Thoughts on the Market

Investors in the education sector have focused on threats from generative AI, but may be missing the potential for greater efficiency and new opportunities in workforce reskilling.----- Transcript -----Welcome to Thoughts on the Market. I'm Brenda Duverce from the Morgan Stanley Sustainability Research Team. Along with my colleagues bringing you a variety of perspectives. Today I'll discuss the potential impact of generative AI on the global education market. It's Tuesday, November 28th at 10 a.m. in New York. When ChatGPT was first introduced, it disrupted the education system with the threat of plagiarism and misinformation, and some school systems have banned it. Some companies in the educational technology space were initially affected by this, but have since recovered as the risks have become clearer. Still, investors appear to be overly focused on the risks GenAI poses to education companies, missing the potential upside GenAI can unlock. From a sustainability perspective, we view GenAI as an opportunity to drive improvements to society in general, with education being one core use case. We would highlight two areas where GenAI will be key. One, in improving the overall education experience and two, in helping to reskill or upskill an evolving workforce. Starting with the quality of the education experience, GenAI has the potential to transform learning and teaching, from automating tasks with chatbots to creating adaptive learning solutions. Applications such as auto grading, large language model based tutors and retention management can drive efficiencies and increase productivity. We see efficiencies driving $200 billion of value creation and education over the next three years. In the fragmented education market, we expect lower costs to flow through to prices as companies pass along cost savings to maximize volumes.  The second key area that we highlight from a sustainability angle is the reskilling and upskilling of the workforce. We think the market may be under appreciating the role education companies can have in this respect. Many fear that GenAI would lead to substantial job losses in various areas of the economy, and the market sometimes assumes that job loss leads to permanent displacement of workers long term. But we argue this isn't necessarily true. Workers typically re-enter the labor force with an updated skill set. Take, for instance, the introduction of ATMs and the concerns that ATMs would replace bank tellers and lead to significant job loss. This didn't prove to be the case. Over time, there were fewer tellers per bank branch, but the overall number of tellers continued to rise. Furthermore, the bank teller role evolved as customers sought a better experience and bank tellers responded by reskilling. Another example of this type of disruption was the introduction of the spreadsheet in the accounting industry. Many argued that spreadsheets would replace accounting jobs. However, data from the Bureau of Labor Statistics indicates the opposite, the number of accountants and financial managers rose significantly. When it comes to reskilling or upskilling workers impacted by GenAI, we think this could cost somewhere around $16 billion within the next three years. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.

Morgan Stanley published its 2024 macroeconomic and investment outlooks last week after spirited debates among our economists and strategists. Three topics animated much of this year’s discussion: lingering concerns about recession; China; and the challenging real estate market in the U.S.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about some of the key debates we engaged in during our year ahead outlook process. It's Monday, November 27th at 10 a.m. in New York. We published our Year Ahead Global Economics and Strategy Outlook last Sunday and more detailed asset class and country specific outlooks have been streaming out since. At Morgan Stanley Research the outlooks are the culmination of a process involving much deliberation and spirited debate among economists and strategists across all regions and asset classes we cover. While we strive for cohesion and consistency in our outlook across economies and markets, we are convinced that in a highly interconnected world, facing numerous uncertainties, challenging each other's views makes the final product much stronger. In that spirit, here are some of the key debates we engaged in along the way. Slowdown but not recession? In their baseline scenario, our economists expect a significant slowdown in developed market economies while inflation is tamed and outright recession is avoided. Unsurprisingly, the prospect of a substantial slowdown that does not devolve into a recession was debated at length. Our economists maintain that while recessions remain a risk everywhere, they expect any recession, such as the one in the United Kingdom, to be shallow. Since inflation is falling with full employment, real incomes should hold up, leaving consumption resilient despite more volatile investment spending. Our economists call for policy easing to start across several DM economies in the middle of 2024 was also much discussed. For the U.S., our economists call for 100 basis points of rate cuts starting around the second half of the year and the cuts begin even before inflation target has been achieved and without a spike in the unemployment rate. The motivation here is not that the Fed will cut to stimulate the economy, but the cuts are a move towards a more normalized monetary policy. As the economy begins to slow and net new jobs created fall below replacement levels, we think that the Fed sees the need to normalize policy instead of maintaining policy at very restrictive levels. The China question. Relative to the expectations in our mid-year outlook, China growth surprised to the downside. We clearly overestimated the ability and willingness of China policymakers to restore vigor to the economy. Thus, as we debated China, we spent time on the policy measures needed to offset the drag from the looming 3D trap of debt, deflation and demographics. We look for subpar improvement in both growth and inflation in 2024, with real GDP growth reaching a below consensus 4.2%. More central government led stimulus will only cushion the economy against continued deleveraging in the housing sector and local government financial vehicles.Real estate challenges. U.S. residential and commercial real estate markets diverged dramatically over the course of 2023, and their trajectory in the year ahead was an important debate. The dramatic affordability challenges posed by higher mortgage rates caused a significant pullback in existing home sales, renewing decreases in inventory that provided near-term support for home prices. On the other hand, the combination of challenges for key lenders such as regional banks and secular challenges to select property types such as offers coupled with an imminent and persistent wall of maturities that need to be refinanced, drove commercial real estate prices and sales meaningfully lower. Looking ahead, as rates come down, we expect affordability to improve and for sale inventory of homes to increase. U.S. home prices should see modest declines, about 3% as the growth in inventory offsets the increased demand, with fundamental stressors still largely unresolved, we expect the outlook for commercial real estate to remain challenging. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

Original Release on November, 7th 2023: AI could help video game companies boost engagement and consumer spending, but could also introduce competition by making it easier for new companies to enter the industry.----- Transcript -----Welcome to Thoughts on the Market. I'm Matt Cost from the Morgan Stanley US Internet Team. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss how A.I could change the video game industry. It's Tuesday, November 7th at 10 a.m. in New York. New A.I tools are starting to transform multiple industries, and it's hardly a surprise that the game industry could see a major impact as well. As manual tasks become more automated and the user experience becomes increasingly personalized, A.I. tools are starting to change the way that games are made and operated. Building video games involves many different disciplines, including software development, art and writing, among others. Many of these processes could become more automated over time, reducing the cost and complexity of making games and likely reducing barriers to entry. And since we expect the industry to spend over $100 billion this year building and operating games, there's a significant profit opportunity for the industry to become more efficient. Automated content creation could also offer more tailored experiences and purchase options to consumers in real time, potentially boosting engagement and consumer spending. Consider, for example, a game that not only makes offers when a consumer is most likely to spend money, but also generates in-game items designed to appeal to that specific person's preferences in real time. Beyond A.I generated content, we also need to consider the impact of user generated content. Some popular titles already depend on the users to shape the game around them, and this is another core area that could be transformed by A.I.. Faster and easier to use content creation tools could make it easier for games to tap into the creativity of their users. And as we've seen with major social platforms, relying on users to create content can be a big opportunity. With all that said, these transformational opportunities create downside risk as well. Today's large game publishers rely on their scale and domain expertise to differentiate their products from competitors. But while new A.I. tools could make game development more efficient, they could also lower barriers to entry for new competitors to jump into the fray and put pressure on the incumbents. Another risk is that A.I. tools could fail to drive the hope for efficiencies and cost savings in the first place. Not all technology breakthroughs in the past have helped the industry become more profitable. In some cases, industry leaders have decided to reinvest cost savings back into their products to make sure that they deliver bigger and better games to stay ahead of the competition. With that in mind, the biggest challenge for today's industry leaders could be making sure that they find ways to differentiate their products as A.I. tools make it easier for new firms to compete. Where does all of that leave us? Although a number of A.I. tools are already being used in the game industry today, adoption is just beginning to tick up and there's a lot of room for the tools to improve. With that in mind, we think we're just on the cusp of this A.I. driven revolution, and we may have to get through a few more castles to find the princess. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

Original Release on November, 2nd 2023: Generative AI could transform the nature of work and boost productivity, but companies and governments will need to invest in reskilling.----- Transcript -----Stephen Byrd: Welcome to Thoughts in the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research. Seth Carpenter: And I'm Seth Carpenter, the Global Chief Economist. Stephen Byrd: And on the special episode of the podcast, we'll discuss how generative A.I. could reshape the US economy and the labor market. It's Thursday, November 2nd at 10 a.m. in New York. Stephen Byrd: If we think back to the early 90's, few could have predicted just how revolutionary the Internet would become. Creating entirely new professions and industries with a wide ranging impact on labor and global economies. And yet with generative A.I. here we are again on the cusp of a revolution. So, Seth, as our global chief economist, you've been assessing the overarching macro implications of the Gen A.I. phenomenon. And while it's still early days, I know you've been thinking about the range of impacts Gen A.I could have on the global economy. I wondered if you could walk us through the broad parameters of your thinking around macro impacts and maybe starting with the productivity and the labor market side of things? Seth Carpenter: Absolutely, Stephen. And I agree with you, the possibilities here are immense. The hardest part of all of this is trying to gauge just how big the effects might be, when they might happen and how soon anyone is going to be able to pick up on the true changes and things. But let's talk a little bit about those two components, productivity and the labor market. They are very closely connected to each other. So one of the key things about generative A.I is it could make lots of types of processes, lots of types of jobs, things that are very knowledge base intensive. You could do the same amount of work with fewer people or, and I think this is an important thing to keep in mind, you could do lots more work with the same number of people. And I think that distinction is really critical, lots of people and I'm sure you've heard this before, lots of people have a fear that generative A.I is going to come in and destroy lots of jobs and so we'll just have lots of people who are out of work. And I guess I'm at the margin a lot more optimistic than that. I really do think what we're going to end up seeing is more output with the same amount of workers, and indeed, as you alluded to before, more types of jobs than we've seen before. That doesn't exactly answer your question so let's jump into those broad parameters. If productivity goes up, what that means is we should see faster growth in the economy than we're used to seeing and I think that means things like GDP should be growing faster and that should have implications for equities. In addition, because more can get done with the same inputs, we should see some of the inflationary pressures that we're seeing now dissipate even more quickly. And what does that mean? Well, that means that at least in the short run, the central bank, the Fed in the U.S., can allow the economy to run a little bit hotter than you would have thought otherwise, because the inflationary pressures aren't there after all. Those are the two for me, the key things one, faster growth in the economy with the same amount of inputs and some lower inflationary pressures, which makes the central bank's job a little bit easier. Stephen Byrd: And Seth, as you think about specific sectors and regions of the global economy that might be most impacted by the adoption of Gen A.I., does anything stand out to you? Seth Carpenter: I mean, I really do think if we're focusing just on generative A.I, it really comes down, I think a lot to what can generative A.I do better. It's a lot of these large language models, a lot of that sort of knowledge based side of things. So the services sector of the economy seems more ripe for turnover than, say, the plain old fashion manufacturing sector. Now, I don't want to push that too far because there are clearly going to be lots of ways that people in all sectors will learn how to apply these technology. But I think the first place we see adoption is in some of the knowledge based sectors. So some of the prime candidates people like to point to are things like the legal profession where review of documents can be done much more quickly and efficiently with Gen A.I. In our industry, Stephen in the financial services industry, I have spoken with clients who are working to find ways to consume lots more information on lots of different types of firms so that as they're assessing equity market investments, they have better information, faster information and can invest in a broader set of firms than they had before. I really look to the knowledge based sectors of the economy as the first target

Third-quarter consumer spending was strong, but a growing gap between middle- and higher-income consumers may affect the holiday shopping season.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S Equity Strategy Team. Sarah Wolfe: And I'm Sarah Wolfe and the U.S Economics Team. Michelle Weaver: On this special episode of the podcast, we wanted to give you an update on the U.S. consumer and a preview of our holiday spending expectations this year. It's Tuesday, November 21st at 10 a.m. in New York. Michelle Weaver: Sarah, recent data releases and your modeling suggests that U.S. consumer spending will begin to slow more meaningfully in 2024 and 2025. And you've argued that the slowdown in consumption is driven by a cooling labor market which weighs on real disposable income and elevated rates, putting further pressure on debt service costs. Given all this, would you say that the U.S. consumer is still healthy as we approach the holiday season and the end of the year? Sarah Wolfe: You're exactly right. Consumer spending in the third quarter was very strong, and we know that there's going to be some more of that underlying momentum pulled into the fourth quarter, which includes holiday shopping season. Just last week, we got the October retail sales report, which did show a notable deceleration in consumer spending from the third quarter into the fourth quarter, but still positive retail sales. There are a few reasons, however, that, you know, we take pause at saying that the holiday shopping season is going to be very strong. The first is that there is this growing discrepancy between the health of a struggling lower middle income household versus the solid higher income household. The second is the expiration of the student loan forbearance. We know that about half of borrowers have started making payments as of October. And the third is the wallet shift away from goods and toward services that will impact the type of holiday spending. I would like to hone in on this discrepancy between the health of the lower middle income household and higher income households. We've highlighted that lower middle income households have been pulling back more in discretionary and they've been trading down as they're disproportionately being hit by tighter lending standards, higher inflation, higher debt service costs. And that's likely going to reflect the type of holiday spending that we see this year. In particular, higher income households have just more buying power, they're more willing to spend on experiences. And so we could just see that holiday shopping that's more skewed towards higher income spenders and that's more experience oriented will be the winners of this holiday shopping season. Michelle Weaver: What specific trends have you seen in U.S. consumer spending in the third quarter? And what do you expect for the final quarter of this year? Sarah Wolfe: Consumer spending in the third quarter was really strong because the labor market largely was very resilient, and as a result, we saw that there was just more momentum for goods and services spending, so both reaccelerated into the third quarter. However, what we could see is that there still is this clear preference shift on experiences over goods in particular accommodations, travel, etc. And so I think that's going to feed through into the type of holiday shopping that we see this year. Michelle Weaver: And I know that during Covid, consumers were able to save a lot more money than usual. How are these excess savings balances looking now and what do you expect going forward? Sarah Wolfe: We estimate that about 40% of the excess savings stockpile has been spent down, so there's still a pretty hefty 60% of excess savings sitting among households. However, we do not expect much more drawdown in excess savings across 2024. The reason is that our work shows that the excess savings stockpile is increasingly being held by the highest income households. They, first of all, have a lower propensity to consume out of savings, but more importantly, they had been willing to spend down their excess savings over the past two years. But that was to fuel their pent up demand for the services, economy recovery. And now that we've seen a full recovery on that side of the economy, there's really just less desire, less willingness to spend out of excess savings. Further, we're seeing that there's been an increasing movement from liquid to less liquid assets. So more and more of that savings is not just sitting in cash under the bed and so it's less likely to make its way into consumer spending. Michelle, based on your recent survey work in collaboration with U.S. Equity Analyst, what are you seeing in terms of holiday spending intentions for U.S. consumers this year compared to last year? Michelle Weaver: So the majority of holiday shoppers are planning to keep the

The next phase in artificial intelligence could be “edge AI,” which lowers costs and improves security by embedding AI capabilities directly in smartphones and other devices.----- Transcript -----Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. And along with my colleagues, bringing you a variety of perspectives, today I'll discuss Edge A.I. It's Monday, the 20th of November at 2 p.m. in London. The last year has seen a surge in adoption of artificial intelligence, particularly for foundational model builders and consumer-facing chatbots. But we think the next big wave of A.I will be embedded in consumer devices, this is smartphones, notebooks, wearables, drones and autos, amongst others. Enter Edge A.I. This means running A.I algorithms locally rather than in centralized cloud computing facilities in order to power the killer apps of the A.I age. Generative A.I., cloud computing, GPUs and hyperscalers, that is, the large cloud service providers that run computing and storage for enterprises. They all remain central to the secular machine learning trend. However, as A.I continues to permeate through all aspects of consumer life and enterprise productivity, it will push workloads to hardware devices at the edge of networks. The US data firm Gartner estimates that by 2025, half of enterprise data will be created at the Edge, across billions of battery powered devices. The key benefits of A.I computation performed at the Edge are lower cost, lower latency personalization and importantly, higher security or privacy relative to centralized cloud computing. And the prize in moving these workloads to the Edge is large, we're talking some 30 billion devices by the end of the decade, but the hurdles are also significant. We think 2024 will be a catalyst year for this theme. And the companies that could benefit range from household name hardware vendors to key components suppliers around the world. But just as there are benefits to Edge A.I, there are constraints as well. Not all Edge devices are created equal, for example. The clearest limitations across hardware media are battery life and power consumption, processing capabilities and memory, as well as form factor, i.e. how they look. For example, mass market smartphones and notebooks today don't have the battery life or processing capability to run inferencing of the largest large language models. This will have to change over time, which will require investment predominantly in advanced proprietary silicon or custom ASICs as they're known, of which we've seen a number of announcements from big tech companies in recent weeks. The hardware arms race is really heating up in our view. It's important to note, though, that generative A.I. and Edge A.I are not mutually exclusive. In fact, Generative A.I. has reinforced the already growing need for edge A.I. Our consumer and investor trend analysis suggests that the theme is already moving into its upswing phase. Moreover, a slate of new product releases as soon as Q1 2024, such as Edge A.I enabled smartphones with embedded custom silicon, should drive further investor interest in this theme over the coming 12 months. And we think smartphones stand the best chance of breaking the bottleneck soonest and they also have the largest total addressable market potential in the short and medium term. This is an uncrowded theme which we think is in pole position for 2024. Thanks for listening. If you enjoy the show, please leave a review on Apple Podcasts and shared Thoughts on the Market with a friend or a colleague today.

