Llevamos unos cuantos meses donde se oye de todo y se augura nuevas caídas de los mercados, que no se acaban de producir… Además todo lo que en teoría debe sentar mal al mercado, lo hace al revés, es bullish!!!
Todo lo que hace la FED...
0% rates = bullish
QE 1, 2, 3 = bullish
Taper = bullish
No QE = bullish
Rate Hikes = bullish
Balance Sheet reduction = bullish?
¿Hasta cuándo? Ni idea, llevamos años diciendo que esto anda demasiado fuerte y que debe corregir, pero el mercado sigue haciendo máximos tras máximos…
Over the years, the clients of Goldman Sachs have periodically found themselves on the verge of panic.
Then, in July 2016, Goldman's clients again had a burning question: they were struggling to reconcile how extreme valuations of both equities and bonds can co-exist. As David Kostin explained one year ago, "client discussions reveal low portfolio risk coupled with concern that the rally lasts. Most investors have been skeptical of the valuation expansion and have not participated in the 8% rebound from the post-Brexit low on June 27. Upside call buying has been a popular strategy to insure against upside risk." Additionally, Goldman clients were very worried that this remains a market without any earnings growth, and that much of the S&P upside has been due multiple expansion: "the S&P 500 forward P/E has already expanded by 70% during the past five years, exceeding all other expansion cycles except 1984-1987 (up 111%) and 1994-1999 (up 115%). Both prior extreme P/E multiple expansion cycles ended poorly for equity investors."
While it is unclear if said clients got over their concerns and got on with the BTFD program, what we do know is that since last July, already extreme valuations have only gotten more extreme, and as a result, Goldman clients are once again very worried, this time about an "imminent equity downturn" (banker euphemism for crash).
As Goldman's chief equity strategist, David Kostin writes in his latest Weekly Kickstart, "the question every client asks: “Is an equity correction imminent?”
He then concedes that "Of course, at some point the S&P 500 will retreat"... but then gives two (painfully laughable) explanations why not just yet. First, however, he lays out the 7 reasons why Goldman's clients are so fearful:
1. History. Many investors argue the bull market is “long in the tooth” and will soon come to an end. It has been 14 months since the S&P 500 index experienced a 5% sell-off and 19 months since the market had a correction of 10%. The last bear market defined as a fall in the index greater than 20% ended in 2009. The current bull market has lasted for 8.5 years and the S&P 500 has climbed by 260% compared with a 124% rise in earnings and a 64% P/E multiple expansion to 18x forward EPS.
2. Volatility (or lack thereof). Realized 3-month vol is nearly the lowest in 50 years. Implied vol as measured by the VIX stands at 12, a 6th percentile event since 1990. In his recent book, Tectonic Shifts in Financial Markets, the legendary Salomon Brothers economist Henry Kaufman (with the superb sobriquet “Dr. Doom”) references the lesson of Sherlock Holmes in “The curious incident of the dog in the night-time” that what doesn’t happen matters as much as what does. Low volatility across asset classes may be masking risks that are not evident today but will be obvious in retrospect.
3. Valuation. Equity valuations are stretched on almost every metric. The typical stock trades at the 98th percentile and the overall index at the 87th percentile relative to the past 40 years. Only on a Free Cash Flow (FCF) yield basis is the market valued at an average level (4.4%). But as we detailed in a recent report, the collapse in capex spending explains the FCF yield. On a cash flow from operations basis the market trades at the 87th percentile. Other asset classes are also highly valued vs. history: nominal Treasury yields (92nd), real yields (75th), and HY (75th) and IG (69th) spreads.
4. Economics. The current US economic expansion just celebrated its 8th birthday making it one of the longest stretches without a recession. Only the 10-year expansion during 1991-2000 and the 9-year expansion from 1961 to 1969 had longer durations. The median length of the 16 expansions since 1921 has been 42 months. Along with the question about an equity correction, another frequent inquiry is “when will the next recession occur?” Our economists assign an 18% probability of a recession within 12 months.
5. Fed policy. The FOMC has lifted the funds rate by 100 bp since it started tightening in December 2015. During prior hiking cycles, equity P/E multiples typically fell but multiples have actually expanded during the past two years. Futures imply one hike by year-end 2018 vs. our economists’ estimate of five. The uncertain pace of further tightening is a cause of much investor anxiety.
