Morgan Stanley On Why The Gig Is Up

Tyler Durden's picture

"What we have on our hands is a good old fashioned quagmire" is how Morgan Stanley's Mike Wilson sets up his surprisingly non-sheep-like perspective on the troubles that US equity investors may be about to face. Expanding on MS's bearish strategic (fundamental) forecast, that we discussed earlier in the week, Wilson combines the 'liquidity vs negative-real-rate' thesis (that the Fed's liquidity is perhaps no longer 'good' for stocks) with his own views on ECRI's weakness (very 2008-like in relation to ECO surprises), household debt deleveraging (more and longer), how much QE3 is already priced in and what will its effect be when it comes (less and less positive in nominal and real terms), investor sentiment (very bullish), long-term technicals (weak breadth), and short-term earnings expectations (deteriorating and weighted to 'weak' financials to end with the pragmatic realist perspective that perhaps 'the gig is up'.



MS notes both tail-winds falling and expectations rising as a possible double-whammy for stocks:

Vincent Reinhart reminds us that recent growth has been lifted by 2 temporary tailwinds. Namely, the unwind of the negative shocks from Japan’s earthquake and the run-up in energy prices early in 2010. Furthermore, we are currently in the anniversary period of the 2% payroll tax cut from last year. This will have a drag on y/y growth as well.


For those that are still not convinced US GDP growth is vulnerable, check out Exhibit 3. Even with the better high frequency data on the economy (Economic Surprise Index), it has not been enough to change the trajectory of the outlook for growth (ECRI LEI). If anything, there has been a further deterioration in this very reliable economic leading indicator. Keep in mind that the stock market is one of the key components in the ECRI and equities have recovered sharply. This suggests the economic variables are even weaker than the headline index. Finally, this is very similar to what we saw in 2008 and much different to the temporary slow down in 2010.





The Fed and QE3 Expectations

While today's NFP print may be good for Obama's talking points, MS notes that the Fed may still reduce growth expectations as their 'prompt' for QE3 and even so, the market seems to have priced this in to a significant level already:

Consistent with Vincent’s projection for a significant GDP slowdown in 1Q, he believes we are likely to see a meaningful reduction in the FOMC member forecasts over the next several meetings. Vincent proposes this reduced forecast will give the Fed the ammunition they need to justify QE3 sometime in the spring. Why are they doing this? I think it’s pretty clear our “recovery” remains tepid at best and shaky at worst. The Fed is simply taking out a little insurance against another growth scare that appears likely to begin in 1Q and get progressively worse throughout 2012. They also know this is an election year and that implementing QE3 could create a political firecracker. Therefore, if they are going to act, they had better act early and definitively. I think Vincent is onto something here and I would expect the Fed to signal QE3 perhaps as early as their next meeting.


Based on Vincent’s reading of the Tea Leaves, they are preparing to make their case to the public. The rhetoric is likely to only get louder as the economic data gets weaker.


So we are left in the purgatory of slowing economic growth + QE3. I feel like Bill Murray in the movie Groundhog Day, losing the will to wake up each morning to live the same day over and over again. We all know how the day ends and it’s just not as fun the 3rd time around. In fact, I could make the case that QE3’s impact is likely to be even smaller than QE2. QE1 kept stocks elevated for about a year and resulted in approximately 600 SPX points (666 to 1225). Meanwhile QE2 was only able to keep markets propped up for about 6 months and gave us 300 SPX points (1050 to 1350).


So what should we expect from QE3? 3 months and 150 SPX points? And, what if we already got it? After all, stocks bottomed in early October at 1100 and here we are 3 months later at around 1250. Maybe the market has already discounted the Fed’s next act much like it did with QE2. Finally, I think it’s important to point out that the world’s central banks have been printing wildly for the past 6 months and gold is breaking down. This suggests to me they are behind the curve and not printing fast enough and so QE3 may only keep us running in place at best.


Fed Liquidity Losing Luster

Even with QE3, the MS sales-trader suspects the gig is up as liquidity's impact is marginal and historically speaking whether inflation or deflation is around the corner, equities will struggle:

QE3 and incremental fiscal stimulus could help stocks grind higher in the near term, but if companies continue to miss numbers at the same pace we have observed in the early CY4Q reports, stocks are going lower. Furthermore, it’s not clear to me if additional liquidity is going to be good for stocks at this point. History suggests that once real interest rates actually go negative, it’s no longer good for stocks. Adam’s 2012 outlook note presents a hypothetical chart of what the equity risk premium looks like at different risk free rates (Exhibit 5).



