Key Financial Market Quotes (April 2018)
Massive liquidity injections from global central banks have sent stocks and bonds to record highs over the past years. The coming financial crisis may have a sharp impact on the crypto space. Investors may fly away from traditional assets and seek safe haven assets such as the US Dollar, precious metals, and top cryptocurrencies. The transition between the traditional financial system and the new one may be nearer than we think.
We always closely follow what important market players communicate at the end of a bull market because they often say out loud what the really “big guns” silently believe.
Although the following list is non-exhaustive, here is what asset managers, analysts, bankers, institutional leaders, or important voices communicated in client notes or in the financial media during the past month.
Julian Brigden of Macro Intelligence Two Partners in an interview with MacroVoices on April 1: “What actually lowered Treasury yields through almost all the period of QE was falling inflation. It was disinflation. And I use that term because I’m not a big believer in deflation.” “When it comes to equities, I think, certainly, if we’re in an inflationary environment they’ll outperform fixed income. They’re in for a bit of a shock, I fear. I fear we’re on the cusp of a 20-percenter. It could be potentially worse. And I do feel, personally, that we’ve put the highs in. I’ve said either the market has to collapse under its own weight, for whatever reason (higher volume, trade talks, whatever), and then the Fed backs off. Or, faced with the inflation picture, the Fed is just going to keep hiking until they eventually crack the market. It won’t be intentional. It’s never intentional. But it’s what always happens. So I fear that the highs are in.” “You get bond pressure and rate pressure and equity problems, and then the dollar. And the dollar comes in and is just the final napalm run into the risk-off move, and then we’ll kick off again.”
Charles Gave, Founding Partner & Chairman of Gavekal Research, in a Financial Sense Newshour podcast on April 6: “Most money today is managed with the idea that if the stock market goes down, the bond market will go up, and that is not what happens in an inflationary period. I'm trying to warn our clients to be careful that the diversification tool that they’ve been using for 30 years may be about to stop working.” “The recommendation that I've made are basically Asian bond markets … which will give you anywhere between 4 to 8 percent of yield. If the US moves into inflation, their currencies will go up. You will make money like a bandit on the yields falling and the currency rising. Build a diversified portfolio of Asian bonds, and you put that in front of your US equities portfolio and, in my opinion, in 10 years’ time you'll be smiling to the bank, whatever happens.”
Goldman's derivative strategists John Marshall and Katherine Fogerty on April 2 via Zerohedge: “The spike in VIX and realized volatility was large enough for investors outside the equity market to take notice and could lead to a reduction in risk-taking appetite on the margin in the coming months. It was yet another symptom of the market fragility created by lower liquidity. We believe that a shift towards risk reduction and expectation of higher volatility is likely to change the trading dynamics in 2018 and increase the value of time spent on hedging.”
Bill Blain of Mint Partners via the website on April 3: “Stocks are crumbling. Bond yields are falling. Yield curves are flattening. Sentiment is wobbling. Trump is jawing. The Chinese are - no doubt - smiling.”
Morgan Stanley S&T Team in a note released on April 3 regarding the US Equity ETFs $7.5 billion weekly outflows: “This feels much less like a rotation and much more like money being taken out of the market. Seeing outflows of this magnitude is notable.”
Barnaby Martin of Bank of America Merrill Lynch on April 5: “Investors worry about a potentially toxic combination of low European inflation at year-end just as the ECB – for political reasons – has to stop adding assets. This is the narrative of “Quantitative Failure”. The world has never had more debt. In fact, since the Global Financial Crisis, global debt has increased close to $50 trillion (~40%). Monetary largesse in the aftermath of the crisis was used to kick-start the economy, yet it has also simply added to the world’s debt pile. And how does one solve a problem of too much debt when bond restructurings and haircuts are no longer palatable? Inflation.”
JPMorgan Chase CEO Jamie Dimon in his annual letter to shareholders on April 5: “Since QE has never been done on this scale and we don’t completely know the myriad effects it has had on asset prices, confidence, capital expenditures and other factors, we cannot possibly know all of the effects of its reversal. We have to deal with the possibility that at one point, the Federal Reserve and other central banks may have to take more drastic action than they currently anticipate – reacting to the markets, not guiding the markets.” “Financial markets have a life of their own and are sometimes barely connected to the real economy. Volatile markets and/or declining markets generally have been a reaction to the economic environment. Most of the major downturns in the market since the Great Depression reflect negative future expectations due to a potential or real recession. In almost all of these cases, stock markets fell, credit losses increased and credit spreads rose, among other disruptions. The biggest negative effect of volatile markets is that it can create market panic, which could start to slow the growth of the real economy. The years 1929 and 2009 are the only real examples in the United States in the past 100 years when panic in the markets caused large reductions in investments and hiring. I wouldn’t give this scenario very high odds. Most people think of those events as one-in-a-thousand-year floods. But because the experience of 2009 is so recent, there is always a chance that people may overreact. If truly negative events started to unfold, we could expect the Federal Reserve, with its enormous authority and power, to take strong action, including changing regulations, if the Fed thought it necessary.”
