Morgan Stanley Wealth Sells All Junk Bond Holdings, Warns Of Recession Risk

According to Morgan Stanley Wealth Management, it is too late to buy junk bonds in this market cycle, which is why one of the otherwise most bullish banks is cutting its high-yield bond holdings to zero, Mike Wilson, the CIO of Morgan Stanley Wealth writes in his 2018 outlook.

While tax cuts are expected to inject fresh momentum into high-flying stocks, the boost may be short-lived and mask balance-sheet weaknesses, Wilson wrote in his Wednesday note as discussed by Bloomberg. Wilson also believes - as do we - that all the Trump tax reform will do is accelerate the next downturn by "bringing forth the excesses we typically see before a recession."

While the tax cuts just enacted in the U.S. may lead to better growth in the short term, they may also bring forth the excesses we typically see before a recession — which is something credit markets figure out before equities." As a result “we recently took our remaining high yield positions to zero as we prepare for deterioration in lower-quality earnings in the U.S. led by lower operating margins.”


With Wilson expecting operating margins to peak due to lower tax rates, rather than from rising sales and profitability, he now recommends selling yield and buying short-term fixed income.

And while the Morgan Stanley CIO does not except a recession in 2018 despite a mature market where making money becomes more difficult, as the cyclical peak approaches he warns that "investors should prepare for at least one correction in global stocks this year."

“We think it will be much tougher to make money in 2018 and 2019 than in 2016 and 2017 as the risk of a recession and outright bear market comes closer,” Wilson wrote. “Late-cycle dynamics have become even more evident.”

Furthermore, between tightening monetary policy and fewer positive surprises in earnings and economic data, any remaining upside is likely to be speculative, Morgan Stanley concludes.







mobius8curve SickDollar Thu, 01/04/2018 - 08:17 Permalink

They are intertwined with the Fed! There is a ten year cycle baked into the cake! Think 2008-2009 on steroids for 2018-2019 with one caveat! This cycle brings us into the tribulation where some of these forecasts will come true:

Prepare accordingly!


In reply to by SickDollar

wmbz Thu, 01/04/2018 - 08:10 Permalink

"any remaining upside is likely to be speculative, Morgan Stanley concluded.

"speculative" The good news is that up until now, that has not happened!

mily Thu, 01/04/2018 - 08:12 Permalink

James Gorman: "What have I told you since the first day you stepped into my office? There are three ways to make a living in this business, be first, be smarter, or cheat. Now, I don't cheat. And although I like to think we have pretty smart people in this building it it surely a hell of a lot easier to be first"

Colm Kelleher: "Sell it all, today..."

Ink Pusher Thu, 01/04/2018 - 09:39 Permalink

LMFAO, BTW we and our hedge fund bum chums just started another recession over the past month or so getting ready to gang ass rape all those pension and mortgage funds again just like we did the last time...

Get the Vaseline out and bend over, it's 2007 all over again.

earleflorida Thu, 01/04/2018 - 10:30 Permalink

what else have they forgotten to tell us we already know...

or is it that our FRB System has empirical (data) knowledge that [our] TBTFs (Commercial Banks) have already hit their [?reserve threshold?] and are severely[?] undercapitalized and haven't maintained a 'economic-capital-increase' far above the regulatory minimum with which the markets having increased globally 25%-35% in the past year[!] to buffer any Geopolitical/Financial crisis!



mototard Thu, 01/04/2018 - 11:01 Permalink

Two basic facts:


a.  Any ponzi scheme always goes on for far longer than it should, even most of the individuals involved know its a scam (think Bernie Madeoff)

b.  When a ponzi scheme collapses, it always does so far faster than anyone anticipated, including the insiders who knew about it.


The timing of this is impossible to predict, but the outcome is certain.