Last week, Ted Pick, head of institutional securities at investment bank Morgan Stanley, joined bankers and investors from Jamie Dimon to Carl Icahn in warning that chances of a recession are steadily rising, marked by periods of a hot and cold economy. 

“There is a fire narrative, and that fire narrative is inflation. And then there is a bit of an ice narrative, that recession talk, hard landing or soft landing,” he said. “We’ll have these periods where it feels awfully fiery, and other periods where it feels icy, and clients need to navigate around that.” 

There is still a decent chance the U.S. will enter a recession, but we likely will not know for sure until next fall, Pick said. 

He forecasts an economic downturn and slowdown in banking business if “inflation and inflationary expectations are cementing” by next fall, as this would force the Fed to tighten monetary policy and raise interest rates even higher.

But even if a recession does hit, it will not necessarily entail an economic collapse akin to what happened in 2008. And Pick says that the U.S. is on the precipice of an entirely different business cycle which will be a departure from the loose monetary policy of the last 15 years. 

Paradigm shift

A momentous upheaval to the economy may have been inevitable after a record bull market run marked by a prolonged period of low borrowing rates, according to Pick.

The pandemic briefly interrupted this run in 2020, but the economy bounced back quickly last year, with massive rebounds from all three major stock indices and a record volume of mergers and acquisitions. 

But after a new war in Ukraine, high inflation, and higher interest rates, a new economic norm is emerging, according to Pick. 

“It’s an extraordinary moment,” he said. “It signals a paradigm shift: the end of 15 years of financial repression and the next era to come.”

This new economic era could be an entirely new business cycle, one Pick says might be defined by higher borrowing rates than consumers have grown accustomed to over the past decade and a half.

Financial repression—which Pick spoke of several times during his speech—refers to a monetary strategy of redirecting company profits from the private sector to pay off government debts. According to Pick, it often leads to lower interest rates for a prolonged period of time and reduced savings in the private sector, and the policy has been employed by the U.S. several times in moments of high public debt.

The shift away from an age of “financial repression” won’t happen overnight, he says. 

“We’ll be having this conversation for the next 12, 18, 24 months,” Pick said, but assured that a change is coming, and a new business cycle with different rules is set to emerge in the old one’s wake.

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