Our Chief U.S. Economist previews the key economic themes of 2024, including potential rate cuts, housing affordability, job growth and more. ----- Transcript -----Welcome to Thoughts on the market. I'm Ellen Zentner. Morgan Stanley's Chief U.S. Economist. Along with my colleagues, bringing you a variety of perspectives, today, I'll discuss our 2024 outlook for the U.S. economy. It's Friday, November 17th at 10 a.m. in New York. You may remember that back in March 2022, we called for a soft landing for the U.S. economy. And we still maintain this view, even though strains in the economy are becoming more noticeable and recession fears remain alive. And that's because the Fed's monetary policy is weighing increasingly on growth and especially next year. High rates for longer are causing a persistent drag, bringing growth sustainably below potential over our forecast horizon. We forecast that U.S. GDP growth slows from an estimated 2.5% this year on a Q4 over Q4 basis to 1.6% in 2024 and 1.4% in 2025. We also expect U.S. consumer spending to begin to slow more meaningfully in 2024 and 2025, driven by a cooling labor market which weighs on real disposable income and elevated rates, putting further pressure on debt service costs. But there are some positive indicators for the year ahead as well. We think that business investment and equipment will finally turn positive by the second half of next year following two years of decline, while the surge in nonresidential construction should move to a lower but more sustainable pace. Bank lending conditions have tightened sharply for the past year, but in public credit markets, many businesses refinanced while rates were still low. Turning to the housing market, we expect home sales to be weak in the first half of next year, but activity should pick up in the second half and further into 2025. And that's primarily because affordability will improve. We also think homebuilding activity will be stronger in the second half of next year. Home prices should see modest declines as growth in inventory offsets the increase in demand. By 2025 with lower rates existing home sales should rise more convincingly. We see job growth slowing throughout the forecast horizon, although we expect the unemployment rate to remain low because companies will still be focused on retaining headcount. And the labor force participation rate should continue to recover, with real wage growth increasing in 2024 and 2025. Now, inflation, which was at record highs last year, has been decelerating, mainly driven by core goods deflation and disinflation in housing. We expect negative monthly data releases for core goods inflation through the forecast horizon. So we continue to think that the Fed is done to here, that back in July of this year, the funds rate peaked at 5.375% for this cycle, and we think they're on hold now until June 2024, when we expect the Fed to take its first cautious step with a 25 basis point cut, followed by a 25 basis point cut one quarter later in September. In the fourth quarter of 2024, the Fed will likely begin cutting 25 basis points every meeting, eventually bringing the real rate to .4% by the fourth quarter of 2025, when core inflation, GDP growth and unemployment are near neutral. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

After poor performance in 2022, a traditional 60/40 equity/bond portfolio could see an annual return around 8% over the next decade.----- Transcript -----Welcome to your Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Cross Asset Strategist. Along with my colleagues, bringing you a variety of perspectives, today, I'll discuss our long run expectations for what markets will return in 2024. It's Thursday, November 16th at 10 a.m. in New York. 2023 has seen a relentless rise in government bond yields. This has hit total multi-asset returns this year, while also lifting nominal expected returns over the long run for fixed income and stocks above historical averages. U.S. equities are expected to return about 9.6% per year for the next decade, little change from the level last year. While ten year U.S. Treasuries are projected to be at 5.8%, up quite significantly from 4.7% in 2022. But the steeper climb in nominal long run expected returns for government bonds is also eroded risk premiums, that is the investment returns assets are expected to yield over and above risk free assets. For example, the equity risk premium for U.S. stocks sits at around 3.8%, down from 4.9% just a year ago. Given soaring yields over the last three months, it's understandable why some investors may be skeptical of fixed income. Except today's higher yields are a strong reason to buy bonds because they can better cushion fixed income returns. In fact, looking across assets, fixed income stands as being particularly cheap to equities relative to history. European and Japanese equities screen cheap to most other assets on an FX-hedged basis, and Euro-denominated assets look cheap to dollar denominated assets. Furthermore, our estimated optimal allocation to agency mortgage backed securities has increased at the expense of investment grade credit over the past year, reflecting how cheap mortgages are relative to other markets. Against this backdrop, a traditional 60/40 portfolio which allocates 60% to stocks and 40% to bonds and carries a moderate level of risk, looks viable once again despite its poor performance in 2022, when both stocks and bonds suffered greatly amid record inflation and aggressive interest rate hikes. From where we sit now, the high long run expected returns across most assets mean that a traditional 60/40 equity bond dollar portfolio would see about 8% per year over the next decade. The last time it was this high was in 2013 and surely a 60/40 equity bond euro portfolio could see 7.7% per year over the next 10 years, the most elevated since 2011.While long-run expected returns have climbed higher, unfortunately for 60/40 strategies correlation has surged. We still think there's some diversification benefits/volatility reduction in a 60/40 portfolio from bonds’ low risk rather than low correlation, but the rise in bond volatility has also challenged this fear. The big question here is whether the high correlation between stocks and bonds will normalize. There's an argument that it won't, and perhaps surprisingly, it's all to do with A.I. Now, for the last three decades or so, the positive relationship between growth and inflation has been an important factor on negative correlation between stocks and bonds. Higher inflation erodes bond returns, and that's offset by higher stock returns from rising growth and vice versa. But in the case of A.I technology diffusions, we can see a boost to growth and reduction in inflation in the short run, which in turn challenges assumptions that stock and bond returns will have low to negative correlations in the future. In other words, bonds, as was the case this year, would no longer be the good diversifier they have been over the last three decades. Timing and sequencing will matter, and how A.I. may impact growth inflation correlations is only one of many factors that can move multi-asset correlation over time. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

If you're a listener to Thoughts on the Market you may be interested in another of our podcasts: What Should I Do With My Money? ----------------------------------------------------------------------------------------------------------------------------This material has been prepared for informational purposes only. It does not provide individuallytailored investment advice. It has been prepared without regard to the individual financialcircumstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC(“Morgan Stanley”) recommends that investors independently evaluate particular investmentsand strategies, and encourages investors to seek the advice of a Financial Advisor. Theappropriateness of a particular investment or strategy will depend on an investor’s individualcircumstances and objectives.----------------------------------------------------------------------------------------------------------------------------The team here at Thoughts on the Market is so excited for our friends at Morgan Stanley Wealth Management and their What Should I Do With My Money? podcast, which was recently chosen by listeners as their favorite money and investment podcast in the 2023 Signal Awards.Whether you're a seasoned investor or just venturing into the investment world for the first time, there's never been a better time to tune in as the team at What Should I Do With My Money? gears up for a new season. In each episode, we listen in on a conversation between a guest with money questions and a financial advisor from the team at Morgan Stanley. In this excerpt, Willow and Sarah talk about buying a property versus renting.For more information visit morganstanley.com/mymoney.  

Our roundtable discussion on the future of the global economy and markets continues, as our analysts preview what is ahead for government bonds, currencies, housing and more. ----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. This is part two of our special roundtable discussion on what is ahead for the global economy and markets in 2024. It's Tuesday, November 14th at 10 a.m. in New York. Yesterday you heard from Seth Carpenter, our Global Chief Economist, and Mike Wilson, our Chief Investment Officer and the Chief U.S. Equity Strategist. Today, we will cover what is ahead for government bonds, corporate credit, currencies and housing. I am joined by Matt Hornbach, our Chief Macro Strategist, James Lord, the Global Head of Currency and Emerging Markets Strategy, Andrew Sheets, Global Head of Credit Research, and Jay Bacow, Co-Head of U.S. Securities Products.Vishy Tirupattur: Matt, 2023 was quite a year for long end government bond yields globally. We saw dramatic curve inversion and long end yields reaching levels we had not seen in well over a decade. We've also seen both dramatic sell offs and dramatic rallies, even just in the last few weeks. Against this background, how do you see the outlook for government bond yields in 2024? Matt Hornbach: So we're calling our 2024 outlook for government bond markets the land of confusion. And it's because bond markets were whipped around so much by central banks in 2023 and in 2022. In the end, what central banks gave in terms of accommodative monetary policy in 2020 and 2021, they more than took away in 2022 and this past year. At least when it came to interest rate related monetary policies. 2024, of course, is going to be a pretty confusing year for investors because, as you've heard, our economists do think that rates are going to be coming down, but so too will balance sheets. But for the past couple of years, both G10 and EM central banks have raised rates to levels that we haven't seen in decades. Considering the possibility that equilibrium rates have trended lower over the past few decades, central bank policy rates may be actually much more restricted today than at any point since the 1970s. But, you know, we can't say the same for central bank balance sheets, even though they've been shrinking for well over a year now. They're still larger than before the pandemic. Now, our economists forecast continued declines in the balance sheets of the Fed, the ECB, the Bank of England and the Bank of Japan. But nevertheless, in aggregate, the balance sheet sizes of these G4 central banks will remain above their pre-pandemic levels at the end of 2024 and 2025.Vishy Tirupattur: Matt, across the developed markets. Where do you see the best opportunity for investors in the government bond markets? Matt Hornbach: So Vishy we think most of the opportunities in 2024 will be in Europe given the diverging paths between eurozone countries. Germany, Austria and Portugal will benefit from supportive supply numbers, while another group, including Italy, Belgium and Ireland will likely witness a higher supply dynamic. Our call for a re widening of EGB spreads should actually last longer than we originally anticipated. Elsewhere in Europe, we're expecting the Bank of England to deliver 100 basis points of cumulative cuts by the end of 2024, and that compares to significantly less that's priced in by the market. Hence, our forecasts for gilts imply a much lower level of yields and a steeper yield curve than what you see implied in current forward rates. So the UK probably presents the best duration and curve opportunity set in 2024. Vishy Tirupattur: Thank you, Matt. James, a strong dollar driven by upside surprises to U.S. growth and higher for longer narrative that has a world during the year characterized the strong dollar view for much of the year. How do you assess 2024 to be? And what differences do you expect between developed markets and emerging market currency markets? James Lord: So we expect the recent strengthening of US dollar to continue for a while longer. This stronger for a longer view on the US dollar is driven by some familiar drivers to what we witnessed in 2023, but with a little bit of nuance. So first, growth. US growth, while slowing, is expected to outperform consensus expectations and remain near potential growth rates in the first half of 2024. This is going to contrast quite sharply with recessionary or near recessionary conditions in Europe and pretty uncompelling rates of growth in China. The second reason we see continued dollar strength is rate differentials. So when we look at our US and European rate strategy teams forecasts, they have rates moving in favor of the dollar. Final reason is defense, really. The dollar likely is going to keep outperforming other currencies around the world due to its pretty

As global growth takes a hit and inflation begins to cool, how does the road ahead look for central banks and investors? Chief Fixed Income Strategist Vishy Tirupattur hosts a roundtable with Chief Economist Seth Carpenter and Chief U.S. Equity Strategist Mike Wilson to discuss.----- Transcript -----Vishy Tirupattur:  Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today on the podcast we'll be hosting a very special roundtable discussion on what is ahead for the global economy and markets by 2024. I am joined by my colleagues, Seth Carpenter, Global Chief Economist and Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist. It's Monday, November 13th at 9 a.m. in New York. Vishy Tirupattur: Thanks to both of you for taking the time to talk. We have a lot to cover, so I am going to go right into it. Seth, I want to start with the global economy. As you look ahead to 2024, how do you see the global economy evolving in terms of growth, inflation and monetary policy? Seth Carpenter: Thanks, Vishy. As we look forward over the next couple of years, there are a few key themes that we're seeing in terms of growth, inflation and monetary policy. First, looks like global growth has stepped down this year relative to last year and we're expecting another modest step down in the global economy for 2024 and into 2025. Overall, what we're seeing in the developed market economies is restrictive monetary policy in general restraining growth, whereas we have much more mixed results in the emerging market world.Inflation, though, is a clear theme around the world. Overall, we see the surge in inflation. That has been a theme in global markets for the past couple of years as having peaked and starting to come down. It's coming down primarily through consumer goods, but we do see that trend continuing over the next several years. That backdrop of inflation having peaked and coming down along with weaker growth means that we're setting ourselves up for overall a bit of an easing cycle for monetary policy. We are looking for the Fed and the ECB each to start an easing cycle in June of this year. For the Fed, it's because we see growth slowing down and inflation continuing to track down along the path that we see and that the Fed will come around to seeing. I would say the stark exception to this among developed market economies is the Bank of Japan. We have seen them already get to the de facto end of yield curve control. We think by the time we get to the January policy meeting, they will completely eliminate yield curve control formally and go from negative interest rate policy to zero interest rate policy. And then over the course of the next year or so, we think we're going to see very gradual, very tentative increases in the policy rate for Japan. So for every story, there's a little bit of a cross current going on. Vishy Tirupattur: Can you talk about some of the vulnerabilities for the global economy? What worries you most about your central case, about the global economy? Seth Carpenter: We put into the outlook a downside scenario where the current challenges in China, the risks, as we've said, of a debt deflation cycle, they really take over. What this would mean is that the policy response in beijing is insufficient to overcome the underlying dynamics there as debt is coming down, as inflation is weak and those things build on themselves. Kind of a smaller version of the lost decade of Japan. We think from there we could see some of that weakness just exported around the globe. And for us, that's one of the key downside risks to the global economy. I'd say in the opposite direction, the upside risk is maybe some of the strength that we see in the United States is just more persistent than we realize. Maybe it's the case that monetary policy really hasn't done enough. And we just heard Chair Powell talk about the possibility that if inflation doesn't come down or the economy doesn't slow enough, they could do more. And so we built in an alternate scenario to the upside where the US economy is just fundamentally stronger. Let me pass it back to you Vishy. Vishy Tirupattur: Thank you Seth. Mike, next I'd like to go to you. 2023 was a challenging year for earnings growth, but we saw significant multiple expansion. How do you expect 2024 to turn out for the global equity markets? What are the key challenges and opportunities you see for equity markets in 2024? Mike Wilson: 2023 was obviously, you know, kind of a challenging year, I think, for a lot of equity managers because of this incredible dispersion that we saw between, kind of, how economies performed around the world and how that bled into company performance. And it was very different region by region. So, you know, first off, I would say US growth, the economic level was better than expected, better than the consensus expected

Investors whose corporate bond holdings have lost value in 2023 could sell before the end of the year, locking in their losses to offset gains elsewhere. Here are three reasons that they probably won’t.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, November 10th at 2 p.m. in London. One of the questions that's come up on my recent travels is the risk from so-called tax loss selling. Bonds of many stripes have had a tough year, and the concern would be that investors would like to sell now and crystallize any losses to offset other gains. Tax loss selling has been a recent driver of single stock performance, as often happens around this time of year, as noted by my colleague Michael Wilson, Morgan Stanley CIO and Chief U.S. Equity Strategist. But for corporate bonds, we think these risks look pretty modest. There are a few reasons why. First, while corporate bonds have had a tough year, the losses aren't particularly large and indeed have gotten a lot better in recent weeks, as yields have started to rally. US investment grade bonds or the U.S. aggregate bond index is plus or minus a couple of percentage points, and we're just not sure these are big enough losses for investors to take action. In equity markets, you generally need much larger drawdowns to generate year end tax selling. Second, the investor bases are different. Equity markets tend to see much more participation in individual stocks, which creates opportunities for tax loss harvesting. Investment credit, especially among individual investors, is more commonly done through funds, where the smaller drawdowns I just mentioned would mean less incentive to take action. These different investor bases also have different motivations. We think many individual investors, whether through funds or individual securities, invest in corporate bonds for a stable long term income. We think they're simply less likely to have the sort of trading mindset of the average investor holding stocks. Meanwhile, institutions who hold corporate bonds also face constraints. While some may sell for a capital gains offset, others face a penalty for realizing such a loss and thus are more incentivized to hold these securities they believe remain ultimately creditworthy. And for long dated corporate bonds, which have the largest year to date losses, well, those are certainly enjoying some of the strongest end-buyer demand. Finally, we think any tax related selling we do see in the credit market could wash at the overall market level. Similar to equities, investors selling losers at year end don't necessarily drive down the market overall, as these funds are often recycled into other securities. And indeed, October through December, when tax loss selling usually occurs, are seasonally strong months for the equity market or the credit market. And we think a similar thing could happen in corporate bonds, where investors who do sell a corporate bond fund for a tax loss may be likely to recycle this into another part of the bond market. Total returns for corporate bonds have been tough year-to-date, but we're skeptical that these would lead to tax loss selling and another like lower. The modest scale of year-to-date losses, the nature of the investor base and the potential for any such sales to be recycled into other parts of the market are all reasons why. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you.