6. Interest rates. Two months ago, Treasury yields equaled 2.4%, ten-year implied inflation was 1.7%, and the S&P 500 stood at 2410. Our year-end forecasts of a 2.75% bond yield and a 2400 level in the S&P 500 looked rational. However, weaker-than-expected inflation data sparked a 35 bp drop in bond yields to 2.05% and a 2% stock market rally to 2465 (+10% YTD). Looking ahead, we maintain our year-end 2017 target (-3%).
7. Politics. President Trump’s fluid positions on domestic policy disputes in Washington, D.C. and geopolitical gamesmanship with Pyongyang and Beijing make political forecasting a precarious activity. One fund manager cited the “Law of Conservation of Volatility” under which there is a finite amount of uncertainty in the world. All the risk is now concentrated inside the Beltway and volatility outside of politics is close to zero. Of course, this could change at a moment’s notice.
As Kostin further adds, "investors cite the points above to justify their forecast of a looming correction. According to their narrative, high valuation leaves little room for error. A Fed tightening despite low inflation will spark concerns about the sustainability of economic expansion and lead to a jump in vol that may be compounded by a political event that in turn will spark a wave of selling. As factors reverse performance, quant funds will liquidate positions putting additional downward pressure on share prices and driving indices lower."
So what is Goldman's response to these 7 very valid concerns? In a nutshell, "don't worry and just BTD" or as Kostin puts it, "because investor euphoria is non-existent, an imminent start of a long decline seems
unlikely."
Skepticism abounds with normal 3% mutual fund cash positions. However, a sturdy consumer accounts for 69% of US GDP and buybacks remain persistent. Firms with high growth investment ratios have durable prospects even in the event of a market hurricane.
Maybe Goldman clients should add an 8th concern: a grossly incompetent advisor.
In any event, for those who enjoy having their hand held and buying stocks which trade at the 98th percentile in valuations, hoping for even higher prices, this is who Kostin "rationalizes" his grossly wrong assessment:
Although the preceding sequence of events could happen, we view it as a low probability event in the near-term for two key reasons:
First, investors are not complacent. In Sir John Templeton’s timeless observation, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Investors today are situated between skepticism and optimism. Few are euphoric as 27% of core managers are beating their benchmark. “Tormented bulls” best describes investor mentality. Alpha-seekers have normal cash positions (3.2% of mutual fund assets), active manager redemptions are offset by beta inflows (ETFs), and corporates continue to repurchase shares.
Second, US economic growth persists led by consumers that account for 69% of GDP. Monthly job growth has averaged 175K YTD, wages are rising (our leading indicator is a 2.7% rate), confidence is at the highest level since 2001, and household balance sheets are the strongest since 1980. For corporates, S&P 500 sales and EPS will rise by 5% and 7% in 2018. “Firms of tomorrow” with Growth Investment Ratios averaging 91% of CFO in past 3 years (vs. S&P 500 median of 17%) will grow 2018 sales and EPS by 7% and 12% and will outperform should a market hurricane occur (GSTHHGIR).
In short: yes, the market should crash, but because investors are not complacent (just don't look at the VIX), and because the economy is so strong (just don't look at the 10Y), everything will be fine. Surely this optimistic bias would lead Goldman to at least expect some upside from here in the S&P? Well, no:
"We expect the S&P 500 will end 2017 at 2400 (-2.6)%."
And scene.
Abrazos,
PD1: Te copio lo que dijo Goldman Sachs hace una semana:
The B word is something which is almost whispered in financial circles. To acknowledge there might be a bubble somewhere is like admitting the proverbial elephant is in the room.
But, like many taboo words, it seems the mainstream are coming around to the idea that it is ok to mention the word ‘bubble’ and express their concerns about the possibility of at least one existing.
This week Goldman Sachs’ Lloyd Blankfein, Deutsche Banks’ CEO John Cryan and strategists at Bank of America Merrill Lynch have separately expressed concerns that there are signs of bubbles in the markets - from the obvious bitcoin bubble to the less obvious bubble in London and other property markets and bubbles in many stock and bond markets.
