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VIDEOWhy Morgan Stanley Doesn't Think US Is Headed for Deflation
A recent report researches the similarities and differences between our financial situation and Japan's.
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Morgan Stanley released a research report on Monday that asked a simple question: Are the US and Europe about to follow Japan into deflation? To jump to the chase, Morgan Stanley doesn't think so.
The report states that Japan fell into deflation because of a combination of structural factors that included high central bank independence and low accountability, advanced aging of population, an electoral system that represents the older votes, and a current account surplus. And Morgan Stanley doesn't think these factors are likely to change soon.
The research team doesn't think the US will fall into a deflationary spiral because it has none of the characteristics evident in Japan. For instance, the report states that the US central bank is more independent and the dual mandate of the Fed is more transparent. Furthermore, The Fed chairman is required to testify in front of the House and Senate, giving the Fed accountability. As for the US population, it is aging but, according to Morgan Stanley, not as fast as Japan.
I think the only true difference is that the US has run a current account deficit for many years and most of our debt is held by foreigners, whereas in Japan very little of the country’s debt is held by foreigners. The counter argument to this point is that the US dollar's status plays the same role as Japan’s current account surplus. According to Morgan Stanley, the dollar’s role as a reserve currency creates a huge demand for dollar reserves and is the equivalent of an account surplus.
As stated above, Morgan Stanley doesn't see the US as a case for Japan. I kind of disagree, to me the reasons Japan fell into deflation look an awful lot like the case here. However, Morgan Stanley notes that the chances of deflation in the US could be reduced by cleaning up lenders' balance sheets and mitigating mortgage foreclosures.
As for preventing deflation, Morgan Stanley says the Fed still has plenty of options. The first is to take the policy rate to zero. The second is a cap on short-term treasury yields, long-term treasury yields, and MBS yields. Third is to lend directly to the private sector via the banking system. And finally, my favorite option, the old printing press.
From an investment standpoint, Morgan Stanley thinks government bonds will outperform and real estate and equities will underperform. As I wrote on Tuesday, I believe that dividend stocks could be attractive here, especially with rates so low. Some names of interest are Verizon (VZ), Altria (MO), Reynolds American (RAI), and Bristol-Myers Squibb (BMY) for those inclined to own equities. However, I may be warming up to the idea of investing in farmland, a la Michael Burry.
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