Despite some falloff in consumer interest, anti-obesity drugs are still likely to have profound implications at both the macro and sectoral level.----- Transcript -----Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. Along with my colleagues, bringing you a variety of perspectives, today I'll give you an update on the all important obesity theme and how it's impacting a wide range of industries. It's Thursday, November the 9th at 2 p.m. in London. GLP-1s, a type of anti-obesity medicine, have been on the market since 2010, but it's taken until 2023 for this theme to really come to life. We believe that GLP-1s will clearly have profound implications over the long term, both on a macro and micro level. Obesity has far reaching implications for the global economy as it leads to lost productivity and significant health care costs. We estimate the macro impact of obesity at 3.6% of US GDP, with potentially $1.24 trillion in lost productivity indirect costs. Anti-Obesity drugs have the potential to address at least some of this economic burden and at a reasonable cost. The micro implications on businesses year-to-date have seen about a $600 billion swing in market cap. That includes, to the upside, $340 billion for the GLP-1 makers and over $260 billion lost in market value for the stocks that are potentially disrupted. For context, that compares to a total US drug market of $430 billion annually. 2023 saw an impressive surge in investor interest in anti-obesity drugs. Yet and perhaps surprising to some based on hashtag and web traffic data we track, consumer interest appears to have waned in recent weeks. We think this notable dip from the peak in activity is driven in part by supply constraints, paused geographic expansion and curtailed promotional activity. Importantly though, this fade in initial consumer excitement is occurring at the same time that company transcript mentions of obesity or GLP-1 by non-pharma companies are reaching new highs. This disconnect between sain street moderation and excitement versus Wall Street's rise in excitement, is very typical of short term hype cycle tops in equity markets, particularly given the current environment of higher interest rates. But even as the initial buzz around obesity drugs is fading back to more moderate levels in the near term, we do believe there will be wide ranging implications over the long term that are hard to deny. And our global analysts have been all over this on a sector by sector basis. First off, we believe that US alcohol beverages per capita will correct due to abnormally high consumption in recent years and longer term structural challenges such as demographic, health and wellness. For beer growing adoption of obesity medication presents an incremental risk factor to consumption, although many of these companies are already working on healthier options. Across packaged foods, patients on anti-obesity medications have been cutting back the most on foods high in sugar and fat, such as confections, baked goods, salty snacks, sugary drinks and alcohol. Companies with a weight management or better for you portfolio appear to be better positioned for here. Within US food retail, we think dollar stores which target lower end consumers with outsized exposure to high calorie foods, will be the most adversely impacted in the context of increased adoption of these drugs. Separately, insulin pump makers should be only minimally impacted, we think, by GLPs by 2027, which suggests that the share price reaction to the downside for these stocks year-to-date may be materially overdone. Obesity has a direct impact on osteoarthritis, with about twice the prevalence of arthritis in obese versus non obese patients. A much higher need for arthroplasty with higher BMIs and obese patients having higher surgical complications. GLP-1 usage could have some complex effects on these ortho stocks. We also see longer term risk for most of the US and European fast food industry. The same goes for carbonated sugary drinks and for chocolate lovers out there, the rising GLP-1 adoption could pressure chocolate consumption longer term. But the magnitude of these impacts remains uncertain, as indulgence will still remain a core consumer need even in this new GLP-1 paradigm. All in all, we remain bullish on the anti-obesity drug market, particularly given the staggering 750 million people globally living with obesity, and this continues to be a dynamic space for investors to watch closely. Thanks for listening. If you enjoyed this show, please leave a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today.

The recent treasury rally signals that perhaps the U.S. fiscal trajectory isn't as challenging as bond investors had feared.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of U.S. fiscal policy on markets. It's Wednesday, November 8th at 10 p.m. in New York. As Congress gets back to work on funding the government and avoiding a government shutdown, investors' attention has turned back to public finances. In particular, as bond markets sold off much of the year, a common theory posited by clients to our team was that U.S. fiscal policy was to blame. Expanding deficits meant higher supply and could also mean higher inflation, growth and ultimately a higher peak Fed funds rate. But upon closer examination, maybe the U.S. fiscal trajectory isn't as challenging as feared, and the bond market may be finally noticing. Treasuries have rallied in the past week. Which makes sense to us as our assessment is that U.S. fiscal expansion at all levels has either peaked or is near its peak. Consider that the federal deficit this year rose largely based on lower revenues driven by factors that are unlikely to repeat. For example, Fed remittances zeroed out, and there's about $85 billion of deferred collection of tax revenue due to natural disasters. Together with other factors, we think this year's nearly 1% growth in deficits as a percentage of GDP will be followed next year by a decline of about 0.2%. Further downside is possible if a spending sequester kicks in, in April. Also, consider that major deficit expansion isn't likely to be on Congress's agenda. Between now and the 2024 election, there's little reason to expect deficit expanding bills beyond the current baseline. Government control is divided, and history shows that makeup rarely does fiscal expansion unless it's responding to an economic crisis. After Election Day, Republicans and Democrats do have deficit additive policies they say they want to pursue, but the numbers are relatively modest. Republicans' plan to extend parts of prior tax cuts would add about 0.3% to deficits as a percentage of GDP in the first year, and we estimate the consensus tax and spending plans of Democrats would add about 0.1%, both manageable numbers. Also worth noting is that state and local governments seem near their peak fiscal expansion. Their recent expansion appears tied to spending of prior COVID aid, which is quickly depleting, as well as hiring, which is nearly back to pre-COVID levels. So bottom line, if you're concerned about Treasury yields resuming their upward trend, look elsewhere for a catalyst. Consumption would be the most likely culprit but at the moment, our economists are still seeing downside there in the near term. This gives us confidence that the worst of U.S. government bond returns is probably behind us for this cycle. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show.

AI could help video game companies boost engagement and consumer spending, but could also introduce competition by making it easier for new companies to enter the industry.----- Transcription -----Welcome to Thoughts on the Market. I'm Matt Cost from the Morgan Stanley US Internet Team. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss how A.I could change the video game industry. It's Tuesday, November 7th at 10 a.m. in New York. New A.I tools are starting to transform multiple industries, and it's hardly a surprise that the game industry could see a major impact as well. As manual tasks become more automated and the user experience becomes increasingly personalized, A.I. tools are starting to change the way that games are made and operated. Building video games involves many different disciplines, including software development, art and writing, among others. Many of these processes could become more automated over time, reducing the cost and complexity of making games and likely reducing barriers to entry. And since we expect the industry to spend over $100 billion this year building and operating games, there's a significant profit opportunity for the industry to become more efficient. Automated content creation could also offer more tailored experiences and purchase options to consumers in real time, potentially boosting engagement and consumer spending. Consider, for example, a game that not only makes offers when a consumer is most likely to spend money, but also generates in-game items designed to appeal to that specific person's preferences in real time. Beyond A.I generated content, we also need to consider the impact of user generated content. Some popular titles already depend on the users to shape the game around them, and this is another core area that could be transformed by A.I.. Faster and easier to use content creation tools could make it easier for games to tap into the creativity of their users. And as we've seen with major social platforms, relying on users to create content can be a big opportunity. With all that said, these transformational opportunities create downside risk as well. Today's large game publishers rely on their scale and domain expertise to differentiate their products from competitors. But while new A.I. tools could make game development more efficient, they could also lower barriers to entry for new competitors to jump into the fray and put pressure on the incumbents. Another risk is that A.I. tools could fail to drive the hope for efficiencies and cost savings in the first place. Not all technology breakthroughs in the past have helped the industry become more profitable. In some cases, industry leaders have decided to reinvest cost savings back into their products to make sure that they deliver bigger and better games to stay ahead of the competition. With that in mind, the biggest challenge for today's industry leaders could be making sure that they find ways to differentiate their products as A.I. tools make it easier for new firms to compete. Where does all of that leave us? Although a number of A.I. tools are already being used in the game industry today, adoption is just beginning to tick up and there's a lot of room for the tools to improve. With that in mind, we think we're just on the cusp of this A.I. driven revolution, and we may have to get through a few more castles to find the princess. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

Last week’s uptick in stock prices, driven by a pullback in bond yields and the Fed’s decision to hold rates steady, is likely to fizzle over the coming weeks.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, November 6th, at 10 a.m. in New York. So let's get after it. With many stocks down more than 20% from the July highs, a dynamic punctuated by tax loss selling from institutional managers at the end of October, equity markets were primed for some kind of a bounce. However, last week's rally in equities was the largest that we've seen all year, and it was led by many of the year-to-date laggards. Furthermore, both market cap and equal weight versions of the S&P 500 index were up 5.9%, as breadth showed its first signs of life since June. In our view, this move in equities was more about the strong rally in bonds than anything else. After an historic rise this past quarter, ten year Treasury yields reached an attractive level of 5% near the end of last month. Perhaps even more attractive for investors to ignore was that real ten year yields were at 2.5%. One factor driving bond yields lower last week was the Treasury's announcement of its planned longer term securities issuance that was below expectations. We also attribute the move to the weaker than expected economic data releases last week, more specifically, manufacturing and services purchasing manager surveys fell by much more than expected. The labor market data also showed further signs of cooling. Specifically, continuing jobless claims are now up more than 35% from the cycle trough, and the unemployment rate is now up 0.5% from the lows, both of these are important thresholds in past labor cycles. Finally, revisions to prior non-farm payroll data have consistently been negative this year, while the Household Labor survey indicated we lost 348,000 jobs last month. Given the absolute level of yields in a slowing growth and inflation backdrop, bonds may finally be attracting larger asset owners and allocators. Meanwhile, earnings revision breadth remains well into negative territory, with the big growth stocks earnings results providing only modest stability to this important leading indicator. This year's earnings recession continues to play out, particularly at the stock level. This is one reason why broader indices and the average stock's performance within the S&P 500 have been so much weaker than the very concentrated market cap weighted S&P 500 index this year. From a tactical perspective, the underlying performance breadth remains weak, while several broader and equal weighted indices remain flat on the year, with elevated volatility. A challenging risk reward set up in the context of 5% plus risk free yields that are currently available in money markets and T-bills. Yet the number one question we continue to get is whether there will be a rally into year end. For equity only asset managers, that's an important question and debate, but for asset owners and allocators, the prospect of adding additional equity risk at current levels seems unattractive given these other alternatives. The bottom line, we think the strong rally in rates drove stocks higher last week. Bulls have interpreted this move as a signal the Fed is done hiking rates and is likely to cut next year without any material deterioration to the labor market or some other negative event for growth. In contrast, we believe that the rate decline was mainly a function of less than expected, longer dated bond issuance guidance from the Treasury combined with some signs that the economy is slowing from the torrid pace of the third quarter. This is in line with our economists' tepid forecast for the fourth quarter and 2024 GDP growth and supports our view that the earnings recession is not yet over. Such an outcome suggests last week's rally should fizzle out over the coming week or two as it becomes clear the growth picture does not support either Fed cuts or a significant acceleration in EPS growth in the near term. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show. 

As the majority of the stress from higher rates falls on weaker borrowers, investors should consider moving up in quality.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, November 3rd at 2 p.m. in London. Downgrades in the loan market are moderating after a spike in 2022. That's good news overall, but still suggests an environment that will reward a higher quality bias in high yield investing. After rising throughout last year, net downgrade activity for U.S. leveraged loans, which represent corporate loans to below investment grade borrowers, have declined about 50%. The most extreme downgrades where issuers fall to a triple C rating, have moderated the most, while triple C upgrades have become more frequent, as companies have successfully refinanced upcoming debt. Fewer net downgrades, and especially less movement into this riskiest triple C cohort, is good news. And we think it's consistent with the idea that despite a near doubling of borrowing costs over the last two years, default rates will only rise to about average levels and not something higher and more alarming. But within this activity, we think there's also a message, the majority of the stress from those higher rates is falling on weaker borrowers. Investors should look to move up in quality. Why do we think this? When interest rates rise, the impact on borrowers happens gradually, rather than all at once, since borrowers are still likely to have some debt outstanding that was taken out when rates were lower. That means that today's financial metrics and ratings may still not fully reflect the impact of the unusually fast rise in borrowing costs. That still to come impact, could fall most heavily on loan issuers rated B3/B-, the last step above the lowest triple C tier. My colleagues Vishwas Patkar and Joyce Jiang of the U.S. Credit Strategy team estimate that by the end of this year, over 1/3 of these issuers could have an interest coverage ratio, which represents the ratio of your cash flow to your borrowing costs, below 1.3x, even if their earnings are flat. In a scenario where growth is even weaker this year, that share would be even higher. And despite these low single B's facing the most risk from higher borrowing costs, in our view, markets aren't charging a particularly large premium to avoid them. The extra spread that an investor gets from moving down to a B- credit from the notches above, is near the lowest of the last ten years. And our up and quality bias isn't just about playing defense, as higher rated issuers are generally seeing better ratings transition trends. Double B rated credits are posting more upgrades than downgrades and outperforming lower rated single B's or triple C's. And even higher rated triple B credits are posting an even larger volume of upgrades relative to downgrades over the last 12 months. Ratings actions are stabilizing and suggest extreme outcomes for default rates are likely to be avoided. But given fundamentals and pricing, moving up in quality still makes sense. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen and leave us a review. We'd love to hear from you. 

Generative AI could transform the nature of work and boost productivity, but companies and governments will need to invest in reskilling.----- Transcript -----Stephen Byrd: Welcome to Thoughts in the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research. Seth Carpenter: And I'm Seth Carpenter, the Global Chief Economist. Stephen Byrd: And on the special episode of the podcast, we'll discuss how generative A.I. could reshape the US economy and the labor market. It's Thursday, November 2nd at 10 a.m. in New York. Stephen Byrd: If we think back to the early 90's, few could have predicted just how revolutionary the Internet would become. Creating entirely new professions and industries with a wide ranging impact on labor and global economies. And yet with generative A.I. here we are again on the cusp of a revolution. So, Seth, as our global chief economist, you've been assessing the overarching macro implications of the Gen A.I. phenomenon. And while it's still early days, I know you've been thinking about the range of impacts Gen A.I could have on the global economy. I wondered if you could walk us through the broad parameters of your thinking around macro impacts and maybe starting with the productivity and the labor market side of things? Seth Carpenter: Absolutely, Stephen. And I agree with you, the possibilities here are immense. The hardest part of all of this is trying to gauge just how big the effects might be, when they might happen and how soon anyone is going to be able to pick up on the true changes and things. But let's talk a little bit about those two components, productivity and the labor market. They are very closely connected to each other. So one of the key things about generative A.I is it could make lots of types of processes, lots of types of jobs, things that are very knowledge base intensive. You could do the same amount of work with fewer people or, and I think this is an important thing to keep in mind, you could do lots more work with the same number of people. And I think that distinction is really critical, lots of people and I'm sure you've heard this before, lots of people have a fear that generative A.I is going to come in and destroy lots of jobs and so we'll just have lots of people who are out of work. And I guess I'm at the margin a lot more optimistic than that. I really do think what we're going to end up seeing is more output with the same amount of workers, and indeed, as you alluded to before, more types of jobs than we've seen before. That doesn't exactly answer your question so let's jump into those broad parameters. If productivity goes up, what that means is we should see faster growth in the economy than we're used to seeing and I think that means things like GDP should be growing faster and that should have implications for equities. In addition, because more can get done with the same inputs, we should see some of the inflationary pressures that we're seeing now dissipate even more quickly. And what does that mean? Well, that means that at least in the short run, the central bank, the Fed in the U.S., can allow the economy to run a little bit hotter than you would have thought otherwise, because the inflationary pressures aren't there after all. Those are the two for me, the key things one, faster growth in the economy with the same amount of inputs and some lower inflationary pressures, which makes the central bank's job a little bit easier. Stephen Byrd: And Seth, as you think about specific sectors and regions of the global economy that might be most impacted by the adoption of Gen A.I., does anything stand out to you? Seth Carpenter: I mean, I really do think if we're focusing just on generative A.I, it really comes down, I think a lot to what can generative A.I do better. It's a lot of these large language models, a lot of that sort of knowledge based side of things. So the services sector of the economy seems more ripe for turnover than, say, the plain old fashion manufacturing sector. Now, I don't want to push that too far because there are clearly going to be lots of ways that people in all sectors will learn how to apply these technology. But I think the first place we see adoption is in some of the knowledge based sectors. So some of the prime candidates people like to point to are things like the legal profession where review of documents can be done much more quickly and efficiently with Gen A.I. In our industry, Stephen in the financial services industry, I have spoken with clients who are working to find ways to consume lots more information on lots of different types of firms so that as they're assessing equity market investments, they have better information, faster information and can invest in a broader set of firms than they had before. I really look to the knowledge based sectors of the economy as the first target. You know, so that Stephen is mostly how I'm thinking about it, but one of

Investors are questioning whether a new U.S. Speaker in the House of Representatives will push for fresh legislation, and whether a potential government shutdown is on the horizon.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact to markets from Congress's agenda. It's Wednesday, November 1st at 10 a.m. in New York. Last week in D.C., following a few weeks of Republicans failing to coalesce around a nominee, the House of Representatives chose a speaker, Republican Mike Johnson. So, with a new speaker in place, does that mean investors need to rethink their expectations about legislation that could impact markets? Not exactly. At least not before the next presidential election. Here's three takeaways from us to keep in mind. First, a new speaker doesn't mean new momentum for most of the legislation that investors tell us they care about. For example, fresh regulations for social media or cryptocurrency are no closer as a result of having a new speaker. Those are issues both parties are keen to tackle but are still working out exactly how they'd like to tackle them. Second, a government shutdown still remains a possibility. Speaker Johnson has said avoiding a shutdown is a priority for him, stating he would allow a vote on another stopgap spending measure to give Congress more time to agree on longer term funding levels. But such a stopgap measure could also reflect that House Republicans haven't yet solved for their own internal disagreement on key funding measures, such as aid for Ukraine. If that's the case, then a shutdown later this year or early next year remains a possibility. And, while on its own, a brief shutdown wouldn’t meaningfully affect the economy, markets will reflect a higher probability of weaker growth on the horizon, particularly as failure to agree on longer term funding would put in play an automatic government spending cut under current law. Third and finally, military aid and funding is likely to be a source of intense debate in Congress but we still expect defense spending to rise, supporting the aerospace and defense sectors in the equity market. Two factors give us comfort here. First, the Fiscal Responsibility Act, which was the bill that was passed to raise the debt ceiling, also laid out multi-year government spending targets that include an increase in defense spending. Being already passed by Congress, we expect this is the template they'll work within. Second, while a sufficient minority of the House Republican caucus is skeptical of further aid to Ukraine, such aid enjoys broader bipartisan support across all of Congress. So we expect any spending bill that makes its way through Congress is likely to have that aid. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show.