Rather than a nice linear relationship between the 2 variables as the Fed would like to believe, it is more of a “smile” that suggests equity risk premiums actually rise as we approach zero risk free rates. After all, the reason risk free rates are zero is because things are so screwed up! Similarly, as rates rise too much, the equity risk premium rises at a non-linear rate. I think this is an eloquent way of saying monetary policy has simply run its course.


I decided to take Adam’s theory a step further and look at how many times in history we have had negative 10-year real interest rates since the Fed’s charter was first created in 1913. It hasn’t been often. Please look at Exhibit 6 and notice the periods in which we had negative real rates. The dates are 1915-20; mid 1930s, 1940s, 1970s and today. While hardly scientific, it doesn’t take a financial markets historian to know these were not stellar times to be invested in equities.




What is interesting to me is that these periods incorporate times of both deflation (mid 1930s) and inflation (WWI, WWII and 1970s). In other words, maybe it doesn’t matter if the gold bulls (inflationists) or the libertarians (deflationists) are right. In either scenario, equities are likely to struggle, and the gig may finally be up.


Long-Term Chart Worries

Exhibit 8 shows that the SPX has closed above its 200-day moving average for 3 consecutive days to start the new year, a clear positive. However, it is struggling to break through the former neckline from the well established head and shoulders pattern in 2011. It is also in the process of forming the right shoulder of a much larger and ominous H&S pattern.



The neckline for this H&S comes in around 1100 and counts all the way down to 775 if it breaks. Yikes! At the end of the day, I think this chart sums it up pretty well. The neckline and 200 day moving average represent the upper bounds of where this market should trade on a fundamental basis. I think we are towards the upper bound today due to the significant monetary stimulus currently being provided by several central banks and on the assumption that the Fed is not far behind. As 4Q earnings season begins, I suspect we will fall from current levels and possibly test the neckline of the larger H&S pattern. If the earnings picture materially worsens in 1Q and 2Q, this neckline could break.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Nine Pies's picture

Maybe they're just sitting on a pile of shorts?

economics1996's picture

BS unemployment numbers again, 8.5%.  Number of workers down in December, all that counts in GDP production. 141,070,000 to 140,681,000.

I thought December was a hire month. 

BaBaBouy's picture

""SETI May Have Discovered Aliens ""


I always knew the ALIENS would bail us out.

Sure, they will take all our GOLD and SILVER, and issue us TrILLIONS of ALIEN Paper FIATS Money in return...

PEOPLE... We are Saved !

strannick's picture

The G.I.G. is up? Im not familar with that index. Is it a 'Gold in Gilts' ratio?

Oh regional Indian's picture

Not much else left that can save us (from the outside anyways). I guess the alien meme is good for another...what.... 6 months of can kicking?

Or how about they will appear over the London Olympic stadium and whith their incredible bend-a-beam laser, obliterate the One Square mile? Nice fantasy. Settee, SOFA, SOPA FTW.

But with regards to the MS and GS and BOFA releases, so full of NUMBers that we read everyday...weird thing is getting lectured by the Fox, while peering from behind the chicken-wire.


My grand en-sign...

Pay Day Today's picture

An alien invasion is all it would take to solve our unemployment problems. One way or another.

BaBaBouy's picture

""SETI May Have Discovered Aliens ""


Yeah, and they all work at SACKS and the FED ...

SheepDog-One's picture

And theyve got swap more lines to open! Hooray for space bucks!

LongOfTooth's picture

Or perhaps setting on a pile that's in their shorts.



SuperRay's picture

not 'gig'....'jig' let's get our basic terms correct, since everything else is going to hell.  We can take solace in adherence to correct usage

myshadow's picture

beat me to it SuperRay...

to expand,



The phrase "the jig is up" surfaced more than 200 years ago. The exact origin is unknown, with speculation ranging from the end of a musical performance to the removal of a fishing line (a jig) from water – although the anglers' term didn't catch on until the 1860s, so this seems unlikely.

