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00:04Ted, thanks for letting us come into the headquarters and have a conversation about the quarter and beyond.
00:11Welcome to Morgan Stanley, Leslie.
00:13Thank you.
00:13Thanks for coming.
00:14Thank you.
00:15You spoke on the earnings call about these two phases of the quarter.
00:19There was the July and August that were brisk, you said, and September changed the equation with inflation and higher
00:24rates and oil.
00:26Do you expect the fourth quarter will look more like the earlier part of the third quarter or the latter
00:31part?
00:31Well, that's the great question, right?
00:33The two known unknowns of the year have been the AI phenomenon and geopolitics.
00:40And I think the lights just went out, but we're going to keep going, right?
00:45But they're back.
00:46Here we are.
00:47Okay, glass half full.
00:48And the interaction of the AI phenomenon and geopolitics has been the dominant reality of the whole year.
00:57And what we saw in this past quarter are really two quarters, as you say.
01:01The first quarter was really risk-on.
01:05AI phenomenon powering GDP growth, 5%, 6%.
01:10The economy continues to move along in full employment.
01:13The Fed is focused on inflationary expectations.
01:16The sentiment, positive.
01:17And then as we got towards Labor Day, folks started asking about the rate at which the CapEx spend would
01:23take place.
01:25Are interest rates and inflation higher and elevated and sticky in a way that actually suggests there could be some
01:31incremental risk to the economy?
01:34And obviously geopolitics in two places.
01:36So it's really two very different stories.
01:39And I'd like to think that we are going to have the first narrative, the positive narrative, if we can
01:45get some control over the geopolitics.
01:47If some of the geopolitics sort of comes under control, I think a lot of it flows back to the
01:52positive part of the glass,
01:54which is that the AI phenomenon is real, the economy continues to grow on the back of it, inflation is
02:01under control, corporate earnings are great.
02:04So I'm cautiously optimistic about the fourth quarter.
02:08Where I'm more optimistic is Morgan Stanley's place in it, because we are acting as a central advisor to clients.
02:16And that's in the wealth business, in our investment banking business, in our markets business.
02:20And there we are very busy.
02:22I want to ask about just the AI super cycle, because, as you mentioned, it's been kind of critical, both
02:29from a sentiment standpoint, as well as for a Morgan Stanley business standpoint.
02:33And on last quarter's call, you said that only 10 to 15 percent, that we were only 10 to 15
02:40percent through that cycle.
02:42Since then, we've seen bigger political pushback on data centers.
02:46We've seen higher interest rates, as you mentioned.
02:48And we've seen the large players ratchet back their own development over concerns about safety.
02:53Have your expectations shifted at all in light of those headwinds, just in terms of the durability of this super
03:00cycle and the ability to, you know, benefit and capitalize from it?
03:05We're asking the right question.
03:07One has to accept the premise that the AI super cycle is a once in a generation, once in a
03:14multi-generational phenomenon.
03:15And we at Morgan Stanley believe that to be true.
03:18So the question is, at what rate will the hyperscaler CapEx be deployed?
03:22Is it a trillion a year?
03:24Is it a trillion two a year?
03:26Will it take eight years or 10 years?
03:28Will it be 12 trillion or 15 trillion?
03:30These are huge numbers.
03:32But over the course of time, I think it is a reality that if you want to be in it,
03:36to win it, you have to be in in big size.
03:39And a lot of those flows are being put against the best capitalized, highest cash flow companies in the world.
03:44And our role is to act as an advisor in the middle to help structure private versus public, debt versus
03:49equity.
03:50Leslie, I think it is without a doubt the case that the AI investment cycle is here.
03:55How long it takes to deploy?
03:57At times, will there be investment ahead of the technology and vice versa?
04:02Absolutely.
04:03That's the case with any once in a generation or once in a multi-generation phenomenon.
04:07But for efficiency, for productivity, for resiliency, the digital realm is here.
04:13And I think it's critically important that Morgan Stanley is a part of that as a trusted advisor.
04:18And so we are double overweight that.
04:20And whether the hyperscaler CapEx is a trillion next year or a trillion two or 900 billion, it's less important
04:27than where we're going.
04:28And where we're going is probably, in the long run, depending on how you measure it, 10 to 15 trillion,
04:33which against an S&P of 70 or 80 trillion is a big number.
04:38But it's one that, bear in mind, is powering probably 50 basis points of real growth in the U.S.
04:44economy, as you know.
04:45So it's real, and we believe it will be sustained.