With mortgage rates at their highest level in 20 years, housing affordability may deteriorate to levels not seen in decades.----- Transcript -----Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-Head of Securitized Products Research here at Morgan Stanley. Jay Bacow: And I'm Jay Bacow, the other Co-Head of Securitized Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing U.S. home prices. It's Tuesday, October 31st at 11 a.m. in New York. Happy Halloween. Jay Bacow: Jim. Mortgage rates are close to 8%. They haven't been this high since the year 2000. Now, you've pointed out in this podcast before, home prices have been incredibly resilient. So what is this combination of mortgage rates being at the highs over the last 20 years versus resilient home prices mean for housing affordability? Jim Egan: Well, not good. Now, one of the statements that you and I have made on prior episodes of this podcast is that affordability remains incredibly challenged. But at least throughout the first half of 2023, it really wasn't getting any worse. If mortgage rates stay at these levels, we can no longer make the second half of that statement. In fact, affordability deterioration would return to the most severe that we've seen in decades, 2022 experience notwithstanding. Jay Bacow: Okay. But what does that mean for the housing market? You know, at first blush, it doesn't sound great, but we've done a lot of these podcasts, and the story that you're talking about sounds kind of similar to what we saw last year in 2022. Home sales and housing starts could fall, but home prices would remain protected as homeowners are effectively locked in to their current low mortgage rate and there's not a lot of for sellers. Jim Egan: Those dynamics certainly continue to play a role in our thinking. But in our view, with mortgage rates at these levels, that requires us to think about both the short term impacts but also the longer term impacts if we were to stay here. Jay Bacow: All right, Jim, you said shorter term first. So what do we think happens in the near future? Jim Egan: Basically, what you just described, look, the immediate reaction to the recent climb in mortgage rates has been on the supply side. Existing listings have begun falling again, as of August we can now say that we have the fewest listings on record, controlling for time of year, the housing market is very seasonal and homebuilder confidence has also retreated. Now it increased in every single month of 2023 from January through July. In the past three months, it's down over 30% from that peak, and the NAHB attributes a lot of this u-turn to higher mortgage rates. At least when it comes to home prices, we think that the impact from these renewed decreases in the supply of homes is going to have a greater impact on prices than any decrease in demand. In fact, that did cause us to move our home price forecast a couple of months ago. We were flat at the end of this year and again, we're saying short term, this is October, the end of this year is pretty close. Our bull case was plus five. We're not moving all the way to that plus five, but we're moving towards that plus five from our 0% base case. Jay Bacow: All right. So over the next few months, you're a little bit more constructive on home prices, but people own homes for many years. So longer term, what do you expect the outlook to be? Jim Egan: Well, the answer there is, you know, more predicated on how long mortgage rates stay at these levels. We do think that a higher for a longer environment requires a different outlook today than it did in late 2021 and early 2022, and there are a number of reasons for that, but I think one of the bigger ones, Jay, is kind of the distribution of outstanding mortgage rates today. What does that look like? Jay Bacow: The average outstanding mortgage rate today is roughly three and 5/8%. But if you look at the distribution of homeowners, because we spent basically all of 2020 and 2021 at really low mortgage rates and many homeowners were stuck in their house, they spent a lot of time refinancing. And so there isn't that many mortgages that have a much higher rate than that. And so if we look at, for instance, the universe of mortgages between 7% and 8%, that's less than 2% of the outstanding mortgages. Jim Egan: And this is an important point, because not that many borrowers are falling out of the money with this move, we don't think that supply is going to see the sharp, sharp drops that we experienced throughout 2022. There's also some level of transaction volumes that need to take place regardless of economic incentive. If we look at home sales versus the stock of own homes is one example here. We're already at the lows from the great financial crisis. So instead of sharp declines in home sales moving forward, we think it's more accurate to describe a higher for a longer rate env

As we head into the end of the year, investors are again worrying about the impact that higher interest rates will have on growth.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, October 30th at 10 a.m. in New York. So let's get after it. 2023 has been a year of big swings for stock investors. Coming into the year, the consensus agreed that domestic growth is going to disappoint as recession risk appeared much higher than normal. The primary culprit was the record setting pace of tightening from the Federal Reserve and other central banks in 2022. In addition to this concern, earnings for the mega-cap leaders had disappointed expectations during the second half of 2022. As a result, sentiment was low and expectations about a recovery were pessimistic. Stocks had reflected some of that pessimism, even though they had rallied about 10% from the October '22 lows.The other distinguishing feature of the consensus view at the beginning of the year is that the bullish pitch was predicated on a Fed pivot and China's long awaited reopening from its lengthy pandemic lockdowns. This meant that many investors were overweight banks, industrials and commodity oriented stocks like energy and materials and longer duration bonds rather than mega-cap growth stocks. Such positioning could not have been worse for what has transpired this year. Domestic economic growth and interest rates have surprised on the upside, keeping the Fed more hawkish on its rate policy while commodity prices have been weak due to disappointing global economic growth despite China's reopening. The regional bank failures in March spurred a different kind of pivot from the Fed, as they decided to reverse a good portion of its balance sheet reduction when it bailed out the uninsured deposits of these failing institutions. That liquidity injection spurred a big rally in companies with the highest quality balance sheets. Newfound excitement then around artificial intelligence provided another reason for mega-cap growth stocks to trade so well since the March lows. This summer, that rally tried to broaden out as investors began to think artificial intelligence may save us from the margin squeeze being felt across the economy, especially smaller cap companies that don't have the scale or access to capital to thrive in such a challenging environment to grow profits. But now, even the higher quality mega-cap growth stocks are suffering. Since reporting second quarter earnings, these stocks are lower by 12% on average. Third quarter earnings were supposed to reverse these new down trends, but last week that didn't happen. Instead, most of these company stocks traded lower, even though several of them posted very strong earnings results. In our experience, this is a bearish signal for what the market thinks about the business and earnings trends going into 2024. In other words, the market is suggesting earnings expectations are too high next year, even for the best companies. Our take is that given the significant weaknesses already apparent in the average company earnings and the average household finances, we think it will be very difficult for these mega-cap companies to avoid these headwinds too, given these small companies and households are their customers. Finally, with interest rates so much higher than almost anyone predicted six months ago, the market is starting to call into question the big valuations at which these large cap winners trade. From our perspective, it appears that 2023 is coming full circle, with markets worrying again about the impact that higher interest rates will have on growth rather than just valuations. The delayed impact and reaction on the economy is normal, but once it starts, it's hard to reverse. While we were early and wrong in calling for this outcome in the spring, we think it's now upon us. For equity investors, what that really means is that this year is unlikely to see the typical fourth quarter rally. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

Corporate credit continues to outperform other class assets, due in part to U.S. economic growth in the third quarter.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, October 27, at 2 p.m. in London. Credit has a reputation of being the scouts of financial markets, sniffing out and detecting danger well ahead of others. In 2000, 2007 and 2011, to name a few, credit markets started to weaken well before other asset classes in flagging danger. The Federal Reserve used credit spreads as one of their most important measures of financial stress. While we’d like to think that this is because credit investors are smarter than their peers, a more realistic answer lies in the nature of the asset class. Because credit offers a generally limited premium if things go right, relative to larger losses if things go wrong, credit investors are often incentivized to price in a rising probability of danger early. And so it's notable that amidst the current market weakness, credit is pretty well behaved, with benchmark spreads on U.S. investment grade credit roughly unchanged since October 3rd. Credit is very much a passenger, not a driver, of the proverbial financial market bus that in recent weeks has been swaying back and forth. We think credit continues to be a relative outperformer across assets, and for that to be true, two things need to continue. First, credit is very sensitive to the likelihood of a deep recession. Recent data has been good, with the U.S. economy growing a whopping 4.9% in the third quarter. While our US economists expect slower growth in the fourth quarter, we think a generally stronger than expected U.S. economic story has, and should continue to be, helpful to corporate credit. Second, credit has managed to avoid some of the bigger headaches surrounding other asset classes. Credit valuations are less expensive and closer to average than U.S. equity markets. Credit is less sensitive to volatile interest rates and enjoys a more stable base of demand than U.S. mortgages. And the outlook for future supply in corporate bonds looks lower than, say, U.S. Treasury bonds, as companies are starting to react to higher rates by borrowing less. Credit has a well-deserved history as an early warning signal for markets. But for now, we think it is better to view it as a financial markets passenger. Government bond yields and earnings are in the driver's seat and are much more likely to be important for driving overall direction. For now, we think this can suit credit just fine and continue to expect it to be a relative outperformer. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen and leave us a review. We'd love to hear from you. 

With China at risk of falling into a debt deflation loop, lessons from Japan's deflation journey could provide some insight.----- Transcript -----Daniel Blake: Welcome to Thoughts on the Market. I'm Daniel Blake from the Morgan Stanley Asia and Emerging Market Equity Strategy Team. Laura Wang: And I'm Laura Wang, Chief China Equity Strategist. Daniel Blake: And on this special episode of the podcast, we'll discuss what lessons Japan's deflation journey can offer for China. It's Thursday, October 26th at 10 a.m. in Singapore and Hong Kong.  Daniel Blake: So in the period from 1991 to 2001, known as Japan's lost decade, Japan suffered through a prolonged economic stagnation and price deflation. While the corporate sector stopped deleveraging in the early 2000’s. It wasn't until the Abenomics program, introduced under Prime Minister Shinzo Abe in 2013, that Japan emerged from deflation and started the process of a gradual recovery in corporate profitability. China's economic trajectory has been very different from Japan's over the last 30 years, but we now see some parallels emerging. Indeed, the risk of falling into a Japanese style stagnation is becoming more acute over the past year as a deep cyclical downturn in the property sector combines with the structural challenge that our economists call the 3D journey of debt, demographics and deflation. So, Laura, before we dig into the comparison between China and Japan's respective journeys to set the stage, can you give us a quick snapshot of where China's equity market is right now and what you expect for the rest of the year? Laura Wang: Sure, Daniel. China market has been through a quite volatile ten months so far this year with a very exciting start given the post COVID reopening. However, the strong macro momentum didn't sustain. Property sales is still falling somewhere between 30 to 50% each month on a year over year basis. And challenges from local government debt issue and early signs of deflationary pressure suggest that turn around for corporate earnings growth could still take longer to happen. We had downgraded China within the global emerging market context at the beginning of August, mainly out of these concerns, and we think more patience is needed at this point. We would like to see more meaningful easing measures to stimulate the demand and help reflate the economy, as well as clear a road map to address some of the structural issues, particularly around the local government debt problem. In contrast to China, Japan's equity market is very strong right now, and Morgan Stanley's outlook continues to be bullish from here. So, Daniel, why is it valuable to compare Japan's deflationary journey since the 1990s and China's recent challenges? What are some of the bigger similarities? Daniel Blake: I think we'll come back to the 3D's. So on the first to them, on debt we do have China's aggregate total debt around 290% of GDP. So that compares with Japan, which was about 265% of GDP back in 1990. So this is similar in the sense that we do have this aggregate debt burden sitting and needs to be managed. Secondly, on demographics, we've got a long expected but now very evident downturn in the share of the labor force that is in working age and an outright decline in working age population in China. And this is going to be a factor for many years ahead. China's birth rate or total number of births is looking to come down to around 8 million this year, compared with 28 million in 1990. And then a third would be deflation. And so we are seeing this broaden out in China, particularly the aggregate GDP level. So in Japan's case, that deflation was mainly around asset price bubbles. In China's case, we're seeing this more broadly with excess capacity in a number of industrial sectors, including new economy sectors. And then this one 4th D which is similar in both Japan's case and China now, and that's the globalization or de-risking of supply chains, as you prefer. When we're looking at this in Japan's case, Japan did face a more hostile trade environment in the late 1980s, particularly with protectionism coming through from the US. And we've seen that play out in the multipolar world for China. So a number of similarities which we can group under 4D's here. Laura Wang: And what are some of the key differences between Japan/China? Daniel Blake: So the first key difference is we think the asset price bubble was more extreme in Japan. Secondly, in China, most of the debt is held by local governments and state owned enterprises rather than the private corporate sector. And thirdly, China is at a lower stage of development than Japan in terms of per capita incomes and the potential for underlying growth. So, Laura, when you're looking ahead, what would you like to see from Chinese policymakers here, both in the near term as well as the longer term? Laura Wang: As far as what we can observe, Chinese policymakers has alre

The rise in Treasury yields, among other factors, has caused significantly tighter financial conditions. If these conditions slow growth in the fourth quarter, another rate hike this year seems unlikely.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues, bringing you a variety of perspectives, I will be talking about the implications of the continued selloff in the Treasury market. It's Wednesday, October 25th at 10 a.m. in New York. The grueling selloff in U.S. treasuries that began in the summer continues, most notably in the longer end of the yield curve. The ten year Treasury yield breached 5% on Monday, a level not seen since 2007 and an increase of about 125 basis points since the trough in July. Almost all of this move higher in the ten year yield has occurred in real yields. In our view, the Treasury market has honed its reaction to incoming data on the hawkish reaction function that the FOMC communicated in its September meeting, which was subsequently reiterated by multiple Fed speakers. Over the last several weeks, the asymmetry in the market's reaction to incoming data has been noteworthy. Upside surprises growth have brought up sharp increases in long end yields, while downside surprises inflation have met with muted rallies. To us, this means that for market participants, upside surprises to growth fuel doubts whether the pace of deceleration inflation is sustainable. In this context, it is no surprise that upside growth surprises have mattered more to long in yields than downside inflation surprises. We've indeed seen a spate of upside surprises. The 336,000 new jobs in the September employment report were nearly double the Bloomberg survey of economists. Month over month changes in retail sales at 0.7% were more than double the consensus expectation of about 0.3%, and triple if you exclude auto sales. We saw similar upside surprises in industrial production, factory orders, building permits as well. The rise in Treasury yields has further implications. The spike has contributed significantly to tighter financial conditions. As measured by Morgan Stanley Financial Conditions Index, conditions have tightened by the equivalent of about three 25 basis point hikes in the policy rate since the September FOMC meeting. As Morgan Stanley's Chief Global Economist Seth Carpenter highlighted, the implications of tighter financial conditions for growth and inflation depend critically on whether the tightening is caused by exogenous or endogenous factors. A persistent exogenous rise in rates should slow the economy, requiring the Fed to adjust the path of policy rates lower over time to offset the drag from higher rates. If instead, the higher rates on an endogenous reaction, reflecting a persistently stronger economy driven by more fiscal support, higher productivity or both, the Fed may not see the need to adjust its policy path lower. We lean towards the formal explanation, than the latter. In our view, it is unlikely that the third quarter strength in growth will persist. In fact, third quarter consumer spending benefited from large one off expenditures. Combine that with the expiration of student loan moratorium, we think will weigh heavily on real personal consumption in the fourth quarter and by extension, on economic growth. Tighter financial conditions driven by higher long end yields will only add to this drag. Therefore, we expect incoming data in the fourth quarter to show decelerating growth, which we expect will lead to a reversal of the recent yield spikes driven by term premiums moving lower. The subtle shift in the tone of Fed speak over the past two weeks suggests a similar interpretation, indicating a waning appetite for an additional hike this year in the wake of tighter financial conditions while retaining the optionality for future hikes. They think that the yield curve is doing the job of the Fed. This jibes with our view that there will be no further rate hikes this year. While our conviction on fourth quarter growth slowdown is strong, it will take time to become evident in the incoming data. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

As the U.S. Federal Reserve keeps rates elevated, investors are selling off bonds in anticipation of new issues with higher yields, triggering a historic rout in the world's biggest bond markets.----- Transcript -----Welcome to Thoughts on the Market. I'm Matthew Hornbach, Morgan Stanley's Global Head of Macro Strategy. Along with my colleagues, bringing you a variety of perspectives, today, I'll discuss the ongoing U.S. Treasury bond market route. It's Tuesday, October 24th, at 10 a.m. in New York. The world's biggest bond markets are in the midst of a historic route, and an increasing number of experts are referring to this as the deepest bond bear market of all time. Simply put, it works like this. When the central bank policy rate increases, investors' expectations for yields on bonds go up. This prompts investors to sell the bonds they currently own in order to buy newly issued ones that promise higher yields. So in this higher for longer interest rate environment, investors have been selling bonds, resulting in serious declines in bond prices and simultaneous surges in bond yields. In the U.S. Treasury market, which is considered the bedrock of the global financial system, the yield on the 30 year U.S. government bond recently hit 5% for the first time since 2007. German and Japanese bond yields are also reaching significantly elevated levels. Why does the turmoil in the bond market matter so much for consumers? For one thing, the yields on local government bonds impacts how banks priced mortgages. In the U.S. Specifically, mortgage rates tend to track the yield on ten year treasuries. Government backed mortgage provider Freddie Mac recently announced that the average interest rate on the 30 year fixed rate mortgage hit 7.3% in the week ending September 28th. That's the highest level since 2000. The ripple effects from the bond market route stretch further than mortgages. For instance, higher U.S. yields also means an even stronger U.S. dollar, which puts downward pressure on other currencies. The equity markets also can't escape the impact of higher bond yields. Those higher yields compete for money that might otherwise get invested in the stock market. As yields surged in September, the S&P 500 fell about 4.5%, despite relatively positive economic data. Against this backdrop, consensus explanations for the bond market sell off have been focusing on technical drivers, like U.S. Treasury market supply and investor positioning adjustments, as well as fundamental drivers, like fiscal sustainability concerns, Bank of Japan policy changes and stronger than expected growth. What surprises us is that the Fed rarely enters the discussion, specifically its reactions to data and its subsequent forward guidance. But we do believe the Fed's involvement is one of the major drivers behind the current bond market rout. Without the Fed's more hawkish reaction to recent growth and inflation data, other technical and fundamental drivers would not have contributed as much to higher Treasury yields, in our view. As things stand, markets will need to continue to come to grips with interest rates staying high. The U.S. economy remains resilient, despite still elevated inflation. Our U.S. economist now thinks the Fed's December Federal Open Market Committee meeting is a live meeting. The September U.S. Consumer Price Index and payrolls data met our economists' bar for a potential additional hike later this year. And so these most recent data releases make the next round of monthly data even more important, as policymakers deliberate what to do in December. And these decisions by the Fed will continue to have a significant impact on the bond market. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people find the show.