UBS' Art Cashin to CNBC on April 6: “It's a good deal more volatile than almost anything else you've seen. It is unfortunately reminiscent of some of the volatility we saw in '87.”
Peter Schiff, CEO of Euro Pacific Capital, via his YouTube account, on April 5: “Stocks are expensive. The bull market is over. It’s now a bear market. People want to get out. People are allocating out. Growth is slowing whether people want to acknowledge it or not.”
Nader Naeimi, money manager at AMP Capital Investors, to Bloomberg on April 4: “We’re torn here. On the one hand, there’s great fundamentals, global growth is synchronized, but the political risk is just becoming too much to handle. At some point, you just bite the bullet and say, I’m just going to get out of all my assets, all my exposures out of the US. That’s the No. 1 thing we’re thinking. We’ve got to find ways to protect the portfolio.”
BMO in a credit strategy note on April 7: “One very interesting aspect of equity market volatility that seems to come up more and more in our client meetings is the role ETFs play in the volatility, and the growing concern that the proliferation of ETFs may actually fuel the next disorderly repricing of financial assets.”
Morgan Stanley's five warning signs that the end of business cycle is approaching: “1) Resources are stretched. The unemployment rate is very low and wage growth is at cyclical highs. 2) Inflation rises slightly above the central banks’ 2% goal. 3) The investment cycle is becoming stretched, while corporate profitability is deteriorating. 4) The private sector is leveraging aggressively, and excesses are building. 5) Central banks take real rates into restrictive territory, slowing demand and causing defaults. This is the piece of the puzzle that brings the business cycle to an end.”
Société Générale’s Strategist Albert Edwards in an interview with Barron’s on April 5: “In the next recession, bond yields in the US will go negative and converge with those in Germany and Japan. The forward US P/E bottomed at about 10.5 times in March 2009 on trough earnings. That was lower than the previous recession. In the next recession, I would expect the P/E to bottom at about seven times, a lower low with earnings about 30% lower because of the recession. That would put the S&P lower than the 666 low of the previous crash. If a recession unfolds, easy monetary policy won’t stop the market from collapsing. It will play itself out.”
Citi's global macro strategy team in a research note published on April 8: “The real Fed Funds rate has now risen above two of the three measures of the Laubach Williams Natural Interest Rate suggesting that, for the first time since late 2007, policy has become restrictive”.
Bridgewater Associates’ Ray Dalio via LinkedIn on April 9: “Nowadays, we can’t avoid considering geopolitical developments because they are playing a greater than normal role in affecting economies and markets. Recent geopolitical developments have led me to raise my probabilities of trade and other types of wars, such as capital wars, cyber wars (and possibly even shooting wars).”
Russian Energy Minister Aleksandr Novak on April 9, regarding the Kremlin mulling taking payments for oil in national currencies, circumventing the US dollar: “There is a common understanding that we need to move towards the use of national currencies in our settlements. There is a need for this, as well as the wish of the parties. This concerns both Turkey and Iran – we are considering an option of payment in national currencies with them. This requires certain adjustments in the financial, economic and banking sectors.”
SGH Macro Advisors in a note released on April 9: “From what we understand, the Chinese government has halted its purchases of US Treasuries. Despite the direct encouragement, according to Chinese sources, by US Treasury Secretary Steve Mnuchin for China to ‘stay put’, Beijing has apparently discontinued purchases of US Treasuries ‘for the past few weeks’.”
Bill Blain of Mint Partners on April 10: “The stability of the market’s mindset worries me. I can’t help but wonder if we’re sitting on top of a volcano?”
Jeffrey Sprecher, Chairman of the New York Stock Exchange, to Bloomberg on April 10: “People put more faith in a guy named Satoshi Nakamoto that no one has ever met than they do in the US Fed.”
Jeffrey Gundlach of DoubleLine Capital on March 29 via CMG Wealth: “Gold is negatively correlated with the dollar. We see that gold broke above its downtrend line. But now we see a massive base building in gold. Massive. It’s a four-year, five-year base in gold. If we break above this resistance line one can expect gold to go up by, like, a thousand dollars. Will it happen? Well it’s not happening right now but it’s a very interesting juncture. It’s a great time to be buying gold straddles. Because one way or the other this baby has got to break in a big way.”