The most obvious one is bitcoin. Bitcoin is up 380% this year whilst the combined market cap of cryptocurrencies is up by 800%. However these are by no means anomalies according to analysts at BAML.
Cryan and Blankfein agree, thanks to central bank money printing and low interest rates, they too are expressing their concerns over the state of markets.
"When yields on corporate bonds are lower than dividends on stocks? That unnerves me ... "
Lloyd Blankfein
There's no bubble here
Professor Robert Shiller has been calling a bubble in bitcoin for a couple of years, for him it is the latest sign of 'Irrational Exuberance'.
“The best example right now [of irrational exuberance] is Bitcoin. And I think that has to do with the motivating quality of the Bitcoin story. And I’ve seen it in my students at Yale. You start talking about Bitcoin and they’re excited! And I think, what’s so exciting? You have to think like humanities people. What is this Bitcoin story?”
The bitcoin community was not best pleased when the man who is credited with being able to spot speculative manias decided to single out the cryptocurrency as the latest one.
In response CoinTelegraph wrote an article entitled 'Bitcoin So High Above the Bubbles They Can't Be Seen'. The author claims that bitcoin is failing to follow the pattern of other bubbles.
In fact, a closer inspection of the growth, and the eventual burst of the associated bubbles shows that Bitcoin is so far off the charts that it looks like an absolute outlier.
The bitcoin crowd are doing exactly what so many tend to do when a market is massively outperforming - they build a narrative from it and begin to fuel the belief that the price can only go up.
A BBC Capital article on the bitcoin phenomenon quotes a small bitcoin investor as saying '“I don’t know how far it’s going to grow,” he explains, “but if something is growing at hundreds of per cent, that’s a pretty valuable return.” Note 'I don't know how far it's going to grow...' The investor is convinced this can only go one way.
For now we can perhaps assure ourselves that unlike in some other markets few investors will have gone all in or driven themselves into debt (as per the housing market).
A happy, bubbly narrative
Bubbles are created when investor enthusiasm and optimism are at excessive levels.
In a 2010 interview with the Financial Crisis Inquiry Commission (FCIC) Warren Buffett explained that this happens because investors originally invest based on a sound premise, which is then the only focus for the investment strategy and they end up blinkered.
Simply put investors begin to invest based on a sound premise, for example house prices are going to go up because money is losing its value and there is a more demand than supply.
Investors are convinced that as house prices are climbing they must buy now. This goes on and on based on the original premise. Investors ignore other developments such as house price climbs are now outstripping inflation. We are seeing a similar thing in bitcoin.
The housing example is no more pertinent right now than in Australia which is basically a $1.7 trillion house of cards. According to LF Economics, Australian housing speculators are able to use unrealized gains in properties as a 'cash substitute' for down payments on other investment properties. 'Profitability is therefore predicated on ever-rising house prices...“[Many] international wholesale lenders ... may find out the hard way that they have invested into nothing more than a $1.7 trillion ‘piss in a fancy bottle scam’,”
Homebuyers forget the original premise and and become blinkered by the price action - which is that house prices are going up and up. Because it has been relatively easy and cheap to borrow money to finance purchases on these properties homebuyers suddenly see themselves as investors and decide to buy more than one house, because ‘it’s only going to go up’.
This is where we are with so many asset classes right now, including bitcoin, property, vintage cars and equities.
Debt and bubble junkies
But what gets the narrative going in the first place? In the last ten years it has been the generosity of central banks in their infinite money printing and low interest rate policies.
“Post the financial crisis, the largesse of central banks appears to be inducing quicker and steeper price gains in assets compared to the case historically,” analysts at BAML wrote “Speculative behavior in assets is cropping up more frequently and in more places than just credit markets.”
Earlier in the summer Citi's Hans Lorenzen said the effect of the central banks' 'largesse' was that "the wealth effect is stretching farther and farther afield."
BAML's analysts are also seeing this spread of the bubble effect across a number of markets, not just in credit markets where there is an unprecedented buying spree. 'Asset bubbles seem to be becoming more “bubbly” as time goes by...'