As investor sentiment recovers this month in anticipation of a strong year end, it’s important to acknowledge the factors that make this year’s fundamentals different.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, October 23rd at 10 a.m. in New York. So let's get after it. In our recent research, we’ve been arguing that the odds of a fourth quarter rally have fallen considerably. Our observations on narrowing breadth, cautious factor leadership, falling earnings revisions and fading consumer confidence tell a different story than the consensus view for a rally in the year end that's more centered on sentiment and seasonal tendencies. While we acknowledge that sentiment deteriorated in September, it's recovered this month on the expectation of seasonal strength in the year-end. In our view, the fundamental setup is different this year than normal, with earnings expectations likely too high for the fourth quarter and 2024. Meanwhile, both monetary and fiscal policy are unlikely to provide any relief and could tighten further. More specifically, while the Federal Reserve has not raised rates any further, it is likely far from cutting. Furthermore, the tightening the Fed has done over the past 18 months is just now starting to be felt across the economy. To that end, the stock market has taken notice with some of the more economic and interest rate sensitive sectors like autos, banks, transportation stocks, semiconductors, real estate and consumer durables significantly underperforming over the past three months. More recently, many defensive sectors and stocks have started to outperform with energy, which supports our late cycle view that the barbell of defensive growth plus late cycle cyclicals we've been recommending. In our view, this performance backdrop reflects a market that is incrementally more concerned about growth than higher interest rates. Even though the Fed has tightened monetary policy at the fastest rate in 40 years, it's confronted with sticky labor and inflation data that has prevented it from signaling a definitive end to the tightening cycle or when they will begin to ease policy. At the same time, the fiscal deficit has expanded to levels rarely seen with full employment. This is precisely why the Fed has indicated a higher for longer stance. In our view, the strength in the headline labor data masks the headwinds faced by the average company and household that the Fed can't proactively address. In addition to the performance deterioration and interest rate sensitive sectors, the breadth of the market continues to exhibit notable weakness. While some may interpret this as a bullish signal, meaning oversold conditions, we believe it's more a reflection of our longstanding view that we remain in a late cycle backdrop where earnings risk remain high. Further support for that view can be seen in earnings revision breadth, which is breaking lower again into negative territory. As another sign this negative revision breadth is an early warning for fourth quarter and 2024 earnings, stocks are trading very poorly post earnings reports whether they are good or bad. Third quarter earnings season is eliciting even weaker performance reactions than the 'sell the news' reaction during the second quarter earnings season. More specifically, the median next day price reaction is -1.6% thus far, versus -0.5% last quarter. We also note that the percentage of positive reactions is notably lower as well, at 38% versus 47% last quarter. With several of the megacap leaders reporting this week, this trend will need to reverse if the broader index is going to hold key tactical levels and rally in the year end as the consensus is now expecting. Instead, we think the S&P 500 price action into year end is more likely to mirror the average stock's performance rather than the average stock catching up to the market cap weighted index. Based on our fundamental and technical analysis, we remain comfortable with our 3900 year end price target for the S&P 500, which implies a very generous 17x multiple on our 2024 earnings per share forecast of approximately $230. Thanks for listening. If you enjoy Thoughts on the market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

Demographic changes are making women in the U.S. more powerful economic agents, driving spending and GDP.----- Transcript -----Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Along with my colleagues bringing you a variety of perspectives, today, I'll take a closer look at women's role in the economy and the impact they could have over the next decade. It's Friday, October 20th, at 10 a.m. in New York. Last week, Harvard economist Claudia Goldin won the Nobel Prize for her work identifying the causes of wage and labor market inequality. Not only is her work notable for its subject matter, it is also because Claudia is the first woman to win the Nobel in economics by herself. In other words, all of the credit goes to her. Golden's body of work has included the role of contraception in helping women with family and career planning, something we studied as well. The rise of what we have dubbed the "SHEconomy" is a topic we at Morgan Stanley Research first covered in 2019 and continue to follow closely. For some context. Today, women are having fewer children and earning more bachelor's degrees than men. The median marriage age for women has increased, as has the age at which we first start bearing children. These shifting lifestyle norms are enabling more women to work full time, which should continue to increase participation in the labor force among single females. In 2019, we estimated that the number of single women in the U.S. would grow 1.2% annually through 2030, and that compares with 0.8% for the overall population. Based on these calculations, by 2030, 45% of prime working age women will be single, the largest share in history. Now, data show that women outspend the average household and are the principal shoppers and more than 70% of households. So women are very powerful economic agents. They contribute an estimated $7 trillion to U.S. GDP per year. They are the breadwinners in nearly 30% of married households and nearly 40% of total U.S. households. In the last decade, single prime working age women from 30 to 34 years old have seen the most pronounced rise in female headship rates, and that's followed by 25 to 29 year olds. Now, if we look back as far as 1985, female homeownership as a share of total homeownership has risen from 25% to 50%. And our projection suggests that with rising female labor force participation and further closing of the wage gap, female homeownership should rise as well. So the profile of the average American woman is also changing, whereas the average American woman in 2017 was white, married and in her 50's, holding a bachelor's degree and employed in education or health services. We think that by 2030 she is more likely to be younger, single and a racial minority, holding a bachelor's degree and employed in business and professional services. Indeed, over the last several years, gender diversity, the male-female wage gap and women's role in the workplace have rightly been a key media and social topic and something that we at Morgan Stanley are very passionate about. And for women, these public discussions have set the stage for equality in areas like education, professional advancement, income growth and consumer buying power. We've come a long way, but it's important to underscore that more work remains to be done. Looking ahead, women are in a position to drive the economic conversation from both the inside as a workforce propelling company performance, and the outside as consumers powering discretionary spending and GDP. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

The automotive industry’s steady transition to “software-defined vehicles” could offer new entrants advantages against established incumbents.----- Transcript -----Lee Simpson: Welcome to Thoughts on the Market. I'm Lee Simpson, Head of Morgan Stanley's European Technology Hardware Team. Shaqeal Kirunda: And I'm Shaqeal Kirunda, from Morgan Stanley's European Autos Team. Lee Simpson: On this special episode of the podcast, we will discuss the evolution of autos in the direction of software defined vehicles. It's Thursday, 19th October at 10 a.m. in London. Lee Simpson: Cars are in the process of transforming from electromechanical terminals to intelligent mobile devices, and we think the emergence of software defined vehicles or SDVs, is a sign we're approaching the car smartphone moment. The migration to SDVs is part of a broader transformation in autos that could even redefine the economics of the car itself. The implications for this are deep and far reaching. So Shaqeal, what is an SDV and how is it different from most cars on the road today? Shaqeal Kirunda: Thanks Lee, so most people are aware of one of the global megatrends in autos to transition to electric vehicles, was less well understood as a transition to the software defined vehicle. An SDV can be defined as any vehicle that manages its operations or adds new functionality, mainly through software. What that actually means to the consumer is a car that features an operating system which is upgradable over the air, not just for apps and infotainment of a whole software upgrades, safety improvements and new functions such as autonomous driving. So for a future SDV, the functions will be defined by the software and not the hardware. This dynamic mirrors how we use apps and software in phones today. Lee, how does this change the whole architecture of the car? Lee Simpson: Yeah, I think computing needs to change. We've seen that in other devices before and here for the car, it's transitioning really from this distributed area of lots of independent microcontrollers or simple chips in the car,ix notes towards something a little more orchestrated or a centralized compute is perhaps the best way to think of this. Now, there will not be a set path. Different OEMs and different platforms will be built along different lines, a logical path, a physical rewiring path. Some will move through domain clusters, others will move to zonal compute. But in the end, the journey will be the same. We'll move to this sort of server on wheels type of architecture, at least from the point of view of compute. And along the way will introduce new players to the automotive space, those larger chip makers who are champions in the systems on CHIP or SOC environment today. And perhaps for them they'll be attracted to this perhaps large silicon TAM that we'll see in the car. We think perhaps $15 billion of extra semiconductor building materials by the end of the decade. So with that in mind, in essence, we think the evolution towards SDVs involves a decoupling of the hardware and software in a vehicle. So, Shaqeal, where are we in this complicated process right now? And what are some of the paths to the future? Shaqeal Kirunda: Interesting question. We're certainly seeing different rates of progress. The key distinction here is between legacy players and new market entrants. New market entrants have embraced the transition to both EVs and SDVs. Through this they can offer over the air upgrades and safety features as well as new functions, creating new software based revenue streams. Legacy manufacturers have taken note of the major transition they're facing, but as incumbents have taken slightly longer to put this into action. Whereas the new market entrants started from scratch, the incumbents are redesigning manufacturing processes they've been executing on for years. They are making progress however, the first newly designed software defined vehicles are scheduled to be released between 2024 and 2026. But if we take a step back for a moment, pandemic caused a major disruption to the semiconductor supply chains that are so central to the auto industry. How will the migrations to SDVs change the use of and reliance on auto related semiconductors? Lee Simpson: Well, I think from a reliance perspective, we've already seen that in cars. There's quite a considerable reliance on those microcontrollers we've mentioned already. But if anything, this will increase. And I think you'll see that a lot of the main consideration of how a car works running through this myriad of new semiconductor chips. I think the key consideration here, however, is this is a safety critical environment and this is not something that compute is normally structured for. If you take, for instance, the cloud or even your mobile phone, the consideration here is far different. Sometimes it's about performance as in the cloud. Sometimes it's about low power or power efficiency

In the continuing transition to a multipolar world, geopolitical uncertainty is on the rise and new government policies could rewire global commerce.----- Transcript -----Welcome the Thoughts on the Market. I'm Michael Zezas, Global head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of recent geopolitical tensions. It's Wednesday at 8 a.m. in New York. As tragedy continues to unfold in the Middle East, we continue, along with our clients, to care greatly about these events. And there's been no shortage of prognostication in the media about if the conflict escalates, how other countries might get involved, and what the effects would be on the global economy and markets. Not surprisingly, this has been the most common topic of discussion for me with clients this week. And as a strategist, who's practice relies on unraveling geopolitical complexities, what I can say with confidence is this: there's no obvious path from here, and so we need to be humble and flexible in our thinking. While that might not be the clear guidance you're hoping for, let me suggest that accepting this uncertainty can itself be clarifying. As we've discussed many times in our work on the transition to a multipolar world, geopolitical uncertainty has been on the rise for some time. Governments are implementing policies that support economic and political security and in the process, rewiring global commerce to avoid empowering geopolitical rivals. The situation is obviously complicated, but here's a couple conclusions we feel confident in today. First, security spending is rising as an investment theme. We believe that U.S. and EU companies will spend up to one and a half trillion dollars to de-risk supply chains. Critical infrastructure stocks could be at the center of this. Additionally, oil prices may rise, but investors should resist the assumption that this alone would lead rates higher. An oil supply shock from security disruptions in the region could be possible after several more steps of escalation. But as our economists have noted, higher oil prices, while they clearly mean higher gasoline prices, the effects may be more muted and temporary across goods and services broadly. In prior oil supply shocks, a 10% jump in price on average added 0.35% to headline U.S. CPI for three months, but just 0.03% to core CPI. Further, higher gasoline prices can meaningfully crimp lower income consumers behavior, weakening demand in the economy and mitigating overall inflationary pressures. Then one shouldn't assume higher oil prices translate to a more hawkish central bank posture. So the situation overall is obviously evolving and complex. We'll keep tracking it and keep you informed. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show.

The asset management and wealth management sectors could see AI boost efficiency in the short term and drive alpha in the medium to long term.----- Transcript -----Mike Cyprys: Welcome to Thoughts on the Market. I'm Mike Cyprys, Morgan Stanley's Head of U.S. Brokers, Asset Managers and Exchanges Team. Bruce Hamilton: And I'm Bruce Hamilton, Head of European Asset Management and Diversified Financials Research. Mike Cyprys: And on this special episode of the podcast, we'll talk about what the Generative A.I Revolution might mean for asset and wealth managers. It's Tuesday, October 17th at 10 a.m. in New York. Bruce Hamilton: And 3 p.m. in London. Mike Cyprys: My colleagues and I believe that Generative A.I is a revolution rather than simply an evolution and one that is well underway. We think Gen A.I, which differs from traditional A.I in that it uses data to create new content, will fundamentally transform how we live and work. This is certainly the case for asset and wealth management, where leading firms have already started deploying it and extracting tangible benefits from Gen A.I across an array of use cases. Bruce, what has been the initial focus among firms that have successfully deployed Gen A.I so far? And, something that has been top of mind for most of us, is Gen A.I replacing human resources? Bruce Hamilton: So Mike, clearly it's early days, but from our conversations with more than 20 firms managing over $20 trillion in assets, it seems clear that the immediate opportunities are mainly around efficiency gains rather than top-line improvements. However over time, as these evolve, we expect that this can drive opportunity for top-line also. All firms we spoke with see the importance of humans in the loop given risks, so A.I as copilot and freeing up resource for more value added activities rather than replacing humans. Mike Cyprys: What are some of the top most priorities for firms already implementing Gen A.I? And in broad terms, how are they thinking about integrating Gen A.I within their business models? Bruce Hamilton: So opportunities are seen across the value chain in sales and client service, product development, investment in research and middle and back office. Initial efficiency use cases would include drafting customized pitch or RFP reports and sales, synthesis of research and extraction of data in research, and coding in I.T.. Now Mike, specifically within the asset management space, there are two primary ways Gen A.I is disrupting. One is through efficiencies and two revenue opportunities. Can you speak to the latter? How would Gen A.I change or improve asset management? And do you believe it will truly transform the industry? Mike Cyprys: Absolutely. I think it can transform the industry because what's going to change how we live, how we work, and that will have implications across business models and the competitive landscape. I believe we're now at a A.I tipping point, just in terms of its ability to be deployed on a widespread basis across asset managers. The initial focus is overwhelmingly on driving efficiency gains and at the moment there's skepticism if Gen A.I can drive product alpha, but it should help with some of the maintenance tax around collecting and summarizing information and cleaning data. This should help release PM's of time to focus more on higher value idea generation and testing their ideas, which should help performance generation. I don't think it hurts. All in, we think this could result in up to 30% productivity gains across the investment functions. Bruce Hamilton: We've talked about how Gen A.I affects asset management. Do you think it can transform how financial advisers do their job and what kind of productivity gains are you expecting to see? Mike Cyprys: Financial advisors stand to benefit the most from Gen A.I because it should help liberate advisors time spent on routine or administrative tasks and allow them to focus more of their time on building deeper connections with clients and allowing them to service more clients with the same resources. And so that's how you get the revenue opportunity, by serving more clients and more assets. It's more of a copilot or tool that enhances human capabilities as opposed to replacing the human advisor. So on the wealth side, we do see more of a revenue opportunity for Gen A.I than we do on the asset management side in the near-to-medium-term. Use cases include collecting client information and interactive ways and summarizing those insights as well as proposing the next best actions and drafting engagement plans and talking points. All in, Gen A.I should help drive productivity improvements between 30 to 40% in the wealth sleeve. Bruce Hamilton: So Mike, what's your outlook for the next 3 to 5 years when it comes to the impact of Gen A.I on asset management? Mike Cyprys: It's really an expense efficiency play in the near to medium term for asset mana

The recent rise in long term yields and economic tightening raises the question of how restrictive U.S. financial conditions have become.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Chief Global Economist, and along with my colleagues bringing you a variety of perspectives. Today, I'll be talking about the tightening of financial conditions. It's Monday, October 16th at 10 a.m. in New York. The net selloff in U.S. interest rates since May prompts the question of how restrictive financial conditions have become in the United States. Federal Reserve leaders highlighted the tightening in conditions in recent speeches, with emphasis on the recent rise in long term yields. One lens on this issue is the Financial Conditions index, and the Morgan Stanley version suggests that the recent rate move is the equivalent of just under two Fed hikes since the September FOMC meeting. Taken at face value, it sustained these tight conditions will restrain economic activity over time. Put differently, the market is doing additional tightening for the Fed. Before the rally in rates this week, the Morgan Stanley Financial Conditions Index reached the highest level since November 2022, and the move was the equivalent of more than 2 25 basis point hikes since the September FOMC meeting. Of course, the mapping to Fed funds equivalence is just one approximation among many. When Fed staff tried to map QE effects into Fed funds equivalence, they would have assessed the 50 basis point move in term premiums we have seen as a 200 basis point move in hiking the Fed funds rate. What does the FCI mean for inflation and growth? Well, Morgan Stanley forecasts have been fairly accurate on the inflation trend throughout 2023, although we have underestimated growth. We think that core PCE inflation gets below 3% by the first quarter of next year. For growth, the key question is whether the sell off is exogenous, that is if it's unrelated to the fundamentals of the economy and whether it persists. A persistent exogenous rise in rates should slow the economy, and over time the Fed would need to adjust the path of policy lower in order to offset that drag. The more drag that comes from markets, the less drag the Fed would do with policy. But if instead the sell off is endogenous, that is, the higher rates reflect just a fundamentally stronger economy, either because of more fiscal policy or higher productivity growth or both, the growth need not slow at all and rates can stay high forever. Well, what does the FCI mean then, for the Fed? Bond yields have contributed about 2/3's of the rise in the Financial conditions index, and the Fed seems to have taken note. In a panel moderated by our own Ellen Zentner last Monday, Vice Chair Jefferson was a key voice suggesting that the rate move could forestall another hike. The Fed, however, must confront the same two questions. Is the tightening endogenous or exogenous, and will it persist? If rates continued their rally over the next several weeks and offset the tightening, then there's no material effect. But the second question of exogeneity is also critical. If the selloff was exogenous, then the tightening should hurt growth and the Fed will have to adjust policy in response. If instead the higher rates are an endogenous reaction, then there may be more underlying strength in the economy than our models imply and the shift higher in rates could be permanent. Thanks for listening. If you enjoy the show, please leave a review on Apple Podcasts or share Thoughts on the Market with a friend or colleague today. 

