Morgan Stanley: "Only One Thing Will Allow Central Banks To Keep The Party Going"

Tyler Durden's picture

Last week, we presented readers with the latest note from SocGen strategist. Albert Edwards, who explained why after so many years of false rate hike starts, the market not only responded to last week's hike in a dovish manner - interpreting last Wednesday's 0.25% hike as a 0.25% rate cut- but as Goldman Sachs showed previously, the dovish reaction was one of the strongest ones since the financial crisis, in other words: "the market no longer believes the Fed." This is what Edwards said, citing his FX colleague Kit Juckes:

[T]he Fed's reluctance to send an aggressive tightening signal, instead preferring to again shuffle upwards its dots just slightly, has disappointed markets. But to be fair, the problem isn't really with the famous dots. It's with the market, which just doesn't believe the Fed will tighten as fast as they say they plan to (see left-hand chart below). If the market took the FOMC at their word and discounted a 3% Fed Funds rate at the end of 2019 and beyond, then we'd probably have a 3% nominal 10-year Treasury yield by now."

That said, a 3% Fed Funds rate would also lead to steep selloff in risk assets as the dividend yield on the S&P, currently at about 2%, would be about 1% below the risk free rate, leading to a wholesale "great rotation" out of stocks.

And while the market may not believe the Fed is ready - and willing - to push rates that high, the relationship also cuts both ways.

As RBC also noted last week, explaining that while the Yellen put is alive and well, the market will simply not tighten financial conditions on its own, forcing Yellen to aggressively hike further... which the Fed may be reluctant to do.

That is the argument in a note released late last week by Morgan Stanley's credit strategists, who note that while the party is still going strong, some 93 months into the current cycle, it may not continue should the Fed engage in an aggressive rate hike scenario. This is what they say:

At 93 months, the current cycle is already longer than all but two post-war recoveries (out of 12 total). We could certainly debate why this expansion is already longer than normal, but strong growth is clearly not the reason. In fact, quite the opposite – a lackluster economic backdrop for years, leading to massive central bank support,has likely kept the cycle going more than anything else. Last year is a good example. As we show below, early in the year, with oil collapsing and the economic data rolling over, recession risks were seemingly rising. As Exhibit 3 shows, central banks across the globe responded. Even the Fed provided stimulus (verbally) by allowing the market to go from pricing in almost three rate hikes at the end of 2015 to almost zero rate hikes in summer 2016. Markets recovered, and the economic data followed.

What is Morgan Stanley's conclusion? Simple: for the party to continue, not only must the Fed revert back to its quasi-dovish mode, but for that to happen the recent economic "rebound" has to end (the sooner the better), extinguishing any reflationary impulse, removing the impetus for Yellen to hike aggressively further, and allowing the Fed to remain on hold for an indefinite period of time.  In short: "In our view, for the cycle to last another several years, we want to see more of the same – a continued environment of ‘ok’ growth and low inflation, which allows central banks to keep the party going."

Hopefully Trump, whose policies threaten to upstage this delicate balance benefitting the 1%, has read the memo.

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xythras's picture
xythras (not verified) Mar 19, 2017 3:20 PM

Now that the Russian shadow is off Trump's head, he can go down to business.

VIDEO: No Evidence of Trump-Russia Collusion – House Intelligence Committee Chair Says


He'll fuck central banks from here to the end of the globe.

That will teach the globalist jews a valuable lesson: Don't mess with Trump.

flaminratzazz's picture

Damn man, how long did you slop at the trough to be this full of shit?

You so blind to ignore the Goldman swamp ceatures surrounding Trump?

Nothing but a spamming self upvoting POS

I wish you were dead.

chunga's picture

Apparently it won't stop until Tyler starts losing advertisers. ZH is on auto-pilot.

hope_talk's picture
hope_talk (not verified) chunga Mar 19, 2017 5:36 PM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do...

OpTwoMistic's picture

There is no inflation. There is only devalution. A 3k car now cost 35k.

I am Jobe's picture

Not seeing enough Yellow Ribbons and Support our Troops bumper stickers. Also many women would rather be hookers in the USA with the war 

FreeShitter's picture

Send the fat ones off to war

flaminratzazz's picture

we would be down to a few 7 year olds if we do that.. hell on second thought it would be way worth it.

jamesmmu's picture

Why The Status Quo Is Under Increasing Attack By 'Populist People Power'

Let it Go's picture

Efforts to justify the most recent market melt-up following the election of Donald Trump are sometimes difficult to comprehend if you are one of those already skeptical of this market. A read of the pdf file of the 2009 bestselling book titled, "This Time Is Different" did little to convince me that this time is different.