Unlike our bitcoin friends, BAML sees a key issue with the current trajectory of the crypto's price:
For instance, the increase in Japanese equities was pronounced between mid-1982 and the end of 1989, with share prices rising around 440% over the period. But Bitcoin, for instance, has risen roughly 2000% since just mid-2015. And other, recent, in-vogue indices seem to be surging higher as well.
Not to mention the Nasdaq index has soared over 18 % this year while the S&P 500 and Dow Jones indexes are each around 10% higher - building on the already large gains seen in recent years. Throughout the year U.S. bond yields at the 10-year and 30-year maturities have also fallen.
As Deutsche Bank's John Cryan pointed out much of this inflation in the market place is thanks to the prolonger period of low-interest rates and cheap monetary policy. He called for the ECB to put an end to their current monetary policy and it is now causing “ever greater upheaval.”
“We are now seeing signs of bubbles in more and more parts of the capital market where we wouldn’t have expected them...I welcome the recent announcement by the Federal Reserve and now also from the ECB that they intend to gradually bring their loose monetary policy to an end.”
Is no one else worried about this?
Cryan pointed out that today volatility is markedly cheap given what is going on in both financial markets and the wider geopolitical space.
"The interesting thing about the markets today is that obviously they pay some regard to these hotspots but they don't seem to be paying too much regard because we see very high asset prices in almost all asset categories..."
In Professor Steve Keen’s book Can We Avoid Another Financial Crisis?, he argues that many countries have become debt junkies.
“They face the junkie’s dilemma, a choice between going ‘cold turkey’ now, or continuing to shoot up on credit and experience a bigger bust later.”
Is it all about to go ‘pop’?
BAML strategist Barnaby Martin thinks not. Currently the market has a benign view on rates and this will most likely only be altered by an ‘inflationary shock’ which will see the major flows into the credit cycle fall back. Or the ECB swiftly stops with its current QE programme.
The latter may come sooner than we think, today the ECB is expected to give some indication on its plans regarding bond purchases, but in reality it probably won’t make much difference.
As Martin writes, this party isn’t coming to an end just yet:
"the end of the credit party will likely require a big inflationary “shock” in Europe, and one strong enough to reset market expectations over the pace of rate hikes. Safe to say that this seems a long way off to us."
As a result, helped by falling political uncertainty (note European policy uncertainty is now lower than US policy uncertainty – the first time since mid-2012) and the renewed rise in negative yielding assets (note record number of European countries now with negative yielding debt), we see credit spreads heading tighter into year-end.
China swoops in from the left-field
How might all this end? Who knows. The last time interest-rates were this low for as long was during the 1930s and that ended with the Second World War.
It might be through trying to avoid World War III that the financial collapse is finally triggered. Currently Trump is relying heavily on China to cool things down with Kim Jong-Un of maniacal despot fame.
In Keen’s latest book China is one of the countries he believes is a debt junkie. The country’s credit-driven expansion has accounted for more than half of global growth since 2008. Why? Because it dealt with the collapse of the Western credit bubble in 2008 by fuelling a bubble of its own.
Today Chinese banks have $35tn of assets on their balance sheets – a fourfold increase since 2008. In the last decade private debt as a proportion of the country’s annual economic output (GDP) has increased from 120% to 210%.
Its financial system could almost be a mirror to those seen in the US and UK in the run up to the financial crisis. It has a large shadow banking system and special investment vehicles that take assets off balance sheets.
How does this relate to Trump, North Korea and the next financial crisis? Trump needs China on side when dealing with Kim Jong-Un. However, last week Beijing said that in the event of war between the two nuclear powers it would sit on the sidelines.
Trump now has to decide how to handle China as the country clearly has its limits in how much it will help. The most obvious option would be to impose economic sanctions for example, slapping tariffs on steel imports. It could also put China in a negative light in terms of its dealings in markets such as going back to Trump’s old rhetoric branding the country as a currency manipulator or accusing it of facilitating illegal piracy businesses.
Should sanctions be imposed then a trade war would inevitably erupt. This eruption would firmly put a pin in China’s bubble and ripples would be sent out across the world.
Bubbles, bubbles everywhere ... lots of potential pins ... got gold?
PD2: ¡Qué sabias palabras!
No sólo mires, observa.
No sólo tragues, saborea.
No sólo duermas, sueña.
No sólo pienses, siente.
No sólo exitas, vive…
