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.
Hedge fund manager Paul Tudor Jones in a letter to investors written on February 2 and released by Bloomberg a week later: “We are replaying an age-old storyline of financial bubbles that has been played many times before. This market’s current temperament feels so much like either Japan in 1989 or the US in 1999. And the events that have transpired so far this January make me feel more convinced than ever of this repeating history.”
Sharmin Mossavar-Rahmani, chief investment officer (CIO) of the Investment Strategy Group at Goldman Sachs, on February 27: “Cryptocurrencies are a much smaller part of the global economy, whether you compare it to US GDP or global GDP, it's less than 1% of global GDP.”
Financial guru Peter Schiff on March 1: “When you are talking about the magnitude of the debt we have, that extra money [raising interest rates] is big. That’s going to be a big drain on the economy to the extent that we have to pay higher interest to international creditors.” “Everything the Fed has done has undermined real economic growth, that is why this coming collapse is going to be so devastating”. “It’s shrinking government that grows the economy. When you make government smaller and you free up resources back into the private sector, that’s what grows the economy.”
Former Fed Chairman Alan Greenspan during an interview on CNBC on March 1: “I would say we are in a bond market bubble. And a bond market bubble really means that prices are too high and when they move down, long-term interest rates move up. And if you take a look at the structure of not price earnings ratios, but earnings price ratios in the stock market, you find that the critical issue of what engendered some of the strength in the recent period is essentially the decline in real long-term interest rates, as is factored into the market. That is in the process of changing. And I think that the bond market bubble is now beginning to unwind, and that is going to bring us ultimately into a state of stagflation. And beyond that it's very difficult to tell. This is not an easy economic outlook because there are too many variables, which we haven't seen in recent decades.” “If the real long-term interest rates go up, it's inevitable that the effect on stock prices is negative. In fact, that's one of the really major factors determining equity price ratios, and therefore, as real long-term interest rates rise, stock prices fall. And I'm not saying what we're looking at in the last few weeks is meaningless, but remember, the last few weeks I think are responding to the good part of the tax cut. You know, before I got into government, I was on a lot of corporate boards in which I had to sit through preparations of capital investment expenditure processes. And what struck me all the time is when they got down to the issue, the very end of it, you had what's the pretax rate of return on this investment and what is the after-tax return. And the after-tax return is a clean cut. So, when you're going down from a 35% marginal rate to 21%, that's impact on perspective investments, which is exceptionally high in a marginal sense. So, in the short-term, I think the capital goods markets will be okay, but longer-term productivity is in for serious diminution.”
Legendary trader Paul Tudor Jones in an interview with Goldman's Allison Nathan on March 2: “Beginning next September, when the ECB concludes its asset purchases, the aggregate balance sheet of the main central banks will start contracting after nearly a decade of expansion. That will be a major data break, making it a horrible time to own bonds.” “In my view, higher volatility is inevitable. Volatility collapsed after the crisis because of central bank manipulation. That game is over. With inflation pressures now building, we will look back on this low-volatility period as a five standard- deviation event that won’t be repeated.”
BOJ Governor Haruhiko Kuroda on March 3: “Right now, the members of the policy board and I think that prices will move to reach 2 percent in around fiscal 2019. So it’s logical that we would be thinking about and debating exit at that time too”. “I’m not saying that the negative rate of 0.1 percent and the around 0 percent aim for 10-year bond yields will never change, but it is possible. We will be discussing that at each policy meeting."
GMO's Ben Inker in a note on March 2: “A trade war has the potential to be very bad for both the global economy and investor portfolios. As I wrote about last December, a significant inflation problem might well be the worst thing that could happen to a balanced portfolio, leading to losses on the order of 40%. A global trade war would be exactly the kind of economic event that could foreseeably lead to losses of that magnitude.”
Financial cycle expert Charles Nenner on March 2: “When unemployment is low, it’s the end of the bull market. Last Sunday, I published a chart that shows every time the unemployment is around 4.1% or 4.2%, and you can see this in 1973, 1987, 1990 and 2007, and you can go on and on, and now, also, you have a market crash. I find it amazing that people can come on television and say things that are totally wrong factually, and you can prove it is wrong.” “We should hit a major low in 2020... If you are in stocks, I say you could lose everything if the DOW goes to 5,000. This is the price target I have had for a couple of years.” “You buy gold because nothing else is going to keep its value. Gold is going, as I have said for a long time, to $2,500 (per ounce) at least.”
Goldman Sachs technical analysis team discussing about Elliott Waves on March 5: “The S&P 500 index saw an initial selloff that was impulsive in nature (wave A). This tends to mean that there’s likely going to be another impulsive 5-wave decline to complete an ABC 5-3-5 count. From current levels, an eventual C wave could reach somewhere close to 2,449.”
Ron Paul, former Texas congressman, to CNBC on March 6: “I think we have a greater distortion and a financial danger sitting out there bigger than ever before. If the Fed continues on the things that they are sort of planning on doing, it's going to be a calamity.”