It chronicles eight centuries of financial follies in which financial meltdowns have typically followed real-estate bubbles, rising indebtedness, and gaping deficits. More on why many of us see a strong similarity between what is happening today and prior financial meltdowns that have resulted in crisis can be found below.

Sudden Debt's picture

Problem is that in the comming months leading to the summer, that inflation is going to up at a terrifying speed.


Well be in a war that is going to intensify like in the middle east or in a new war : N. Korea. which they'll blame.


Also, if we compare inflation numbers on basics from the last 8 years, most of the products have doubled in price.

By this summer alone, we'll be facing price increases nearing 20 to 30% on basics.

The good part is that 99% of the population has the memory of a goldfish and they don't remember or see it.

and the basic math skills of people is bad to say the least.

OckhamsRazr's picture

While I hope you are wrong I think you may be right to a degree.  Let's put it this way, I think by summer we will definitely see some world stage issues changeing (Korea and ME) and inflation will be a problem.  But 20-30% may be a bit of an exaggeration. 

hooligan2009's picture

sigh... the party stopped once debt to government debt to gdp got over 40% with 200% of pension/health promises unfunded

government confiscation of productive assets from pension funds will be a hallmark of the next "crisis", along with vigilinates v beneficiaries, both of which will be seeking to protect food/water/property from each other..

needs to be a movie of "the haves with guns V the have nots with guns" or "main street v the wall street/libtard paradigm"

ponders how much of welfare payments are to criminals (liars/cheaters/stealers) and when will anyone audit government spending per department to prosecute corruption and eliminate waste.

DingleBarryObummer's picture

"Hopefully Trump, whose policies threaten to upstage this delicate balance benefiting the 1%, has read the memo."

MIC spending and repatriation tax holiday will benefit the 1%, don't you worry your pretty little head. 

Then there's always the looming bank bailout v2.0, especially after Smoot-Hawley v2.0 fails. 


Not My Real Name's picture

Schlepwave Thread Hijack Warning. Most comments from this point on are pure spam. Don't waste your time.

Tyler, I often find the comments to be actually more valuable than the published content. Why let these spammers continue to corrupt the comments section and risk losing a portion of your readers?

TrumpRally's picture

Goldman is so corrupt.  I mean this goes back decades and decades.  Abbey is a monster and has always been. 


The thing is that ZH and all of the wall street cronies like Goldman. I think it is because most of these people are clueless as to what Goldman has done and continues to do and is capable of doing. Utterly clueless.


The analysts at Shepwave knew this when they abandaodoned ship in the 90's.  AJC and GOldman are just evil.


SW is doing their best work ever.



ShepWave IMPORTANT Updates for Monday Published. 
Posted: 3/17/2017 19:19 EST


Still Watching CNBC?  Time to turn off the chatter!

The importance of this current time in market history cannot be ignored. Now is not the time to be tied into the emotionalism of CNBC and others.

Read through these ShepWave Updates for Monday to see trigger areas, target areas and expected action in equities as well as crude oil and gold. These vehicles have been extremely predictable; despite the fact that the popular pundits miss move after move.

In these two updates for Monday you will find the weekly analysis for: the US equity indexes as well as Crude Oil and Gold, and you will find the daily time frame analysis for: the US equity indexes as well as Crude Oil, Gold and the VIX.


It is time to turn off CNBC. The talking heads will once again be vague and promote personal agendas and proceed to cheerlead.

Log In at for Monday's TWO IMPORTANT ShepWave Updates.

ErikE's picture

ZH is mainly talking about Morgan Stanley here. But I guess it is easy to get them confused. lol


You are right though about SW.  Their calls have been consistently correct.  Their calls in gold have been nothing short of supernatural. I mean they seem to know every move way before it happens. I hope they can keep this record up. Been a long win streak, I am skeptical. They surely can't keep this up for 10+ more years. 

Dump's picture

I get a bit tired of the SW/Shepwave ads.

Are you in kahoots Tyler? If not, pull the pin on them.


RudolPHDs's picture

Dude they are all in cahoots. I trust no one. That is why I only like SW because they do show their charts and a clear buy and sell signal. No guess work there. The emotionalism of the likes of CNBC is just too much for me to handle at my age. 

Dump's picture

I get a bit tired of the SW/Shepwave ads.

