Morgan Stanley Executive Warns of Turbulent ‘Paradigm Shift’ in Markets as Inflation Soars and Recession Looms

Gasoline prices are posted at a gas station in Washington on May 26, 2022. Nicholas Kamm/AFP via Getty Images

Morgan Stanley co-President Ted Pick said investors face the daunting task of navigating the twin threats of red-hot inflation and economic cooling, warning that global markets are on the verge of a major “paradigm shift” away from years of easy money policies that will drive heightened volatility for an extended period to come.

“We'll have these periods where it feels awfully fiery, and other periods where it feels icy, and clients need to navigate around that,” Pick said during the Bernstein Strategic Decisions Conference in New York last week, referring to inflationary “fire” and recessionary “ice.”

Soaring inflation, which has hit multi-decade highs, has spurred the Federal Reserve to start tightening monetary settings, joining central banks around the world as they, too, take steps to tackle surging prices.

At the same time, a growing number of economic signals point to a mounting risk of recession, with a number of Wall Street figureheads warning that the U.S. economy is in for a rough patch.

“It’s a hurricane,” Jamie Dimon, CEO of JPMorgan Chase & Co., told a recent banking conference, predicting turbulence ahead for the U.S. economy.

“Right now, it’s kind of sunny, things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there, down the road, coming our way. We just don’t know if it’s a minor one or Superstorm Sandy,” Dimon added.

One sign of potential softening in the economy came in the form of last week’s jobs report, which showed U.S. employers added 390,000 jobs in May, the lowest monthly gain in a year.

In a recent note, Goldman Sachs analysts pointed to deterioration in indicators like the first-quarter decline in U.S. gross domestic product, arguing that this “suggests that near-term recession risk has increased.” though they noted that other activity gauges “imply that output is still expanding.”

Amid the mixed picture of the economic landscape, Americans have become deeply pessimistic about the U.S. economy, according to a new Wall Street Journal-NORC poll. Particularly jarring was a 20-point drop from last year in the percentage of respondents who said they have a good chance of improving their standard of living (27 percent).

Allianz chief economic adviser Mohamed El-Erian commented on the poll in a tweet, warning that the deterioration in sentiment could become a self-fulfilling prophecy, with consumers potentially pulling back on spending over worries about the economy.

“Yes US inflation is high and growth concerns are increasing … yet this deterioration in sentiment exceeds what would be warranted by the outlook for the economy,” El-Erian said.

“This matters as a continued worsening in sentiment can itself undermine the outlook,” he added.

In his remarks at the economic conference, Pick said the turbulent transition from the post-2008 financial crisis order, which was marked by a period of low interest rates and cheap debt, would likely play out over the next year or two.

“This paradigm shift at some point will bring in a new cycle,” Pick said. “It’s been so long since we’ve had to consider what a world is like with real interest rates and real cost of capital that will distinguish winning companies from losing companies, winning stocks from losing stocks.”

Calling the current moment “extraordinary,” Pick noted that the intersecting forces of the war in Ukraine, soaring inflation, and the pandemic signal an end to what he described as “15 years of financial repression,” referring to highly accommodative monetary policies.

Pick heads Morgan Stanley’s trading and banking division.