Steve Bannon, former Chief Strategist to US President Donald Trump, on March 6: “With cryptocurrency, we take control of the central banks away. Once you take control of your currency, once you take control of your data, once you take control of your citizenship, that’s when you’re going to have true freedom”.
Atlanta Fed's (voting) president Raphael Bostic, on March 7, when asked whether he was deciding between two or three increases, or three or four: “Some of the developments with the trade policy has introduced some uncertainty as to how the economy is going to perform, so I am really taking a wait-and-see attitude. Everything is on the table.”
Daniel Pinto, head of JP Morgan Chase & Co, to Bloomberg on March 8: “There is never just one trigger, it's a combination of factors and it depends on valuation at the time. The market probably has some way to go probably for the next year or two, but the correction could be 20% to 40%. And for us, we just try to be prepared because during those times, the clients really need you.” “At the moment the scenario is, the economy will continue growing globally very strongly in the US and everywhere else, the Fed and the other central banks are being very prudent with how they adjust monetary policy, and inflation is moving up but its very reasonable - so those are the things you want to watch: that inflation doesn't go up to fast, that forces the Fed and central banks to raise faster...and you want to look at geopolitical issues that are playing out.”
David Rosenberg of Gluskin Sheff on March 8: “On what planet does 2% annual inflation constitute price stability? Prices can’t be rising and stable at the same time. This makes no sense. Furthermore, why 2%? Why not 1%? Whatever the inflation target, the Fed has proven unable to hit it, so maybe it’s time to rethink this whole idea.”
Jeff Gundlach at the Strategic Investment Conference 2018 on March 9: “The situation is set to explode in 2019.”
Roland Kaloyan in Société Générale’s Equity Strategy report on March 13: “We started our 2018 equity outlook by highlighting our concern about the volatility regime given the amount of short volatility positions in the market. Looking forward, a higher volatility regime and tighter central banks should prevent US and European equity markets from extending this nine-year-old bull market much further. Expect the US earnings momentum to fade soon now that the tax reform impact is almost fully taken into account by analysts (2018 EPS growth: +19%). Escalating protectionist measures are a growing tail risk for us. The US midterm election in November will probably be another source of stress for equity markets, potentially pushing the S&P 500 back down to its fair value at 2500.”
Bank of America Merrill Lynch regarding corporations issuing debt to prevent their stock from falling, on March 14: “Monthly stock repurchases by corporate clients represents one of the largest weekly buyback in our data history.”
Precious metals expert David Morgan via USAWatchdog.com on March 14: “The one asset class that is supposed to be the safest is the U.S. Treasury market, and it’s the least safe. Something that is supposed to be unsafe like silver and gold are the safest. The dollar has lost 98% of its buying power since 1913, and the Fed is supposed to have a stable currency policy. Well, they have failed miserably.” “If the “Deep State” gets pushed into a corner much further, they can basically pull the plug. That means the stock market could come tumbling down, and then they could blame the Trump Administration...”
JPM's head quant, Marko Kolanovic, in a note on March 15: “There is a substantial difference between February 2018 and August 2015. Right now, both macro (synchronized global growth) and corporate fundamentals (tax reform and record earnings) are much better than in 2015. This adds demand for equities and strengthens fundamental reversion flows. For instance, compare current fundamentals to 2015, when we had a US earnings recession, EM crisis, China crisis, Energy, and High Yield concerns. This year, we expect $800bn of buybacks vs. ~$600bn in 2015. The difference ($200bn) on its own, equates to all the value of all recent systematic strategies’ selling. And while systematic strategies will buy back most of what they sold, buybacks will not reverse. This is all supportive of the market reaching new highs relatively soon (e.g., with the onset of Q1 earnings season), and is consistent with our previous fundamental and quantitative research.”
Georg Schuh, CIO of Deutsche Asset Management to Bloomberg on March 16: “We have moved our view on stocks from ‘buy the dips’ to ‘sell the rebounds’. I’m not ruling out one final peak in stocks, but we’re getting late in the cycle and we’re starting to see anecdotal evidence that points toward the end of the rally.”
Bill Blain of Mint Partners on March 16: “Markets are suffering a distinct lack of empathy at the moment. No one feels particularly inclined to do anything… and if the whole market is sitting on its hands waiting… then I suspect we’ll be waiting a while longer.”
Danielle Di Martino, founder of Money Strong, on March 19: “It will be interesting to see if we hit 3 percent on the 10-year, as it might serve as a mental catalyst for markets.” “We essentially have a lost decade behind us and if the Fed pushes the economy into recession, expect more QE and debt.” “I think Powell has a better understanding because he used to work in the shadow banking world. But in a nasty recession, he’ll have to have the spine to get through without any type of pressure from the White House.”
Morgan Stanley's chief US equity strategist Michael Wilson in a market report on March 19: “We think January marked the top for sentiment, if not prices, for the year.”
BofA's Chief Investment Strategist, Michael Hartnett, who conducts the BAML monthly Fund Manager Survey, on March 20: “Cracks in the bull case are starting to emerge, with fund managers citing concerns over trade, stagflation and leverage.”