Some scholars believe it originally referred to the end of either a trick or game, since the word jig (sometimes spelled gig) had acquired this meaning by the time Shakespeare was writing plays.

The first recorded use of "the jig is over" appeared in 1777. About 20 years later, a Philadelphia newspaper published the earliest known version of our current expression – throwing in an extra "g" (the jigg is up) for good measure.

What does "the jig is up" imply today? The Canadian Oxford defines it as a scheme that's been "revealed or foiled," while Webster's suggests it means "all chances for success are gone" – especially when applied to "risky or improper" strategies.

The gigantic Oxford English Dictionary broadens the scope to "the game is up, it's all over." The Gage Canadian Dictionary says the expression is slang for "it's all over; there's no more chance," and The Houghton Mifflin Canadian Dictionary of the English Language offers a similar entry: "the game is up; all hope is gone."

As with many words and phrases, then, there is a spectrum of meaning. What's obvious, however, is that "the jig is up" could easily be uttered with conviction by a disgruntled Alliance MP who believes that "it's all over" for the party if the leader doesn't quit.



Replacing the "j" with a hard "g" (as in "guffaw") suddenly makes the expression far less familiar, if not actually strange, to the ear and eye.

Musicians have called short-term jobs "gigs" since the early 20th century – especially one-night engagements. But do jobs ever become up? Certainly contracts can be up, which means they've expired on a specific date. But gigs?

Although there is no reason we couldn't start saying "the gig is up" to mean "the gig is over," the phrase isn't well established.

"The jig is up," on the other hand, is cited by lexicographers all over the western hemisphere. Indeed, in his Dictionary of Historical Slang, Eric Partridge points out that "the jig is up" was actually "standard English" until 1850, when it slid down a few notches to colloquial status.

q99x2's picture

A long time ago I was a Jig and Fixture builder - a toolmaker. Sometimes when I finished a job I would say, "Your jig is up," when asked if I had finished a project.

NotApplicable's picture

So, is that jig as in dance, or in fishing? (My google fu is weak)

My guess is fishing since a jig is fished near the bottom. So if it's up, then fishing is over.

Chappy's picture

WTF is so special about SPY 128?

GeneMarchbanks's picture

'I feel like Bill Murray in the movie Groundhog Day, losing the will to wake up each morning to live the same day over and over again. We all know how the day ends and it’s just not as fun the 3rd time around. In fact, I could make the case that QE3’s impact is likely to be even smaller than QE2.'


walküre's picture

Do like he did in the movie. Find the most attractive girl (stock), go after her and find out what she likes / doesn't like and then make your move. In the end, be happy and have a great girl .. err stock portfolio.

Something like that maybe.

I loved that movie. The world was still a nice place and my faith in the nation, its currency and her credit was solid.

RealFinney's picture

That's not the end of the movie, pandering to her doesn't work - in the end he becomes a better person and she wants to be with him because of that.

SheepDog-One's picture

The gig is up? But we JUST got the 'all clear' to bullishly muddle-thru or play in the mud and pig shit or whatever for another year or so! Aw, this sucks.... can't we get some QE or somethin? That fixes everything and works so well and all.

Bananamerican's picture


teh gig is up and there going to loose all they're munny

 In the 18th century British Navy, the captain of the ship held the power of life or death over the crew of his ship. For certain offenses he could impose the death penalty: a line would be thrown over the lowest yardarm, tied 'round the offender's neck. At the command "take him up" two or three crewmen would hoist the man up. His feet and legs especially jumped about as the condemned  strangled, literally dancing at the end of his rope. Some crew would remain on station to sail the ship. Later, word would be passed: “the jig is up”. All hands were thus informed that the sentence had been carried out.

in closing:

Keith Richards does gigs

Bernanke dances jigs

your wellcum internets

AgShaman's picture

Don't forget to make yer Wikipedia donation

CPL's picture

Cool, saved for further reference during Jeopardy or drunken conversations.

Cognitive Dissonance's picture

Very interesting how so many brokers/bankers are suddenly declaring that the world is about to end.

Maybe it is all a coordinated plea for, or just making the case for, QE 3+?

francis_sawyer's picture

Wilson combines the 'liquidity vs negative-real-rate' thesis (that the Fed's liquidity is perhaps no longer 'good' for stocks)

No shit there Sherlock...

