Morgan Stanley: "This Will Not Be The Wipeout Scenario That Permabears Have Been Warning About For 8 Years"

Yesterday we observed that in a time when even the Fed admits CPI, and its measurement of inflation is no longer satisfactory, or as Yellen put it "a mystery", Morgan Stanley took a page out of the gold bugs' book, and said that "due to the many criticisms and changing methodologies of the consumer price index as a true measure of inflation, we use the price of gold as a very good proxy of the true value of a dollar over long periods of time."

What Morgan Stanley, and specifically its chief equity strategist Michael Wilson, wanted to do, is show the S&P in real terms, i.e., the nominal value divided by the price of gold, to get to an inflation adjusted number. The result was the following:

It showed the relationship for the real S&P 500 going back to the 1920s, and explained as follows:

we think that this chart does an excellent job of illustrating the length and real price damage levied by the three secular bear markets noted above as well as the persistence of the two long and steady secular bull markets from 1942-66 and 1980-2000. We strongly believe that a third secular bull market began in 2011, not 2009.

And yet, the point of the exercise was not to give the impression to Morgan Stanley clients that all is well: quite the contrary, recall that only a few weeks ago, the same Michael Wilson said that this was it for the market for this year as "January marked the top for sentiment, if not prices, for the year."

Instead, what Morgan Stanley hoped to show is that while a cyclical bear market (i.e., a 20% drop from recent highs) is imminent, it is taking place in the context of a still strong secular bull market. The reason for this attempt to goalseek the narrative, is that as the next chart shows, the worst cyclical bear markets all happened during these secular bear markets while the less damaging ones happened in the secular bull markets. Wilson explains further:

On average, the cyclical bear markets that occurred during secular bull markets were down only 25% whereas cyclical bear markets during secular bear markets were down almost 50%, on average.

This as Morgan Stanley warns, "is a massive difference that investors should consider when preparing for the next cyclical bear market", which the investment bank thinks may have already begun with the topping in valuations and sentiment earlier this year, even though we have not yet made the price highs at the index level.

Here, Wilson also makes an interesting observation that even though there has not been a 20% correction in the
S&P 500 since the financial crisis
, one can spot two distinct bear markets in recent history when using the MSCI All Country World Index, which reveals a 26% correction in 2011 when both Europe and Japan had a double-dip recession and a 21% correction in 2015-16 during the global recession led by China's hard landing and the collapse in the commodity/industrial and manufacturing complex.

So could we be on the verge of another 20%+ cyclical bear market for the MSCI All Country World Index?

And here we go back to the "bad cop" part of the Morgan Stanley report, in which it writes that "we think the answer is yes, but only after we make one more price high later this year."

More importantly, however, is the bank's prediction that unlike previous occasions, "the S&P 500 is likely to be a more significant driver this time than it was during the 2011 and 2015-16 episodes."

In other words, look for the US stock market to take the brunt of the coming bear market.

But first... another last minute meltup, because Wilson - who appears to have changed his mind - says that he first expects a higher high in most major equity markets later this year: "In the US, we think that the S&P 500 will top between 2950-3000."

What happens then: "the greatest weakness will likely come from the former leaders which include tech, financials and consumer discretionary in the US. US markets should lead in this decline because the earnings comparisons are the most difficult and financial conditions are tightening the most. Therefore, international developed markets should outperform in US dollar terms."

And here we go back to why Morgan Stanley believes it is still a secular bull market, because while a cyclical bear market is coming, it will be far less painful than if it took place in the context of a secular bear:

Finally, we think that this could end up being another unsatisfying bear market in the context of how most think about the end of the cycle. Whenever one invokes the words 'late-cycle' or 'end of the cycle', the natural response is to want to sell everything, especially since memories of the 2008-09 or 2000-02 corrections are still vivid. Instead, we envision a 1-2-year consolidation with 10-20% price swings and concentrated pain in certain sectors that are either overbought, expensive or fundamentally challenged.

Morgan Stanley's conclusion:

"This will not be the wipe-out scenario that some of the perma-bears out there have been warning about for the past eight years."

To this, the permabears have only one response: the only reason the market appears to be in a secular bull cycle, is because central banks have inflated not one, not two, but three consecutive asset bubbles, at a cost of some $250 trillion in global debt, and the only real variable is whether they will be willing - and able - to blow a fourth, and final, asset bubble. If not, no amount of rhetorical goal-seeking will prevent the crash that is coming and that will make the Great Depression seem like a dress rehearsal.


MrNoItAll Sun, 04/15/2018 - 14:15 Permalink

This time will be different in a really bad way. This is just J.P. Morgan trying to calm the herd as they are lead into the shearing stall.

Cosmicserpent Sun, 04/15/2018 - 14:34 Permalink

That was bullshit so deep I could barely keep my nose above it.  To summarize, the market is going down faster than a $20 meth whore. However, don't worry, it most likely will not be fatal so just let us keep your money bitchez!

JibjeResearch Sun, 04/15/2018 - 14:37 Permalink

There will not be a nominal deflation, but real purchasing power deflation.

This means commodities are cheaper, the bottom 80% purchasing power decreases, and the top 10% purchasing power increases.

More purchasing power inequality increases as we move forward.

Have a combination of good assets to hedge against this effect, you should be ok!

Best Wishes :)

Games Without … Sun, 04/15/2018 - 14:41 Permalink

And what kind of market would we be in if central banks hadn’t engaged in the biggest paper money printing experiment known in human history? Would there even be a semblance of a market? Throw the charts away, we’ve never been here before, and have yet to see what a global debt crisis looks like.