On the heels of a midsummer spike, long-end treasury yields have picked up further momentum, which has created complex implications for the Fed, the corporate credit market, and emerging market bonds.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about our views on the back of moves higher in Treasury yields. It's Friday, October 13th at 3 pm. in New York. The midsummer move higher in long-end treasury yields picked up further momentum in September, spiking to levels last seen over 15 years ago. Market narratives explaining these moves have revolved largely around upside surprises to growth and concerns about large federal fiscal deficits. The September employment report was unequivocally strong, perhaps too strong for policymakers to relax their tightening bias. While inflation has been decelerating faster than the Fed forecasts, continued strength in job gains could fuel doubts about the sustainability of the pace of deceleration. On the other hand, the rise in long-end yields have led financial conditions tighter. By our economists’ measure, since the September FOMC meeting, financial conditions have tightened to the equivalent of about two 25 basis point hikes, bringing the degree of tightness more in line with the Fed's intent. Thus, our economists see no need for further hikes in the Fed's policy rates this year. In effect, the move higher in Treasury yields is doing the job of additional hikes. It's worth highlighting that there has been a subtle shift in the tone of Fed speak in the past two weeks, indicating that the appetite for additional hike this year is waning. Given the moves in Treasury yields, we felt the need to reassess our Treasury yield forecasts and move them higher relative to our previous forecasts. Our interest rate strategists now expect ten-year Treasury yields to end year 2023 at 4.3% and mid-2024 at 3.9%. The effects of higher treasury yields are different in the corporate credit market. Unlike the Treasury market, the concentration of yield buyers in investment grade corporate credit bonds is much higher, especially at the back end of the curve. These yield buyers offer an important counterbalance. In fact, for longer duration buyers, there are not that many competing alternatives to IG corporate credit. While spreads look low relative to Treasury yields, growth optimism is likely to keep demand skewed towards credit over government bonds. Insurance companies and pension funds may have room to add corporate credit exposure, although stability in yields is certainly important. Higher treasury yields have implications to other markets as well, notably on emerging market bonds. Considering the move in U.S. Treasury yields, we think EM credit bonds cannot absorb any further move higher. In a higher for longer scenario, we expect EM high yield bonds to struggle. Therefore, we no longer think that EM high-yield credit will outperform EM investment grade credit. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

Although inflation is largely under control in Asian economies, central banks could be pushed to respond if high U.S. yields meet rising oil prices.----- Transcript -----Welcome to Thoughts on the Market. Chetan Ahya, Morgan Stanley's Chief Economist. Along with my colleagues bringing you a variety of perspectives, today, I'll discuss how higher U.S. rates environment could affect Asia. It's Thursday, October 12th, at 9 a.m. in Hong Kong. Real rates in the U.S. have risen rapidly since mid-May and remain at elevated levels. Against this backdrop, investors are asking if Asian central banks will have to restart their rate hiking cycles. We think Asia should be less affected this time around, mainly because of the difference in inflation dynamics. As we've highlighted before on this show when compared to the U.S., Asia's inflation challenge is not as intense. In fact, for 80% of the economies in the region inflation is already back in the respective central bank's comfort zone. Real policy rates are already high and so against this backdrop, we believe central banks will not have to hike. However, we do think that the central banks will delay cutting rates. Previously, we had expected that the first rate cut in the region could come in the fourth quarter of 2023, but now we believe that cuts will be delayed and only start in first quarter of 2024. So what can trigger renewed rate hikes across Asia? We think that central banks will respond if high U.S. yields are accompanied by Brent crude oil prices rising in a sustained manner, above $110 per barrels versus $85 today. Under this scenario, the region's macro stability indicators of inflation and current account balances could become stretched and currencies may face further weakness. In thinking about which central banks might face more pressures to hike, we consider three key factors, economies with lower yields at the starting point, economies running a current account deficit or just about a mile surplus and the oil trade deficit. This suggests that economies like India, Korea, Philippines and Thailand, may be more exposed and so this means that the central banks in these countries may be prompted to begin raising rates. In contrast, the economies of China and Taiwan are less exposed, and so their central banks would be able to stay put.  Thanks for listening, and if you enjoy  the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

With Congress still without a Speaker of the House, investors should keep an eye on the impact that another potential government shutdown would have on the markets.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of Congress on financial markets. It's Wednesday, October 11th, at 10 a.m. in New York. As of this recording, the U.S. House of Representatives still does not have a speaker following Representative McCarthy's ouster a little over a week ago. Republicans are scheduled to meet today to attempt to nominate the speaker, but until one is chosen, it's unclear that Congress can do any other business. But does that actually matter for investors? Here's two signals from these events that we think are important. First, it signals that Congress is unlikely to deliver any substantial legislation between now and the 2024 election outside of funding bills. Republicans' difficulty choosing a speaker reflects their lack of consensus on many policy issues, including regulation, social spending and more. That further impedes the government's ability to legislate, which was already hampered by different parties controlling the White House and Congress. So for investors who have credited the rise in bond yields and stock prices to expanded fiscal support from the federal government in recent years, you shouldn't expect there to be more on the horizon. The exception to this could be an economic crisis that prompts a fiscal response. But for investors, that means you'd likely see bonds rally and stocks sell off before fiscal support would again become a stock market positive. The second signal, which also cuts against the narrative of government policy support for markets, is that a government shutdown is still a distinct possibility. Congress recently avoided the government shutdown at the beginning of the month by passing a temporary extension of funding into November. But that move only delayed the resolution of key policy disagreements within the House Republican caucus that nearly led to the shutdown in the first place. With the clock ticking toward another shutdown deadline, Republicans are spending precious time selecting a new speaker, and it's not clear they're any closer to resolving their disagreements on key issues such as funding aid to Ukraine. Without that resolution, the risk remains that the House could fail to consider funding bills in time to avoid another shutdown. Now, to put it in context, our economists expect that downward growth pressures from a shutdown event should be modest, and so there are more meaningful factors to consider for markets out there, but certainly this condition doesn't help investors' confidence in the U.S. growth trajectory. And generally speaking, a Congress stunted in its ability to legislate has the potential to become a bigger challenge, particularly if geopolitical events create greater global growth risks. So bottom line, this situation is worth keeping tabs on, but isn't yet something we think should principally drive investors decision making. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show.

As companies integrate generative AI into enterprise software, a wide variety of jobs that depend on requesting or distributing data could be automated.----- Transcript -----Welcome to Thoughts on the Market. I'm Keith Weiss, Head of Morgan Stanley's U.S. Software Team. Along with my colleagues bringing you a variety of perspectives, today I'll discuss the significant potential impact from generative A.I on enterprises. It's Tuesday, October 10th, at 10 a.m. in New York. You may remember the generative A.I powered chat app that reached 1 million users in only five days after its launch late last year. While much of the early discussion on the use of generative A.I focused on the consumer opportunity, we see perhaps an even bigger opportunity in enterprise software. The advantages from traditional A.I to generative A.I are rapidly broadening the scope of the types of work and business processes that enterprise software can automate, and this could ultimately have an impact on industries across the entire economy. Of course, one of the biggest questions everyone seems to have is how will generative A.I impact jobs? We forecast 25% of labor could be impacted by generative A.I capabilities available today, likely rising to 44% of labor in three years. Further, by looking at the wages associated with those jobs, our analysis suggests generative and A.I technologies can impact the $2.1 trillion of labor costs attached to those jobs today, expanding to $4.1 trillion in three years in the U.S. alone. This drives an approximately $150 billion revenue opportunity for software companies in our view. An important caveat here, we believe it's too early to make any definitive claims on the number of jobs that will be replaced by generative A.I. So we used the term impact to denote the potential for either an augmentation or further automation of these jobs on a go forward basis. So what are the jobs we think are most likely to be impacted? Based on the current capabilities of generative A.I technologies like large language models, we believe the common characteristics are skills amongst the jobs most impacted are the need to retrieve or distribute information. For example, billing clerks, proofreaders, switchboard operators, general office workers and brokerage clerks. On the other side of the equation, jobs that are least impacted today are those that require some aspect of physical labor, including ophthalmologists, extraction workers, choreographers, firefighters and manufactured building and mobile home installers. Over the next three years, as this more generalized A.I. technology focuses in on more specific use cases, we believe the impact of generative A.I will shift into more specialized jobs, such as general and operations managers, as well as registered nurses, software developers, accountants and auditors, and customer service reps. Of these, the General and Operations Manager jobs could experience the highest potential cumulative wage impact. In fact, our analysis suggests a $83 billion impact amongst general and operations managers today. The magnitude of the enterprise impact marks only one side of the equation, as the timing of the realizable opportunity becomes increasingly important for investors to navigate this evolving technology cycle. To be clear, the rapid adoption of these consumer technologies are not going to be indicative of the pace of adoption we're likely to see amongst the enterprise. There are several notable frictions to enterprise adoption related to items such as finding a good return on investment, enabling good data protection, the skill sets necessary to run and operate these new technologies and legal and regulatory considerations, all which necessitate significantly longer adoption cycles for the enterprise. For this reason, we think generative A.I remains in the early stages of the opportunity. Thank you for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

While U.S. consumer sentiment is on the decline, there are some categories that have remained stable as purse strings tighten.----- Transcript -----Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S. Equity Strategy Team. Along with my colleagues bringing you a variety of perspectives, today I'll give you an update on the U.S. consumer. It's Monday, October 9th at 10 a.m. in New York. As we get into the fall season and close out the third quarter of this year, investors are paying attention to the state of the U.S. consumer. Our recent survey work reveals that inflation continues to be a primary concern for consumers and that the U.S. political environment is the second most significant concern. Furthermore, consumers continue to worry about their payment obligations, and 30% of people we surveyed expressed concern over their potential inability to repay debts. Low income consumers are generally more worried about their inability to pay rent, while upper income consumers are concerned about their investments, U.S. politics and geopolitics. Overall, consumer confidence in the U.S. economy and household finances worsened modestly in September. More than half of U.S. consumers are expecting the economy to get worse in the next six months, while less than a quarter of consumers are expecting the economy to get better. This worsening sentiment is also consistent across different income cohorts. Additionally, savings rates continue to trend lower versus earlier this year. Consumers report having an average savings reserve of 4.2 months, the average over the past few months has been trending lower compared to earlier in the year. Of course, savings reserves vary significantly by income though, with upper income consumers having on average around 6 to 7 months worth of expenses in savings compared to about 3 months for low income cohorts. Positively fewer consumers reported missing or being late on a loan or bill payment, with 34% missing a payment last month versus 38% in August. Low income consumers are more likely to have missed or been late on payments versus middle and high income consumers. Consumer spending intentions across income cohorts for the next month are similar to last month, with 31% of consumers expecting to spend more next month and 19% expecting to spend less. Consumers continue to prioritize essential categories like groceries and household items, but plan to spend less on more discretionary products like electronics, leisure and entertainment, small appliances and food away from home. Interesting to note, cell phone bills continue to be a clear priority for consumers. Travel intentions have also remained relatively stable. Over half of consumers are planning to travel over the next six months, mostly to visit friends and family, which is slightly up from last year. Not surprisingly, travel spending is higher for high income consumers than for low and middle income ones. However, we have seen plans for international travel start to decline. Thank you for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

As bond yields continue to rise, credit has been more of a passenger than the driver of recent market volatility.-----Transcript -----Andrew Sheets: Welcome to Thoughts in the Market. I'm Andrew Sheets, Morgan Stanley's Head of Corporate Credit Research. Serena Tang: And I'm Serena Tang, Morgan Stanley's Chief Global Cross-Asset Strategist. Andrew Sheets: And on the special episode of the podcast, we'll discuss Morgan Stanley's updated cross-asset and corporate credit views. It's Friday, October 6th at 3 p.m. in London. Serena Tang: And 10 a.m. in New York. Andrew Sheets: Before we get into our discussion, let me introduce Serena Tang as Morgan Stanley's new Global Cross-Asset Strategist. Serena has been working with me for the last 15 years and together we initiated our cross-asset effort nearly a decade ago. Serena was responsible for building the team's investment framework, specializing in multi asset allocation, portfolio optimization, and long run capital market assumptions. So I can confidently say that Morgan Stanley's cross-asset effort is in very capable hands. As for me, I'm now Morgan Stanley's Head of Corporate Credit Research, but I'll continue to host my colleagues as we look forward to bringing you key debates from across asset classes and regions. So, Serena, welcome and let's jump right into what's going on in markets. Over the last several weeks, as everybody in the U.S. has returned from summer, the debate among Morgan Stanley's economists and strategists is centered on two main issues, the outperformance of the U.S. economy and the underperformance of China's economy, as well as the spike of government bond yields, especially at the longer end of the curve. So where has this left our views across asset classes? Serena Tang: Yeah, yields and real yields have indeed moved a lot higher in a very short amount of time, you know, on that narrative that rates will stay higher for longer. And I would say that, you know, while the market has been going against our current call for government bond yields to fall over the next 6 to 9 months or so, we’re steadfast on our preference for high quality fixed income over risk assets like global equities, like high yield corporate bonds. And the reason really comes down to how higher real yields mean the discount rate for equities is also higher, leading to lower stock prices. And we've kind of seen this over the past few weeks or so. I think this is especially true in today's environment where the rise in yields and the rise in real yields isn't really driven by a rise in growth expectations, which you know traditionally have been great for equities thinking about future growth. But rather today's move in yields is really much a function of what the markets think the Fed would do over the coming few months. And all this largely explains the nearly 9% selloff we've seen in global equities since the start of August. But Andrew, you know, such dynamics must also be very similar in the credit world. In your view, how do rising government bond yields affect your outlook for global credit? Andrew Sheets: So I think credit finds itself in a pretty interesting place as bond yields have risen. You know, I would safely say that I think credit as a passenger in recent market volatility, it's not the driver. And, you know, if I think very simply about why bond yields have been selling off and there are a lot of different theories of why that's been happening, maybe a simple explanation would be that bond yields offer pretty poor so-called carry, a government bond, a ten year government bond yields less than just holding cash. They offer poor momentum, they're moving in the wrong direction and they have difficult technicals, i.e., there's a lot of supply of government bonds forecast over the coming years. And across a lot of those metrics, I do think credit looks somewhat better. Credit yields are higher, that carry is better. Credit compensates you more for taking on a longer maturity corporate bond, which is the opposite of what you see in the government bond market. And as yields have risen, companies have looked at those higher yields and done, I think, a very understandable thing, they are borrowing less money because it's more expensive to borrow that money. So we've seen less supply of corporate bonds into the market, which means there's less supply that needs to be absorbed and bought by investors. So credit can't ignore what's going on in this environment and we're broadly forecasting this to be worse for weaker companies, as the effect of potentially slower growth and higher rates we think will weigh more heavily on the more levered type of capital structure. But overall, I think within this kind of challenging environment, I think credit has been an outperformer and I think it can remain an outperformer given it has some advantages on these key metrics. Serena Tang: So you touched on lower quality companies. One of the v

Here’s why convertible bonds, an often overlooked asset class, are becoming more attractive as an alternative to common stock.----- Transcript -----Welcome to Thoughts on the Market. I'm Todd Castagno, head of Morgan Stanley's Global Valuation Accounting Research Team. Along with my colleagues bringing you a variety of perspectives, today I'll be discussing the increasing attractiveness of the convertible debt market. It's Thursday, October 5th at 10 a.m. in New York. Rising interest rates have increased borrowing costs for everybody, and that includes companies looking to raise or refinance debt. And that generates a renewed appetite for an oft overlooked asset class called convertible bonds. But what are convertible bonds? To start, convertible bonds are what we call a hybrid instrument, combining the features of a traditional corporate debt and common equity. Similar to corporate bonds, convertibles offer guaranteed income via interest of the initial investment. The reason they are called "convertible" is because they offer investors the option to convert that bond to common stock when a company's share price hits a certain threshold. These hybrid features provide investors with downside protection and upside equity appreciation. There are many reasons why companies choose to issue convertible debt. First, they offer a strategic financial flexibility for high growth in early stage companies, a quick time to market execution time. Second, convertible debt provides an alternative path for companies that would find it difficult to access straight debt in the market. Third, they offer a way to raise equity without issuing more stock directly through secondary offerings. And this is a big plus for corporates because investors often perceive a secondary offering as a negative signal. And finally, a lower cash coupon and lower interest expense is very attractive in a high-rate environment. Why is that? Convertible bonds have lost market share from traditional corporate debt over the last 15 years. The convertibles market size has remained largely unchanged, while the traditional corporate debt market in the U.S. has roughly doubled. Convertibles are relatively less attractive at lower interest rates and accommodating capital markets for traditional alternatives. As it stands, 2023 is on track to double last year's issuance, as likely to be the highest post global financial crisis issuance outside of COVID. Important to note, the nature of issuance this year is different from recent history. In the last decade or so, issuance has been led by smaller market cap and growth companies, who don't have established debt markets or ratings and thus don't have easy access to straight debt capital. However, this year, 65% of issuers have had a credit rating and thus have had easy access to the straight debt market. They're coming to the convertibles market, not as a necessity, but are instead actively choosing to issue converts because of the favorable economics, through interest expense savings, and a last wrinkle, new favorable accounting. Accounting rules recently changed that reduce complexity for both issuers and investors. While accounting typically does not drive economics, on the margin, the recent change improves transparency and reduces cost to issue. Utilities have been especially large convertible issuers this year in the market. 75% of convertible offerings in 2023 year-to-date have been refinancing, which are likely to be one of the areas primed for growth in the capital markets. Looking ahead, we believe the convertibles market is poised for growth. We will likely see more convertible issuances, given a higher interest rate environment, tighter capital markets and a wall maturities, that is coming due in the next 2 to 3 years. Convertibles are a particularly suitable instrument in this context as they offer defensive income enhanced alternative to investing in the underlying common stock. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

