Morgan Stanley has taken an internal study over the cost of debt and done some basic math so you don't have to. The study figures that stock market corrections occur about six months after the cost of debt begins to increase. Since spreads began to widen in February, Morgan Stanley thinks that (let's see, take the 2, add the 6, carry the 1, integrate by parts... and yup, 8) August could see a 14% market correction, or 2,000 points off the Dow.
Historically, equity markets take a while to pick up on the bad market omens created by higher rates and wider spreads. The eerie similarities between now and the last bubble burst, from the Telegraph:
The current pattern looks similar to the relentless rise in spreads from February to September 2000 when the stock markets finally tipped over... the iTraxx Crossover index measuring risk appetite for high-yield bonds touched bottom at around 170 in February. It has since jumped to 320 - mostly this month - implying a 150 basis point rise in the cost of raising capital.
Morgan Stanley's internal Cassandras think the correction could begin with the unwinding of the yen carry trade in Japan, significantly impacting global liquidity. The Bank of Japan is expected to raise rates in August.
Morgan Stanley Predicts Correction [DealBook]
Morgan Stanley predicting correction [Telegraph]