Are you in kahoots Tyler? If not, pull the pin on them.


OckhamsRazr's picture

I think they could be.  But two totally different types of writing and analysis.  I will say that SW has been calling the markets well. So, it does complement the work of ZH and their extreme bearishness. 

xantippa's picture

I go with the proof of the track record of SW.  Forget their connection with Goldman. I have seen no proof of that at all. That is a bunch of malarkey but their calls in stocks and in gold alone are good enough for me. The problem is tha ZH is not the appropriate place really to be discussing this. There are a lot of "REAL" stock message boards out there that do productive work in this area. ZH is more of a hits mill and attracts the types who are like that and not really serious traders. 

Arnold's picture

You AI are getting more lifelike.
Still no Turing champions.

RudolPHDs's picture

I like their gold calls the best.  Markets should be ready to turn. Just waiting for SW to give the clear signal.   So far so good.

chunga's picture

Almost ALL the comments on this article are spam lol.

StevieTexie's picture

Almost all?   I would say ALL!


I think it is funny that the shepwave people try to come here.  Don't they know there are no real traders left on ZH.  They are all broke because of being short the market for the past 7 years. I laugh all the way to the bank. 

chunga's picture

What a pathetic fraud you are.

Giant Meteor's picture

AI,  Artificial Ignorance. The machines have taken over, and chatter amongst themselves as if real.

Fascinating ..

Patriotico's picture

The SW people are relentless.  They are everywhere.  But you have to admit they have been making some good market calls and have been around for a very long time. So in a sense it is not really that surprising. Reminds me  back when Cramer was still a reputable analyst and was not such a buffoon. He had a large following back then just like SW does now. 

StevieTexie's picture

They are all in this together. I mean is it not obvious.  

But one is a hits mill and one is an actual final destination site so there are some differences.  

RudolPHDs's picture

You do realize that most of the animosity against you Shepwave guys is because most ZH readers are either not traders and have most likely lost all of their money because of being overly bearish for too long.


They will all be broke when it is finally time for the markets to crash which should not be much longer in my opinion. 

Good calls though. Keep it up.  Lovin their calls in GOLD!

TAALR Swift's picture

That tells us that most bearish losers pass the Turing Test. No AI would be so dumb, so human, because it has no emotions to be manipulated for investment purposes.

In the last 50 years Bull markets have lasted longer than Bear markets. This is statistically critical. 

If people were to apply this basic fact with some common sense, then they would probably have a reasonably sized portfolio by now. 

Instead, these bearish investors keep putting money on the Roulette wheel that might pay out well for silver and gold: #42.

Talk about being manipulated and conditioned to behave like a casino gambler!

"I am NOT an addict!  I am a PM investor!  I am NOT being manipulated to stay poor!  I am a strategic investor!  I'm putting $2000 on #42 for PM!  Oh craps!"

StevieTexie's picture

Good analyst but there are no real traders left here.  You all have already mined this field.  Unfortunately most ZH readers are just posers, I mean posters. 

PUNE's picture

You don't think shep wave still has its ties with Goldman?  You are naive. How else do you think they always know which way the market is going? No one has called the markets like that. It is all a conspiracy if you ask me. 

Sledge-hammer's picture
Sledge-hammer (not verified) Mar 19, 2017 4:42 PM

Regards the (((Central Bank/Fed Reserve))) and their party, someone needs to drop his drawers and take a giant dump in the middle of the party. Maybe they will get the message.

AlbertthePudding's picture

They all work for the deep state..they are no more corrupt than the apparatus that runs the show.

StevieTexie's picture

Deep state.  Just another way to label the pervasive corruption. 

Iconoclast's picture

"Trump to upset the 1%"? Are you fuckin kidding me? He is the 1% of the 1% and has directly caused a 35% rise in GS stock in 4 months and 20% in all bank stock. If folk were looking for a renegade iconoclast he ain't it.

VWAndy's picture

 Slavery might keep the party going?

Miss Informed's picture

Not everyone is invited to the party.

francis scott falseflag's picture


Low inflation in business.   Hyperinflation in the stock market.



JailBanksters's picture

I would sooner believe that Charles Manson is NOT a Murderer than the Feral Reserve knows what they are doing.

turkey george palmer's picture

Fuck the fed it's low yields are a giant rip off of savers and retirees. Guess what. Sucks to be anybody these days except servants of the state and corporate world.

Don't expect the party to last too much longer though.

A default will occur that sinks the system and the dollar will soar. But no one will care because everything will shut down.