After a period of low interest rates and cheap corporate debt, global markets are in the beginning of a fundamental shift.
Pick said last week at a New York financial conference that the transition from the economic conditions that followed the 2008 financial crisis will take 18 to 24 months.
The first Pandemic in 100 years has happened. This is the first time in 75 years that we have invaded Europe. We have our first inflation in 40 years. The end of 15 years of financial oppression signals the beginning of the next era.
Jamie Dimon, the CEO of JP Morgan Chase, said last week that a storm is on the way. That sentiment was echoed by Goldman's President, John Waldron. The CEO of a regional bank thinks a recession is unavoidable.
Pick gave some historical context as well as his impression of what the tumultuous period will look and feel like, instead of just raising alarm.
Pick said that markets will be dominated by two forces: concern over inflation and recession.
Pick said that there will be periods where it feels fiery and others where it feels icy.
Some businesses will boom while others will not. Fixed income traders were given less to do after the financial crisis. Government bond and currency traders will be more active as central banks deal with inflation.
The uncertainty of the period has led to a reduction in merger activity. Investment banking fees have fallen 45% so far in the second quarter, while trading revenues have risen as much as 20%, according to a report by JP Morgan.
Pick said that people are trying to figure out whether or not we will have this paradigm shift clarified sooner or later.
The "Goldilocks" narrative will take hold if economic growth and inflation hold up, he said. The Federal Reserve's move to shrink its balance sheet seemed to be pessimistic that this scenario will play out.
The push and pull between inflation and recession will take time. Pick is a theory in which policymakers keep interest rates low to provide cheap debt funding to countries.
Pick said that the next 12 to 18 months would be the time for the conversation.
Negative interest rates and measures to inject money into the system have been hallmarks of the previous era. Savers have been negatively impacted by the moves.
The global financial system was drained of risk by central banks. Cheap debt has been used to keep unprofitable corporations afloat. Thousands of start-ups have bloomed recently with a money burning mandate.
The battle against inflation is being prioritized by the central banks. Everyone from credit card borrowers to billionaires will be affected by their efforts. Start-ups have been told to keep their cash and focus on profitability. The interest rates on online savings accounts have gone up.
Such changes could be difficult. Black Swan-like events in the plumbing of the financial system, including the bursting of the greatest credit bubble of human history, are worrying some observers.
A new business cycle will emerge out of the ashes.
A new cycle will be brought about by this paradigm shift. It has been a long time since we had to think about what a world with real interest rates and real cost of capital would be like.
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