QE3... even though it's already been happening thru SWAPS... When it formally gets announced... Will be a "sell the news" moment... So... to CD's point... "yes" they're soon going to be making the plea for QE3 because with 2T of S&P liquidity "already priced in" to the markets... It will be a "sell the news" event...

The "chosen ones" are already positioned accordingly...

Dr. Engali's picture


The "chosen ones" are already positioned accordingly...

The is only positions to be in when it happens are PMs.

francis_sawyer's picture

Funny thing is though... With regards to my above comment... When I said "already positioned accordingly", I was referring to PAPER STACKS on, say, being "short S&P"... I'll give it its due (at least until BAC, JPM, C, earnings are released ~ which I think is some of where, in anticipation, the S&P is floating upon right now)... But after earnings (BANK) are released, I think there will be an "oops" moment (some unlucky European bank, like Soc Gen, back in '08) has an "oops" rogue trader scandal...

Since the FED has used all it's bullets (in terms of rate reductions)... QE3 will be the only thing to SAVE the system... It's going to spiral downward from there in the same manner of '08 where you have rally, followed by Bear Stearns, followed by maneuver, followed by HOPIUM... ending with Lehman & Bazooka...

At least that'll take us to the elections (where we'll BE SURE to NEED to elect a leader who will not disrupt all the progress that is being made)...

THEY ARE NOT "positioned accordingly" in terms of physical, as we speak... That's why IT WILL NOT BE PERMITTED to let the Euro collapse in the process...

Dr. Engali's picture

I agree with what you are saying. And I short the S&P on strength. However I want as little paper exposure (short or long) as I can have when it happens.

francis_sawyer's picture

as do many (or at least they WISH they had done so)

Manthong's picture

Somewhere up there is a black swan that is getting pretty tired of circling.

walküre's picture

They don't want to get chased out of town as liars afterwards. Lessons learned from 2008. When SHTF the politicians can't turn on the bankers and say, why didn't you warn us?

swani's picture

When is it not a part of a grander plan?

The Big Ching-aso's picture



Gig has become Gag.

??'s picture

All I know is watching Bloomberg they remind me of of CNBC circa 2009 green shoots and all that propaganda when I used to watch those fools.  Now we have marg brennan talking up the economy with a boat maker from Tennessee and Blloombergs geezer in residence Ken Prewitt earlier today in conversation with  Well Fargo's John Silvia about how great things are in the economy. Worth a listen if you need to puke  for some reason.

Everybodys All American's picture

Bloomberg is now no different than CNBC. It is sickening. They have all gotten the message loud and clear from above.

??'s picture

so it's not just me,  a definite change in tone along with pro obama rhetoric

El Viejo's picture

Yeah, I started noticing it too about three weeks ago. I just thought it was pre Christmas positive thinking or maybe the alcohol talking. Boomberg always asked the hard questions. Now, not so much. I made this observation a while back too on ZH somewhere. Sorry I didn't keep the post now. At least I know it's not just me also.

NotApplicable's picture

Happy Days are here again!

LongOfTooth's picture

For me the change became noticeable about the time Matt Miller was taken off the anchor desk and put out on the floor of the stock exchange.  Prior to that he was talking about buying gold, etc.  Apparently somebody didn't like that.  If you look at the Bloomberg website 'ole Matt is way down on the list of personalities.  Wouldn't be surprised if they eventually drop him completely. 


DCFusor's picture

Matt has his own show at 8 pm now, Rewind.  Hope they don't drop him, he's one of the best, and reads here.  Sometimes you wonder how these guys withstand their working hours when you see them live at all hours of the day and night, along with the taped stuff.

slaughterer's picture

SPX upper BB is 1291.   Start your shorts there.  

Everybodys All American's picture

Could spike above but I generally agree. 1.27 Fib.

The Big Ching-aso's picture


Milton Bradley has become the defacto founding-father of our monetary system.


Cognitive Dissonance's picture

Quite Frankly I didn't know if I should laugh or cry (or just wretch) when the new $10 Federal Reserve Note came out and it looked just like Milton Bradley's yellow Monopoly version.

The green back has gone yellow.

$10 FRN

Fake money

Momauguin Joe's picture

Honoring the original "Banksta", the mongrel bastard Hamilton.

onelight's picture

Now that Cramericans all have the same play money, they can all b-b-buy along with Ben.