BraceforImpact Sun, 04/15/2018 - 14:49 Permalink

gonna be a blood bath, especially since they're taking the spot gold price which we all know is a fallacy.


JPM silver inventories up 778% since 2012, and that's just what's reported on the COMEX.


It's going to get much much uglier, as people choose to ignore the central banking cancer rather than face it, and face the truth.


WHEN this collapses, it will be a true free for all. Infrastructure will shut down, food will be scarce, etc. It's going to be insane.


I still get a kick out of the FOREX market. "Yo, If you give me one of these worthless pieces of paper, I'll give you two of mine"

Oldguy05 Sun, 04/15/2018 - 14:50 Permalink

I'm investing in tungsten bars, gold, lead, copper, metal plating equipment and reloading gear.

Tungsten and gold are for gold plated tungsten bars.

lead, copper and reloading gear are for copper plated hollow points to protect myself if I get caught ripping people off selling them gold plated tungsten bars.


Muppet Sun, 04/15/2018 - 14:51 Permalink

Permabears aren't "warning" they're "hoping".


Hoping the economic distortions end.  Hoping excessive debtors are washed out and not rewarded.  Hoping the markets crash so that we can restart once again focusing on fundamentals. 


But alas , this would leave the CBs and governments holding too many losses themselves.  Therefore, it is so, now it is no longer possible to go back.   Chaos is at the doorstep.

pizdowitz Sun, 04/15/2018 - 14:58 Permalink

That analysis assumes that the prices quoted are market prices. They are not. All markets are rigged,


Sanctions and buyers fatigue translate into deflation.

Buyers fatigue: no more "new, exciting" trinkets to buy, or reduction in the purchasing power. Now close to the SHTF level.

Sudden Debt Sun, 04/15/2018 - 15:07 Permalink

The printing presses now have 100% control over the stockmarkets.

No way we'll get a big crash.

Espcially since all the computers have been warned about a inflation spike.

Michigander Sun, 04/15/2018 - 15:36 Permalink

I see, so we use the price of the most manipulated commodity on the planet to prove the relative value of the most manipulated market on the planet.

Ink Pusher Sun, 04/15/2018 - 15:38 Permalink

"Morgan Stanley: "This Will Not Be The Wipeout Scenario That Permabears Have Been Warning About For 8 Years"


Nope , meanwhile back here in reality... MS is actively scooping up & hoarding all the Gold Bullion they can get their dirty little hands on whilst JPM is is actively scooping up & hoarding all the Silver Bullion eh? < Extreme Sarc


east of eden Sun, 04/15/2018 - 16:10 Permalink

If you didn't read the story by Stockman, or listen to the video, you should, at least I think you should before you go expecting another 13% rise in the S&P this year.

Sure, maybe you will be lucky enough to pick the exact top to sell, maybe not. But one thing is absolutely clear in my mind, and that is that by September of 2018, the US will be trying to sell 1.8 Trillion in new debt, every year (150 Billion per month). And that number is going to continue to rise dramatically as rising interest rates bite.

Now perhaps some will say, 1.8 Trillion, no big deal, right? But it will be a big deal if the other CB's (EU,Japan, Switzerland etc) are also trying to unload their balance sheets, at the same time. Let's not forget that collectively CB's goosed the global economy by 210 Trillion US. And of course, if China goes, the US will follow closely behind.

So far, the money that has been spent in the first half of the US fiscal year has earned a negative return of -30%. There has been zero investment in anything approaching a valuable, forward looking assets (i.e. infrastructure), and of course the government continues to pick fights with other countries that could cause you some serious harm.

Let it Go Sun, 04/15/2018 - 16:14 Permalink

A recent report from JP Morgan revealed that S&P 500 companies will buy back a record $800 billion of their own shares in 2018, far exceeding the current high of $530 billion that was recorded in 2017. If indeed we are seeing the later stages of a bull market built on valuation illusions based on share "buyback alchemy" then we can only speculate as to the downside potential of this market.

Below is the link to the second part of a two-part series. The first explored how stock buybacks have been instrumental in driving this market higher since QE fueled easy money starting in 2009. This part focuses on what is ahead and how the recently passed Trump tax plan has supercharged this trend just as it may have been reaching its natural conclusion.

 http://Stock Buybacks Driving Market-Where It Might Take Us!html

MusicIsYou Sun, 04/15/2018 - 16:39 Permalink

The event that will destroy the value of the dollar is going totally cashless. Digital money is lent it's value by the 10% in cash of the dollar that's circulating, get rid of that 10% cash, and the dollar is finished, as well as anything denominated in dollars such as Bitcoin. Bitcoin isn't just a value in and of itself, Bitcoin is measured in dollars. As goes the dollar, as goes bitcoin, and as goes gold too unless gold gets reevaluated to a much higher value first and detached from the dollar before the dollar crashes.

Knave Dave Sun, 04/15/2018 - 18:06 Permalink

Since Michael Wilson of Morgan Stanley changed his big claim in just a few weeks from "January was the year's high" to "a new high is coming soon this year," Morgan Stanley's views don't mean anything anyway by their own self-contradictory admission.


Knave Dave

The Great Recession Blog

hannah Sun, 04/15/2018 - 18:26 Permalink

i show we have zero inflation and the dollar is worth 100% of its original value. i use my own proprietary measuring stick that only i can use. it shows that the value of the dollar is perfect. you must believe me and only me because i own the measuring stick.....