Fundamentals for investment-grade credit remain resilient and steady, while below-grade credit continues to deteriorate. ----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, I'll be talking about our views on corporate credit markets. It's Wednesday, October 4th at 10 a.m. in New York. With the second quarter earnings now in the rearview mirror, we look at how credit fundamentals have evolved and what that means for credit investors. Quality based divergence in credit fundamental performance continues to bear out, reinforcing our preference for higher quality within the credit universe. Investment grade credit fundamentals remain resilient. Overall, issuers have held up reasonably well despite moving past the peak in the strength of balance sheet metrics. While certain metrics have started to deteriorate, most notably interest coverage as a result of higher interest rates, leverage ratios have stayed well-contained despite the uptick in debt levels. We are calling for wider spreads in investment grade credit, as the market might be overly discounting the odds of a recession, and we had already priced for a smooth soft landing. While current spread levels do not leave much room for further compression, current yield levels remain attractive at multi year highs. These levels present both a source of attractive income and potential price upside as growth and inflation cool, particularly heading into a Fed pause and potential rate cutting cycle, which our economists expect will start in March 2024. While one could argue that with spreads at tight levels, the yield demand could simply shift to treasuries. However, with very low dollar prices on most investment grade bonds and the macro optimism around a soft landing, we think investment grade credit will remain well placed for some time to come. In-place fundamentals remain strong and thus far are not flashing signs of alarm to argue for long-duration buyers of credit to shift into treasuries. On the other end of the grade spectrum, in the below investment grade segment, fundamentals have continued to deteriorate. Earnings growth turned negative, coverage metrics fell, cash to debt ratios declined, and leverage rose. The weakness was widespread across sectors, with materials and consumer discretionary sectors seeing the largest year-over-year increase in leverage. Within our high yield fundamental sample, median interest coverage dropped for a third consecutive quarter, now more than a turn below its peak in 2022. The trend was similar for loans as well, while surging interest costs were the primary driver, weaker earnings were also at play. The concentration of "tail" cohorts is rising. In high yield, the vulnerable cohort, that is companies with low coverage and low cash debt ratios, reached 5% in size, which is record high post global financial crisis. In loans, the coverage tail inflected higher for the first time in two years. Clearly, quality based divergence continues to play out in credit fundamentals, which aligns with our recommendation to be defensive and stay invested in the higher quality segments of the credit markets. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

With online grocery shopping growing in popularity, artificial intelligence can improve the customer experience while increasing efficiency.----- Transcript -----Brian Nowak: Welcome to Thoughts on the Market. I'm Brian Nowak, Morgan Stanley's U.S. Internet Analyst. Simeon Gutman: And I'm Simeon Gutman, Hard lines, Broad Lines and Food Retail Analyst. Brian Nowak: On this special episode of Thoughts on the Market, we'll discuss the significant opportunities in online grocery. It's Tuesday, October 3rd at 10 a.m. in New York. Brian Nowak: Simeon, our work suggests that online grocery is the largest remaining category of offline spend, which makes it the biggest opportunity in e-commerce. When we talk about online grocery, do you think of it as pure dot-com? Do you think of it as omnichannel? How do you define online grocery and how do you think about the growth outlook for the industry the next few years? Simeon Gutman: To settle that debate we think of it as omnichannel. The online market includes both delivery and pickup, which we actually think is a 50/50 mix. The market today, we think, is about 11.5% penetrated. That equates to roughly $190 billion of online and pickup sales. It's growing low double digits and we think over time it reaches about the high teens by 2027. Brian Nowak: So 11% adoption now heading to teens penetration a few years from now. That's quite a bit below a lot of other categories in the United States. So let me ask a sort of obvious question. What new types of technologies or innovations have you seen in online grocery that you think are going to really drive faster, more durable adoption going forward? Simeon Gutman: It's likely in the micro and macro fulfillment. I mean, online grocery is complicated. There's a lot of SKUs to pick. There's labor involved. We're seeing better ways that grocers are able picking and packing the groceries. I think still getting it to the end user remains a challenge and that's what we're going to see probably evolve over the next, call it, decade. Brian Nowak: That's helpful. What are some of the other key debates in the online grocery space and what aspects do you think the market is missing or underappreciated right now? Simeon Gutman: I think two key debates are the path to profitability, and if online grocery can reach that profitability threshold and two whether an online only player will encroach on the traditional share and disrupt the market. As for the path to profitability, we think eventually we'll see it. We don't have a lot of examples because we don't think we're there with scale today. But over time we think these models will show some level of profitability. It may not be a fully online model. It'll still be a holistic omni channel model. And then the second piece is we do think there is going to be an encroachment from e-tail or e-commerce only players. The market's big. It's one piece of the market that online only hasn't conquered, but it's such a big TAM, we think everyone has their attention on it. What are some of the most significant advertising opportunities when it comes to online grocery Brian?Brian Nowak: To your point on profitability within online grocery, we think advertising is likely to be a key lever to drive profitability across the space. Historically, we have seen traditional grocers and retailers benefit from trade spend, advertising dollars spent essentially for NCAP placements, shelf space and really in-store marketing. As consumer wallets move online with an online grocery, we expect those dollars to shift toward the online players. And given the high incremental margin of advertising dollars compared to traditional grocery spend. We think that the advertising business is likely to be an important lever in online grocers, both traditional players moving online as well as e-commerce first players growing their business and their ability to build profitable long term ecommerce businesses. Now Simeon online grocery, to your point earlier, is an industry where the unit economics are quite tight and margins are thin. With that as a backdrop, what in your mind are the keys to driving long term durable profitability beyond advertising? Simeon Gutman: Two things. First scale and then second capability. In terms of scale, the more densely populated or the more densely penetrated a grocer can be in a market, the more money we think they can make. And we think the same is true with online grocery. You have to have a high market share in a concentrated place, and that's happening slowly. And some companies are stronger in certain markets than others, but that needs to happen more broadly. Second is the capabilities. And as I mentioned earlier, we're starting to see the emergence of newer technologies, macro fulfillment methodologies, meaning automation in a large scale, micro fulfillment, automation at the local level. And these type of technologies remove the human element, the

Although Congress agreed on a short-term deal to avoid a shutdown, the increase in the deficit and lack of fiscal discipline may concern investors in the long run.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, October 2nd at 11 a.m. in New York. So let's get after it. This past weekend, Congress agreed to a last minute deal to keep the government open for the next six weeks. On one hand, avoiding a government shutdown is a net positive for the equity markets. However, on the other hand, the government is showing very little fiscal discipline will likely weigh on bond markets, which could then reverberate through stocks. This past August, I wrote a note and recorded a podcast asking if the U.S government may have hit a fiscal wall. One of the biggest surprises this year for investors has been the monumental increase in the fiscal deficit. More specifically, over the past 12 months, the fiscal deficit has increased by $1.3 trillion. This has supported better economic growth and may have kept the U.S. economy from entering a recession that many thought was unavoidable earlier this year. But now the piper must be paid. With the U.S. Treasury expected to issue close to $2 trillion in new supply in the second half of the year, the bond market has taken notice. While front end interest rates have been generally stable over the past several months on the expectation the Fed is very close to ending its rate hikes, the longer end of the Treasury market continues to trade very poorly, with ten year yields reaching 4.7%. With inflation expectations relatively stable and economic growth showing signs of slowing, we think this move in ten year yields is directly related to an earlier question. Has the US government pushed a limit of its ability to spend without proper long term fiscal discipline and funding in place? I think it's a reasonable question to ask even though we all know the Fed will likely provide the money necessary for the government to meet its obligations, especially in the short term. But now there is some growing doubt on the sustainability of such programs. The bond term premium has been suppressed over the past decade through quantitative easing and insatiable demand from foreigners looking to store their savings in a reliable place. But with the Fed no longer doing QE and even shrinking its balance sheet, banks unable to step up and buy and foreigners starting to diversify away from the US dollar, it's unclear who will be the natural buyer of this significant new supply. Lack of funding is a risk that markets have not had to think about when budget deficits get a bit out of control. In fact, the last time this happened was 1994, when ten year Treasury yields increased to 8%. The result was one of the biggest belt tightening exercises enacted in a bipartisan manner. Congress really had no choice at that time but to acquiesce to the demands of the bond markets. Could we be looking at a similar response this time? Like many Americans and investors, I have my doubts any real fiscal discipline will be enacted proactively. This just means the bond market may have to push back even harder to get legislators attention. Of course, that would not be good for already elevated equity valuations. The alternative is that Congress gets ahead of it and cuts spending, raises taxes or both, which would arguably be bad for growth. Bottom line, this conflict between markets and policy is nothing new, but this time it's centered around fiscal rather than monetary policy. More importantly, both potential outcomes, higher rates or smaller budget deficits, are likely bad news for stocks in the short term. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

The number of U.S. workers with multiple income streams is increasing steadily, with earnings of $200 billion today poised to double by 2030. Generative AI could help these “multi-earners” hold down their many jobs.----- Transcript -----Ed Stanley: Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. Ellen Zentner: And I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Ed Stanley: And on this special episode of Thoughts on the Market, we'll discuss the impact of A.I. on the multi earning trend we've been observing over the last year. It's Friday, September 29th at 3 p.m. in London. Ellen Zentner: And 10 a.m. in New York. Ed Stanley: You'll remember that the pandemic created the conditions for many people to start pursuing multiple income streams, and post-COVID this need has shifted to an opportunity. And little over a year ago, we first wrote about the rise of multi earners, a large and growing class of workers who, we argued, whose marginal hour was better spent multi-earning than staying in a low paying traditional corporate role, for example. And not surprisingly, Gen Z, a group our economist team have studied in detail, is leading this paradigm shift, and that is clearly underway in our latest survey. Ellen, before we get into some of the current specifics on the fast moving multi-earner and A.I. Trends, can you set the stage for us by giving us a sense of where the US labor market is right now and how things have evolved since the great resignation that we heard so much about during COVID? Ellen Zentner: Sure Ed. Participation in the workforce dropped like a rock around COVID and government subsidies helped folks take time away, and particularly those that work in high risk areas of services where face to face contact is a necessary work requirement. Now, at the same time, the percentage of employees that shifted to some amount of work from home arrangements soared from about 15% to over 50%, and it's remained pretty sticky even as COVID has moved further into the rearview mirror. So while prime age labor force participation has fully recovered and continues to climb, the share of workers with some amount of work from home has remained elevated, as well as those that the Bureau of Labor Statistics here in the US has identified as holding multiple part time jobs. So it turns out it skews toward younger workers. In other words, Generation Z, as you noted, which is a growing share of the prime age workforce. And for many workers, COVID was a wake up call, a call to action, if you will, that multi-earning might better balance a sense of freedom and flexibility while still earning a living wage. Ed Stanley: To expand our lens even more in order to understand the economic backdrop of multi-earning, can you give us a quick overview of the rise of the so-called worker economy over the last two decades? Ellen Zentner: So here's a brief history lesson. Wage growth, when adjusted for inflation, has been falling for decades in the U.S. and is a reflection of factors such as waning presence of unions, the rise of mega companies and the like that reduced worker bargaining power over time. Wage growth should have kept up with gains in productivity, and it just didn't. And as a result, the labor share of corporate profits has been falling. COVID created the labor scarcity needed to reverse that secular decline in labor income by raising bargaining power. In a sense, it galvanized the demand for higher wages that we think is durable. Now Ed, as you mentioned, you first started publishing on the Multi-Earner Trend a year ago, and this trend has been developing by leaps and bounds, it seems, especially when you overlay the fast and furious development of generative A.I. So can you tell us what you're observing and how your thesis is evolving? Ed Stanley: Yeah. So there are three ways that we keep track of to triangulate how this thesis is evolving. The first is official data, and you touched on this. The BLS shows a modest 1 in 20 multi-earners as a portion of the US population, for example, and growing pro-cyclically. So that is one data set we look at. The second is Google Trends. So it's a less well-captured metric in official data, but we can see less about how many people are doing it and more about the growth rate, which we can see is about 18% compound and actually growing counter cyclically. When life gets more challenging from a macro unemployment perspective, people seem to turn to these earnings streams, which inherently make sense. And then the third is to look at our Alphawise survey, the second of which we have that just came out, which shows multi-earning growing 8% year on year and as much as over 15% for Gen Z, which we talked about. So in essence, we don't rely on one dataset to estimate the size or growth of the market. The real addition this year is around generative A.I., where we showed, for those peo

With volatility in Asia and emerging markets causing both upswings and downswings, certain markets will be critical as uncertainty continues.----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Garner, Morgan Stanley's Chief Asia and Emerging Market Equity Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing why we turned more cautious on our coverage recently. It's Thursday, September the 28th at 9 a.m. in Singapore. We turned more cautious on our coverage in early August, downgrading Taiwan and China to equal weight and Australia to underweight, whilst raising India, which we view as defensive, to a major overweight. For India, multi-polar world trends are supporting a surge in inward foreign direct investment in manufacturing, and portfolio flows into both bonds and equities. The country's reforms and macro stability agenda, particularly in fiscal policy, is underpinning a strong capital expenditure and profits outlook. We also maintain Japan equities, currency hedged, as our top pick in global equity markets. Japan has strong nominal GDP growth, positive earnings per share revisions and valuations which remain reasonable in our view, at a little over 14x forward price to earnings. However, the continued debate on China's growth slowdown and now a sudden further rise in US real yields are, in our view, likely to pressure markets lower generally, in what is seasonally a difficult period for our asset class. Volatility is now and generally has been a feature of Asia and emerging equity markets. Hence the intense interest in market timing and hedging strategies in an asset class which has, with the recent exception of Japan, failed to deliver attractive, sustained compound returns for the US-dollar-based investor. Indeed, we've made the point before that on a risk adjusted basis, Asia and emerging equity markets are what is known as Sharpe ratio inefficient in a multi asset sense, that is returns have not compensated for volatility compared to other benchmarks.All of our coverage markets have higher volatility than the S&P 500, and in many cases significantly so. In particular, China A shares, the Hang Seng China Enterprise Index and until recently, the India benchmark Sensex. In terms of why this is the case it probably has to do with the following characteristics. Firstly, more volatility in earnings cycles. Secondly, less developed domestic institutional investor bases than in many developed markets. And thirdly, greater reliance on foreign flows, which are inherently less sticky than domestic flows. However, this is changing now for the India market. Combining data allows us to develop a simple scoring framework to assess complacency versus fear in relation to drawdown risk. It suggests a somewhat complacent mode in general, but particularly for China A, Australian equities, that's the ASX 200, and the overall MSCI EM benchmark, much less so for Topix, Nikkei and the Hang Seng Index. And this reinforces our view that Japan equities are a key holding to maintain currently. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts, and share Thoughts on the Market with a friend or colleague today.

If government funding expires next week, the shutdown combined with other economic issues could make for a weak fourth quarter. Global Head of Fixed Income and Thematic Research Michael Zezas and U.S. Public Policy Analyst Ariana Salvatore discuss.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Ariana Salvatore: And I'm Ariana Salvatore from our U.S. Public Policy Research Team. Michael Zezas: Along with our colleagues, bringing you a variety of perspectives, we'll be talking about the market and economic impacts of a potential government shutdown later this week. It's Wednesday, September 27th at 10 a.m. in New York. Michael Zezas: So, Ariana, let's get right into it. Congress is up against a tight deadline with government funding set to expire on the first day of the next fiscal year, which is October 1st. What's the state of play? Ariana Salvatore: So the first thing I'll say is that the situation is very fluid at the moment with lots of uncertainty between now and Sunday. Last night, the Senate voted to advance a bipartisan clean C.R. or continuing resolution, which could eventually serve as the legislative vehicle to avoid a lapse in appropriations. Clean, in this sense, means that the bill includes little to no funding for Ukraine aid or disaster relief, two items that Republicans had previously taken opposition to. Right now, the ball's in Speaker McCarthy's court. He can choose one of three options, first, to bring the Senate C.R. to the floor and rely on moderates, and perhaps even some Democrats, to cross the aisle and pass the bill. Second, he can ignore it and try to continue with the House-led funding process. Or third, he can take the C.R. out on some Republican policy items like border funding, for example, and send it back to the Senate where it's almost certainly dead on arrival. Options two and three, because of that, increase the likelihood of a shutdown. But option number one really doesn't solve the problem either, as it would just punt the issue until later in the Fall, and in our view, increase the chances of McCarthy facing a motion to vacate the chair or a motion to oust him as speaker. So all of this is to say that a shutdown seems pretty likely at the time we're recording this. The question is, of course, how long it could last. Michael, how are you thinking about the possible duration of a shutdown, assuming we do, in fact, get to Sunday without significant progress being made here? Michael Zezas: So there's a few scenarios to consider here. One is a pretty brief shutdown, one that lasts for less than a week and ultimately ends with a continuing resolution. Perhaps Speaker McCarthy agrees to put the Senate pass continuing resolution on the floor for a vote. Another scenario is one that lasts for a few weeks. And here you might have a situation where House Republicans continue to oppose any continuing resolution. And after enduring a shutdown for enough time, federal employees' paychecks begin to lapse, economic pressure begins to build and all of a sudden there's just more acceptance around the idea of a continuing resolution to allow more time for negotiation. And then another scenario would be something that lasts quite a bit longer, several weeks. And here, you clearly have a breakdown in negotiation positions, members of the Republican caucus perhaps refusing to vote for any type of continuing resolution, there being major roadblocks on the issues you spoke about already, Ariana. And the potential way to fix this would have to be through something like a discharge petition where members of the House of Representatives work around Speaker McCarthy using procedural rules. But that's something that takes a long time to play out and could take several weeks to play out. So given all this uncertainty, sometimes it helps to look back at history as a guide. Ariana, what can we learn from similarities or differences between this and prior shutdown episodes? Ariana Salvatore: Well, for starters, while shutdowns are not necessarily routine, they're also not without precedent. There have been about 20 in total in U.S. history, but more recent ones have lasted longer. For example, the most recent in 2019 under President Trump, was also the longest clocking in at just over a month. However, that case was also unique to what we're seeing today because it was a partial shutdown, meaning that there were some agencies that had already received full-year funding. We've actually never had a full shutdown last more than about a week like we're seeing right now. This time around, because no agencies have received funding, we think there could be a broader based impact relative to the last shutdown that we saw. Michael, given that your focus is across all of fixed income, how are you thinking about the impact of a shutdown across our strategists market