Minutes of the FOMC (March 20-21, 2018) released on April 11: “Reductions in the size of the Federal Reserve’s balance sheet continued as scheduled without a notable effect on markets.”
Robert Shiller to CNBC on April 15: "I'm interested in Bitcoin as a sort of bubble. It doesn't mean that it will disappear, that it'll burst forever. It may be with us for a while."
Former Reagan White House Budget Director David Stockman via USAwatchdog.com on April 15: “In the bond market, I don’t know any other way to describe it... It’s uncharted territory, and we have never been here before... The house of cards is so shaky and so fragile right now that there is the risk of the proverbial black swan event. We don’t see something coming. It shocks the system. It triggers a panic, and the panic soon envelops itself and descends into some sort of doom loop. That could very easily happen.”
Nomi Prins via the Daily Reckoning on April 15: “As any rollercoaster ride goes, fasten your seat belt and keep all arms and legs in the vehicle. With the first three months of 2018 behind us, it is clear that this year will be very different from the last.”
Morgan Stanley chief equity strategist Michael Wilson in a note on April 15 via Zerohedge: “Will the stock market fall? We think the answer is yes, but only after we make one more price high later this year. In the US, we think that the S&P 500 will top between 2950-3000. This will not be the wipe-out scenario that some of the perma-bears out there have been warning about for the past eight years.”
Neel Kashkari, president of the Minneapolis Fed, on April 16 at an event at Howard University: “We are forgetting the lessons of the 2008 crisis. The shareholders got bailed out. The boards of directors got bailed out. Management got bailed out. So from their perspective, there was no crisis.”
Mac Slavo via his website, Shtfplan.com, on April 16: “The stage is set for higher gold prices due to the amount of money being printed… I am of the belief a major reset is coming where the governments of the world will need to get rid of their debt by fixing everything to the price of gold… and that’s why governments like China and Russia and other governments around the world are accumulating gold… it’s because they know what’s going to happen over the next several years…”
The IMF in its World Economic Outlook report released on April 17: “Risks around the short-term outlook are broadly balanced, but risks beyond the next several quarters are clearly to the downside.”
Bill Blain of Mint Partners on April 20: “We are beginning to see cracks across the Tech model. Facebook is just one.”
Morgan Stanley's credit team in a note on April 20: “We continue to see evidence that argues in favour of a very late-cycle environment. In terms of timing, we think that enough signals are flashing yellow and cracks are forming to indicate a credit cycle on its last legs.”
Deutsche Bank's chief Macro Strategist Alan Ruskin: “A $5/b increase in oil is worth at least 10bps on 10y breakevens. Assuming that real yields and breakevens if anything remain positively correlated a WTI near $75/b could precipitate US 10y pushing through 3%.”
Charles Himmelberg, economist at Goldman Sachs, to the WSJ on April 24: “The recent spike in market volatility “suggests there is good reason to worry about how well liquidity will be provided during episodes of market duress. This could contribute to price declines and possibly prolonged periods of financial instability.”
DoubleLine CEO Jeffrey Gundlach via Reuters on April 24: “Gold? It’s getting almost exciting... something big is happening.”
Goldman's David Kostin on April 29: “Brent crude oil has surged to $75/bbl from $45 in 2017. Our Commodities team expects oil prices will rise to $83 during the next three months before falling to $75 later in 2018.”
Billionaire investor David Tepper in a meeting with students on April 28: “It's tough right now. Because historically yields have been fairly low. Actually, tonight I'm trying to figure out what the BOJ's doing because either this meeting or next meeting they might change their policy which would affect our Treasuries and will affect the stock market. So I think as far as the stock market is concerned I think they're okay. I don't think it's great. I think we might've reached the highs for the year.”
Michael Wilson, Morgan Stanley chief US equity strategist, in a note published on April 29: “2018 will mark an important cyclical top for US and global equities, led by a deterioration in credit. For now, in the US we recommend a rotation to late-cycle sectors like Energy and Industrials with Financials as a way to participate in rising interest rates. Tech is likely to participate, too; it just won’t be as dominant as last year, in our view.”
Bill Smead, founder of Smead Capital Management, via Finanz und Wirtschaft on April 29: “If the US economy improves dramatically in the next twelve months and we move from the 2% level on real GDP growth to, let’s say, 4 or 5% a year over the next two years, interest rates are going to rise a lot higher and they are going to go up fast. That means this will probably result in a bear market. It would be a bear market which has to do with overvaluation, not a bear market which has to do with earnings. And that’s what happened in 1987: The stock market went from 800 to 2700 from 1982 to 1987 and in the spring of 1987 the ten-year treasury interest rate went from 7% to 10%. And when those two things collided, the market fell 40% in 78 days.”