong. We expect his recovery and return back home. 

Last blocked text. Well Google phone bitch, you just created a shit storm of viral videos. Frankly, no problem when sending my photos to Neal. Why again do we need to use Google phone to communicate? I'll just call and use my own carrier.  ‎

Sent from my BlackBerry 10 smartphone.
Dre4dwolf's picture

Greed is good

In order to make a lot of money, you have to provide and sell a lot of value.

Being Greedy makes you work harder and make more people happy enough to hand you their money.

flaminratzazz's picture

you are a strange little critter, arent you?

Atomizer's picture

I meant A not I firewall is needed. Sorry, fat fingers typing too fast on BlackBerry Passport. I love the bitch of phone. 

Grandad Grumps's picture

If the markets were not already 6X times their fair value by cash generating standard then maybe some optimism would be possible. The median market company returns zero to its investors ... ZERO! All the markets have going for them is fraud and equity prices controlled by banks.