Corporate credit is likely to continue outperforming, even if downward revisions to GDP, sticky inflation data and a potential government shutdown could mean a less restrictive approach from the Fed.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Tuesday, September 26th at 2 p.m. in London. September has seen widespread market weakness, with both stocks and bonds lower. Several of the big questions behind this move, however, could become much clearer by the end of this week. One area of market concern remains central banks and the idea that they may continue to raise interest rates to tamp down on inflation. While the Federal Reserve decided not to raise rates at its meeting last week, the first time it's done so since 2022, investors nevertheless left that meeting worried the Fed may have more work to do. We hold a different view and think that the Fed will not raise interest rates further. But we'll get an important data point to this view on Friday, with the release of PCE, or Personal Consumption Expenditure inflation. This is the inflation gauge that the Fed cares about most, and on Morgan Stanley's forecast, it will fall to just 2.3%, on a three month annualized basis. That's a large, encouraging step down that would show the Fed that inflation is headed in the right direction. Another area of market concern, somewhat paradoxically, is that the U.S. economy has been quite strong, which in theory would encourage further rate hikes from the Fed. Not only has the US economy shown good GDP numbers so far this year, but unemployment remains near a 50 year low. Fed Chair Powell repeatedly referred to the strength of the economic data in last week's press conference, and some leading economic indicators of industrial activity have actually started to look marginally better. But two other events this week might change that perception. Thursday will see regular revisions to measurements of U.S. economic growth, and Morgan Stanley's economists think U.S. GDP is more likely to be revised downwards, perhaps significantly. A few days later, the US government faces a shutdown as key appropriations bills have failed to clear the U.S. House of Representatives. That shutdown will act as a drag on the economy, potentially to the tune of about 0.2% of GDP per week. Both nominal and real yields have risen as the market remains concerned that the Fed will keep policy restrictive for a longer period of time, given still elevated inflation and robust U.S. economic growth. But it's possible, the GDP revisions, inflation data and a government shutdown all this week could change that perception. For credit, it's worth noting that corporate credit has been a relative outperformer during this rough September. As we discussed on this program last week, higher yields are also meaning fewer bonds are being issued for investors to buy as companies balk at the higher yields they're now being charged to borrow. And in a world where government bonds and equities all yield less than cash does, a so-called negative carry asset, credit again has a marginal advantage. It's a tough backdrop, but we think the credit will continue to be a relative outperformer. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

With the economy late in its current cycle, early-cycle performers such as consumer and housing stocks are underperforming while energy and industrials should continue to outperform.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, September 25th at 11am in New York. So let's get after it. Since mid-July, stocks have taken on a different personality. As we've previously noted, second quarter earnings season proved to be a "sell the news event" with the day after reporting stock performance as poor as we've witnessed in over a decade. In retrospect, this makes sense given weakening earnings quality and negative year over year growth for many industry groups, coupled with the strong price run up in the mid-July which extended valuations. Those valuations continue to look elevated at 18-times earnings, especially given the recent further rise in interest rates and signs from the Fed that it may be adopting a higher for longer posture. On that score, the real rate equity return correlation has fallen further into negative territory, signaling that interest rates are an increasingly important determinant of equity performance. Furthermore, one could argue that the post-Fed-meeting response from equity markets was outsized for the rate move we experienced. One potential explanation for this dynamic is that the equity market is beginning to question the higher for longer backdrop in the context of a macro environment that looks more late-cycle than mid-cycle. As discussed over the past several weeks, equity market internals have been supportive of the notion that we're in a late cycle backdrop with high quality balance sheet factors outperforming. Defensives have also resumed their outperformance, while cyclicals have underperformed. The value factor has been further aided by strong performance from the energy sector, while growth has underperformed recently due to higher interest rates. Given our relative preference for defensives, we looked at valuations across these sectors. In terms of absolute multiples, utilities trade the cheapest at 16 times earnings, while staples trade the richest at 19 times. That said, relative to the market in history, utilities and staples still look the cheapest, both are at the bottom quartile of the historical relative valuation levels, while health care relative valuation is a bit more elevated, but still in the bottom 50% of historical relative valuation levels. Overall valuations remain undemanding for defensive sectors in stocks, which is why we like them. To the contrary, the technicals and breadth for consumer discretionary stocks look particularly challenged right now. We believe this price action is reflecting slower consumer spending trends, student loan payments resuming, rising delinquencies in certain household cohorts, higher gas prices and weakening demand and data in the housing sector. Our economists who avoided making the recession call earlier this year when it was a consensus view see a weakening consumer spending backdrop from here. Specifically, they forecast negative real personal consumption expenditure growth in the fourth quarter and a muted recovery thereafter. Meanwhile, travel and leisure has been a bright spot for consumption, but that dynamic may now be changing to some extent. As evidence, our most recent AlphaWise survey shows that consumers want to keep traveling and 58% of respondents are planning to travel over the next six months. However, net spending plans for international travel declined from 0% last month to -8% this month, indicating consumers are planning fewer overseas trips. Domestic travel plans without a flight move higher. This indicates that consumers want to keep traveling, but are increasingly looking to taking cheaper trips and are choosing destinations to which they can either drive or take a train, rather than fly which is more expensive. All these dynamics fit well with our late cycle playbook. In our view, investors may want to avoid rotating into early cycle winners like consumer cyclicals, housing related and interest rate sensitive sectors and small caps. Instead, a barbell of large cap defensive growth with late cycle cyclical winners like energy and industrials should continue to outperform as it has for the past month. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps for people to find the show.

September historically has been a big month for corporate bond issuance, but borrowing looks less attractive to companies due to the large rise in yields.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, September 22nd at 2 p.m. in London. Credit has outperformed equities recently, with spreads modestly tighter, even as stocks are modestly lower. We think that credit outperformance continues. Supply, demand and income are all part of the story. September is usually a big month for corporate bond issuance as people return from the summer, and all that supply often means somewhat weaker credit performance. But so far, that supply is underwhelmed. While many factors may be at play, we think one is that borrowing is looking less attractive given the large rise of corporate bond yields. Not only are investment grade bond yields at some of their highest non crisis levels in the last 20 years, they're unusually high relative to the earnings or dividend yield offered on company stock. Now, if a company views their equities attractive relative to debt, one way they can express this is to borrow more while buying back or retiring those shares in the market. But conversely, if companies start to view borrowing as expensive, relative to their shares, borrowing and buybacks should both slow. And year-to-date that's exactly what we've seen from non-financial investment grade companies. Meanwhile, those same higher yields that are making companies more reluctant to borrow are keeping demand for bonds solid. And if both the Federal Reserve and the European Central Bank are now finished raising interest rates, as my colleagues in Morgan Stanley economics expect, it could mean that investors are even more willing to allocate to these high grade bonds, while simultaneously encouraging companies to display even more patience with borrowing now that rates are no longer rising. But there's another even more mechanical advantage that credit enjoys. The significant rate hikes from the Fed, and the European Central Bank have meant very high yields on safe short term cash. That, in turn, has made the cost of holding almost any asset more expensive by comparison. Due to these very high cash yields and the fact that short term interest rates are higher than long term interest rates, owning equities or government bonds in the U.S. and Europe is a so-called negative carry position, costing money to halt. The passage of time if nothing changes, is currently working against many of these asset classes. But this isn't the case in credit, where both the level of spreads and the shape of the credit curve mean that the passage of time works in favor of the holder. And it's worth noting that two other assets that have this so-called positive carry property, the U.S. dollar and oil, are also currently being well supported by the market. We think the Federal Reserve and the European Central Bank are now done raising interest rates for the foreseeable future. We think this could modestly discourage borrowing by investment grade companies as they wait for more favorable rates and encourage buying as investors hope to now lock in these higher yields. Moreover, we think that this pause by central banks could help reduce overall bond market volatility, working to the relative advantage of assets that pay investors to hold them like corporate credit does. Thanks for listening. Subscribe to Thoughts of the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

Even with the possibility of a fourth-quarter slowdown in consumer spending, positive data across the board suggests the U.S. economy is still on track for a soft landing.----- Transcripts -----Ellen Zentner: Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Sarah Wolfe: And I'm Sarah Wolfe, also on Morgan Stanley's U.S. Economics Team. Sarah Wolfe: And today on the podcast, we'll be discussing our updated U.S. economic outlook for the final quarter of 2023. It's Thursday, September 21, at 10 a.m. in New York. Sarah Wolfe: Ellen, since early 2022, you and our team have had a conviction that the U.S. economy would slow without a crash and experienced a soft landing. We maintained that view in our mid-year outlook four months ago, but we've recently revised it with an expectation for even stronger growth in the U.S.. Can you highlight some of the main drivers behind our team's more upbeat outlook? Ellen Zentner: Yes, so I think for me, the most exciting thing about the upward revisions we've made to GDP is that there's a real manufacturing renaissance going on in the U.S. and according to our equity analysts, it is durable and organic. So it's not just being driven by fiscal policy around the CHIPS Act and the IRA, but this is de-risking of supply chains, it's happening across semiconductors, our industrials teams have noted it, our construction teams and our LATAM teams around what's going on in terms of on-shoring, nearshoring with Mexico being the biggest beneficiary. So I think that's a really exciting development that is durable and then the consumer has been more resilient than expected. And I know that, Sara, you've been writing about Taylor Swift effect, Beyoncé effect, Barbenheime, you know, and it's just added to a very robust consumer this year than we had initially expected. Sarah Wolfe: Ellen, and what about inflation? What role does inflation continue to play at this point? Is the disinflationary process still underway and what are our expectations for the rest of this year and next? Ellen Zentner: Yes, So I think the disinflationary process has actually played out faster than expected. Well, let me say it's coming in line with our forecast, but much faster than, say, the Fed had expected. And we do expect that to continue. I think some of the concerns have been that the economy has been so strong this year and so would that interrupt that disinflationary process? And we don't think that's the case. The upward revisions that we've taken to GDP that reflect things like the manufacturing renaissance also come with stronger productivity, and they're not necessarily inflationary. But Sara, since your focus is on the U.S. consumer, let me turn it to you and ask you about oil prices. So oil prices have rallied here, you've spent a good deal of time looking at the impact that rising prices might have on real consumer spending, so how do you go about analyzing that? Sarah Wolfe: You're correct. Energy prices do impact consumer spending and in particular, when the price jumps are driven by supply side factor. So supply coming offline, that acts like a tax on households and we see a decline in real spending. We in particular see real spending impacted in the durable goods sector and in autos in particular. We have seen quite a rally recently in oil prices. It's definitely not to the extent of what we saw last year, but what we're going to be watching is how sustained the rally in oil prices are. The higher prices stay for longer, the more it impacts real consumer spending. Ellen Zentner: So retail sales have been strong, when are they going to be slowing? I mean we're going into the fourth quarter here, all on the consumer it looks like it's been stronger than expected. And I know this is sort of a maybe too broad of a question, but are consumers still in good health? Sarah Wolfe: As you mentioned earlier, consumer spending has been more resilient than expected. In part, it's been due to the fact that we've seen a full rebound in discretionary services spending, but it was not paired with a one for one payback in discretionary goods, which we've seen in the retail sales report, have held up better. And so while the consumer remains fairly healthy, we do expect to still see that pretty notable spending slowdown in the fourth quarter and part of that is being driven by the fundamentals. We have a cooling labor market, a rising savings rate, higher debt service obligations. But then as you also mentioned earlier, we had the roll off of some of these one off lifts like Barbenheimer, Beyoncé and Taylor Swift. Ellen Zentner: So why doesn't the consumer just fall off a cliff then? Sarah Wolfe: Because part of our big call for the soft landing is that the labor market is going to be relatively resilient. We do have jobs slowing, but we do not have a substantial rise in the unemployment rate because we think

A potential debt-deflation cycle in China could spell opportunity for U.S. Treasuries and Asia corporate bonds outside of China.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of China's economy on fixed income markets. It's Wednesday, September 20th, at 10 a.m. in New York. We spend a lot of time on this podcast talking about the market ramifications of the evolving US-China relationship, and understandably so, as they are the world's biggest economies. But today, I want to focus more on the evolving economy inside of China and how it has implications for global fixed income markets. A few weeks ago on Thoughts on the Market, my colleague Morgan Stanley's Global Chief Economist Seth Carpenter, detailed how our Asia economics team is increasingly calling attention to what they term China's 3D challenge of debt, demographics and deflation. In short, there's a risk that servicing high levels of debt in China's economy could strain its weak demographic profile and dampen demand in the economy, all leading to a debt deflation cycle. While such an adverse outcome currently is in our economists base case, there's been material slowing in China's economic growth. So in either case, China, at least for the moment, is a weaker consumer on the global stage, meaning they may effectively export disinflation to developed market countries. And while our economists flag this weakness may not translate to substantial disinflation pressures, they also note directionally it may help already cooling inflation in places like the United States. Understandably, our team in fixed income research across the globe is focused on many potential impacts from the spillover effects of China's 3D challenge. But there's two that stand out to me as most relevant to investors. First, for investors in U.S. Treasury bonds, this disinflation pressure, even if modest, could help push yields lower in line with our preference for owning bonds over equities. That disinflation pressure could add to other more meaningful pressures in the U.S. in the fourth quarter, as student loan repayments start in the absence of major entertainment events that were a one time shot to consumption this past summer. Second, if you're an investor in corporate bonds, our Asia corporate credit team sees opportunities to diversify away from China Credit, which has been struggling to deliver solid risk adjusted returns and remains concentrated in the property sector, with our team seeing opportunities in Japan, Australia and New Zealand in particular. Credit markets in these countries not only provide geographical diversification but also diversification into sectors like financials and materials. This is a developing story that's sure to impact the global outlook for the foreseeable future, and you can be sure we'll keep you updated on how it will influence markets. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

A number of U.S. industries rely heavily on critical minerals that must be imported from other countries. Policymakers and business leaders are calling for investment and reshoring to manage that risk. U.S. Public Policy Research Team member Ariana Salvatore and Head of the Metals and Mining Team in North America Carlos De Alba discuss.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore from our U.S. Public Policy Research Team. Carlos De Alba: And I am Carlos De Alba, Head of the Metals and Mining Team in North America. Ariana Salvatore: On this special episode of the podcast, we'll discuss what we see as an inflection point for the U.S. metals and mining industry. It's Tuesday, September 19th, at 10 a.m. in New York. Ariana Salvatore: Since 1990, the U.S. has seen a significant increase in both the variety of imported minerals and the level of dependance on these imports. As of right now, U.S. reliance on imported critical minerals has reached a 30 year high, and simultaneously, investment in the industry is near its lowest point in decades. But as we're seeing the world transition to a multipolar model where supply chains are more regional than global, it's becoming ever more obvious that the U.S. needs to turn to reshoring in order to satisfy its growing need for these critical minerals. So, Carlos, before we get too deep in the weeds, let's start off with something simple. Can you define critical minerals for our audience? Carlos De Alba: Yeah. So the Energy Act of 2020 defined critical minerals as those which are essential to the economy and the national security of the United States. They also have a supply chain that is vulnerable to disruption and serve an essential function in the manufacturing of a product, the absence of which would have significant consequences for the economic and national security of the country. The Act also specified that critical minerals do not include fuel minerals, water, ice or snow, or common varieties of sand, gravel, stone and clay. The U.S. Geological Survey, or USGS, is a government agency in charge of creating the official list of critical minerals that are meet that criteria that I just mentioned. Ariana Salvatore: So given the importance of these critical minerals, what are some of the factors that led to this prolonged underinvestment in the metals and mining industry? And who have been the major exporters of critical minerals to the U.S. over the last three decades? Carlos De Alba: It is quite a complex issue, but the bottom line is that the US has scaled back its mineral extraction, processing and refining capabilities since the 1950s, because of environmental concerns and economic considerations like higher labor costs and lower economies of scale. As mining activities decline in the U.S., the country has increasingly relied on imports from China, Brazil, Mexico, South Africa, Indonesia, Canada and Australia, among others. Ariana Salvatore: So it's obvious that China is clearly in a powerful position to influence the global mineral markets. It's the first one on the list that you just mentioned. What is China to doing right now with respect to its exports of minerals and what is your outlook when you're thinking about the future? Carlos De Alba: Well, over the last 4 to 5 decades, China gradually took over the industry by heavily investing in exploration, mineral extraction, and more importantly, refining and processing capabilities. China's dominance over the world minerals processing supply chains has created, as you would expect, geopolitical and economic uncertainties can cause supply disruptions to crucial end markets such as green technologies and national security. A recent example of export curbs took place in July of this year, when China imposed export restrictions on two chipmaking minerals, gallium and uranium, citing national security concerns. The move was widely interpreted as a retaliation against the US and its allies for having imposed restrictions that caught China's access to Chipmaking technologies. Now this move by China was particularly relevant because the country produces over 80% of the world's gallium supply and 60% of germanium, and it is the primary supplier to the US representing more than 50% of these two minerals imports to the United States. But since we're on this topic Ariana, how are the US policymakers trying to help the strengthening of domestic supply chains? Ariana Salvatore: Right. So most things that involve building up the domestic sphere in order to kind of build resiliency or counter China's influence are quite popular bipartisan priorities. So we're seeing policymakers on both sides of the aisle indicating support for reshoring the critical mineral supply chain. That's mainly accomplished through legislation that targets things like tax incentives, or subsidies for corporates. On the regulatory front, it really comes down to