04:47And in terms of the IPO pipeline, specifically as it pertains to this, Morgan Stanley is a key advisor to
04:53a lot of the companies that are seeking to go public, as well as some who delayed their potential IPOs
04:59during the quarter.
05:00How are you thinking about the window right now for IPOs?
05:04I know you say that the pipeline is strong, as have many of your peers.
05:08But in terms of just the overall environment, are companies able to get the valuations they want, given what we've
05:14seen with the shift in the rate picture?
05:15We continue to be bullish on the corporate finance lifecycle, which is principally led by IPOs and the M&A
05:23product.
05:24It's a global phenomenon.
05:26There's been a ton of pent-up demand.
05:28We're in a reasonable regulatory environment, and that clock may be ticking.
05:32So strategics and sponsors are both thinking about that.
05:36It has been strategic-led.
05:38You think about AI, you want to scale to get bigger, as we've talked about before.
05:41You want to penetrate the public markets if you can.
05:43The holy grail is to go public.
05:45But if you don't go public, you can access private capital by other means and continue to act as a
05:49private company.
05:50But ultimately, you want to have that public currency.
05:52And the IPO market has been quiet for so long, we're starting to see it come to fruition.
05:57And we're seeing these very large, established companies come that are very exciting and will be well-held names.
06:04And for Morgan Stanley, the proposition is not just to act as the underwriter, the advisor, but also they are
06:09workplace clients.
06:10In many cases, we have the preponderance of the unicorns as workplace clients, which is incredibly exciting, because then we
06:17are attracted and attached to the employee base, and they become wealth clients.
06:21So for our integrative firm to have the investment bank working and to have the wealth management business working in
06:26a stock-based world, we're still in a stock-based world.
06:29That makes us constructive.
06:31Now, if interest rates were to get away from us, and that was on the back of a lack of
06:36control over inflationary expectations or real geopolitical noise, then I would expect volumes to go down.
06:43The IPO windows are market-sensitive, so they would be more closed or more opportunistic.
06:48But that's not the way we're thinking about it right now.
06:50We're thinking that the windows are open for the right structure.
06:55Investors are discerning.
06:57They're taking a look at what the right cost of capital is in a normalized interest rate environment.
07:02And in many cases, they want to put the risk capital to work if they believe that the company can
07:05make it over the next three, five, ten years as a public company.
07:08And you mentioned it's an equity world.
07:09Your equities division jumped 41 percent in the quarter.
07:13That was led by prime brokerage and derivative results.
07:16It's obviously been a boon for Morgan Stanley, but there is a question out there whether there's just too much
07:21leverage in the system and whether it increases the risk of the markets right now.
07:25Are you seeing any of that?
07:27We're not seeing it in any kind of troubling way inside of the equities business.
07:33The equities business is really largely a market-making, solution-based business.
07:39Of course, we finance asset managers, too.
07:40But while there are high levels of gross leverage, there isn't anything that has struck us as folks being off
07:47-sides or folks getting tripped up by the complicated geopolitics.
07:51Obviously, as a risk manager, we're constantly looking at how clients are doing every day to make sure we're in
07:58a good place.
07:58But part of what we like is the fact that it's a holistic offering.
08:02You know, we're basically bringing research and content on the desk to our clients.
08:08And what's different today versus when I was running the business many years ago is there's a real derivatives business
08:15now inside of what we call the nine boxes, cash, derivatives, and prime brokerage across the three regions.
08:21It's a global business.
08:23It's a business that talks well with a fixed-income business behaviorally.
08:26We have teams that work together with research and with bankers.
08:29So the clients feel that, and it is a business, as you know, that is built on scale, better, faster,
08:35cheaper if you're doing it through the machine, and real advice if you're talking to a salesperson, she's on the
08:41desk.
08:41That's got to be the barbell, and I think we've achieved that quite nicely, and I think it's something that
08:46in a stock-based world is going to continue to run for many years because the world is just getting
08:51going on equitizing.
08:52We think sometimes in a U.S. context, but if you're in Japan, if you're in India, if you're in
08:56Korea, if you're in big parts of Europe, in France, in Germany, we're at the early stages of equitization.
09:01So it's incredibly exciting and very important, Leslie, because it attaches to our wealth management business.
09:07So as clients amass wealth and they want to monetize that wealth or they want to allocate to different products,
09:13we're able to bring that product to them.
09:15Yeah, and you saw that in the quarter with a whopping $232 billion in wealth management flows, which was more
09:20than BlackRock and Evercore ISI estimates probably more than most public wealth managers combined in the quarter.
09:28Ted Pick, thank you so much.
09:29Thanks, Leslie.
09:30I really appreciate it.