Mike Wilson at Morgan Stanley is back, spreading his bearish propaganda on US equities now that stocks are lower than the levels where he capitulated almost a month ago. We wish our bosses and their investors were as understanding and supportive. If you recall, we did mention in Brazilian jiu-jitsu that when people black out from a chokehold, they often have no recollection of what occurred earlier, continuing to fight once regaining consciousness. Here's a metaphorical example. Stay down, and we'll stop mauling you, buddy.
We don't have a particularly strong view on stocks at the current level. There are a ton of tech IPOs lined up for September/October. The momentum indicators on the S&P 500 are close to entering oversold territory. History has shown it to be a reliable indicator of short-term price reversal.
Morgan Stanley Wealth Management
Here is a recent podcast where Lisa Shalett, Wilson's colleague in Morgan Stanley Wealth Management, resorts to technical mathematical jargon to explain their disastrous house call on markets. It's the classic Wall Street approach of not admitting failures and mistakes but instead speaking in a language that makes clients feel insecure to deflect attention. It's bad enough producing poor forecasts and investment returns, it's even worse when we can't explain them in plain English.
When Shalett says “markets have broken all their models,” at best she means a series of Excel spreadsheets with 2-dimensional scatter-plots and linear regression assumptions, regardless of the quality of fit. Alternatively, the ‘models' are merely historical price relationships which may or may not have mean-reversion characteristics. Never mind if what we're trying to model ties with reality, let's just bet the ranch on it.
Talking like NASA scientists
One could easily mistake these folks at Morgan Stanley for running ensemble stochastic simulation models on non-linear complex systems for NASA. Even NASA scientists are forced to rethink their entire approach when their model predictions are so poor if they wish to remain in a job. Perhaps Morgan Stanley should follow in the footsteps of the Bank of England: hire an outside consultant (Ben Bernanke) for an independent review of their inflation forecasting models.
Now that we've publicly humiliated one of Wall Street's most elite institutions, let's get down to the important stuff…
On bond yields & inflation
Although many analysts and market pundits publicly claim that the odds of a US recession have significantly declined since the turn of the year, in reality, we see ample evidence that many are still clinging to their bearish investment thesis—even if net short risk positions have reduced. It's just an untenable view to express to investors.
Here are the key points we'd like to make:
– Although inflation has been a concern over the past 2 years—and will likely continue to be so in the future—most bond investment thesis hinge on economic growth outlooks, not inflation. The continued gradual sell-off in USD interest rates is more likely driven by a continued dissipation of the recession narrative that was highly consensual at the turn of the year.
– The decline in headline US CPI inflation from 9% down to 3% without any material slowdown in economic activity has removed one additional justification for holding onto a stale position or investment thesis.
– As our colleague Craig Reynolds has mentioned previously, as long as wage growth exceeds personal consumption inflation, the US inflation problem is like a game of whack-a-mole for the Fed. As Americans don't save, inflationary pressures are likely to move into another segment of the economy. For example, initially from goods to services, then into hotels and travel. It's almost impossible to predict 6 months into the future where the mole will pop up. Without early clues in the data, the narrative around inflation falling back down to the Fed's 2% target is more likely to prevail.
– Our best advice is to closely follow the people who have been correct so far this year: Jan Hatzius and the team at Goldman, or Jason Furman at Harvard. Their processes for making future forecasts are likely better than the rest. Based on our recent discussion with them, they're well positioned and balanced in reacting to inbound data moving forward. Similarly, the fund manager who entered 2023 with the wrong view is unlikely to have corrected course sufficiently well to have an objective view.
– It's also worth noting that the NY Fed's multivariate core trend (MCT) inflation indicates that core inflation is likely to decline further in the near term.
Clarification
Following a feedback discussion with a member, we realized that in our attempt to provide a balanced perspective, our commentary on inflation (above) is prone to causing confusion. The MCT inflation charts (above) are intended to present conflicting near-term evidence against a mid-to-longer term inflation outlook, where elevated wage inflation is likely to exert upward pressure on (non-core) headline inflation. The timing and the point at which inflation is likely to reemerge is nearly impossible to predict and will only hold significance once it appears in the data. As we know, when certainty is lacking, markets tend to adhere to narratives that are based on the earliest available data. According to the MCT inflation measure, it is highly probable that prevailing narrative will be that inflation will revert back to the Fed's 2% target sooner than currently anticipated.
LK-99 is not a superconductor
Finally, here is a Nature article on the LK-99 superconducting material that never was:
LK-99 isn’t a superconductor — how science sleuths solved the mystery
Apparently copper sulfide (Cu2S) impurities in the sample were responsible for the diamagnetic properties seen in the video footage posted by the South Korean researchers. LK-99 is far from a superconductor, but in fact, the exact opposite—an insulator.
A few friendships have been ruined since the discovery, as a group within the team of researchers sought to break away from the rest in order to claim the glory. Oh dear!