Steen Jakobsen, Chief Investment Officer and Chief Economist of Saxo Bank via PeakProsperity.com on March 20: “Every single product available to investors today at has less liquidity than is perceived. It's pretty clear that the liquidity side is a concern. We're all chasing the same investments, we're chasing the same themes. We're assume everything is benign when we talk about risk. But I'm very concerned. My quantitative model supports this caution; it's saying we really have to be in the mode of capital preservation now. This is the time for capital preservation.”
Pimco’s Harley Bassman in a report entitled “How will I know…” published on March 19: “Since 2008-09 there has been a high correlation between the daily changes in stock prices and bond yields – when stock prices go up, bond prices go down, and vice versa. If this correlation turns negative so that both stock and bond prices decline, Risk Parity portfolios will be modified to reflect these new correlations and volatilities. In simple terms, they will sell. Risk Parity portfolios will not remain levered long if both assets are declining. So you want to know when to worry? The real bear market will start once this correlation flips.”
John Mauldin in an interview with Erik Townsend's (Macrovoices podcast) on March 20: “The last drawdowns that we had were not the unusual part. They weren’t the odd part. The odd part was 15 months in a row without a 2% correction.” “we’re going to see probably more corrections. We’re going to see more volatility. But I would argue that any correction we see now, absent indications for a potential recession, are buying opportunities.” “If you’re looking for recession indicators, there just aren’t any. Several of my friends who really track this stuff – I mean they’re obsessed – and one of them has 18 recession indicators. And 17 of them are saying No. Another one has 11 recession indicators. By the way, they’re different. I found it fascinating. And the large preponderance of those are saying No.” “Trade war, protectionism, if it gets out of hand, that could create a recession.”
Jack Dorsey, the CEO of both Twitter and payment service Square, on March 21: “The world ultimately will have a single currency, the Internet will have a single currency. I personally believe that it will be Bitcoin. It’s slow and it’s costly, but as more and more people have it, those things go away. There are newer technologies that build off of blockchain and make it more approachable.”
JPM's head quant Marko Kolanovic in a note on March 21: “We maintain our positive near-term view on US equities. Our view is that the path of recovery is likely to mimic the August 2015 selloff that was also driven by systematic selling, as market volatility subsides (prompting re-leveraging of systematic strategies), continuation of strong buyback demand, and focus shifting to strong upcoming earnings season.”
Citi's Matt King in a note to clients on March 21: “LIBOR is still the reference point for the majority of leveraged loans, interest-rate swaps and some mortgages. In addition to that direct effect, higher money market rates and weakness in risk assets are the two conditions most likely to contribute towards mutual fund outflows. If those in turn created a further sell-off in markets, the negative impact on the economy through wealth effects could be greater even than the direct effect from interest rates.”
Jonathan Garner, Morgan Stanley's Chief Strategist for Asia and Emerging Markets, to Bloomberg on March 22: “The rising Libor rates is a bigger concern right now than a more hawkish Federal Reserve, and in fact, is the story of the year. That’s a key reason why markets have struggled. The acceleration in the private borrowing market is the story of the year, not the Fed.”
Bill Gross (Janus Capital) in his monthly letter to clients on March 22: “When it comes to financial markets, (both bond and stock) the “beast” is really leverage, and while it's hard to pinpoint when enough is really enough, the Great Recession really informed us that Hyman Minsky was right – “stability leads to instability” as good times and higher prices lead to a false sense of optimism. The Fed, under Jerome Powell, hopefully has learned that lesson, and should proceed cautiously, as must his counterparts around the globe.”
JPM's Nick Panigirtzoglou in his latest “Flows and Liquidity” report released on March 23: “There are three main reasons cited by clients in our conversations: 1) Macro forces have turned less supportive. 2) Institutional investors think upward momentum in equity markets appears broken. As a result, chasing long-term equity momentum no longer looks as attractive as an investment strategy. 3) Equity valuations are still frothy, and therefore the 9% correction so far since the Jan 26th peak appears not enough to trigger “buy the dip” flows.”
Deutsche Bank in a note on March 25: “After years for hyper-stimulative monetary policy, where everything used to rally, stimulus unwind is taking us into an environment where everything wants to sell off.”
Bill Blain of Mint Partners on March 25: “There is plenty to worry about and the list of market threats is significant: 1) Trade War? Despite the bellicosity, we now know China and the US are talking behind the scenes. We’ve got a couple of months negotiations with the likelihood of a trade compromise that sees China open up, and Trump get something to crow about. The point to panic will be China putting tariffs on Soyabeans or cancelling Boeing orders. at that point escalation looks most likely. 2) Inflation? Yes – it’s happening in terms of wages. 3) Commodities? Oil rises look sustained – and open a number of opportunities. The potential effect on growth, however, could be significant. 4) Europe? There are the predictable column inches in the papers about what a danger to European unity Italy is, or how France’s Macron Miracle is going to come apart. Both are probably overblown. 5) Japan? The Morimoto property scandal sweeping the Abe government could potentially trigger the end of the Abe era if his popularity continues to crash.”
BofA's equity derivatives team on March 27: “What if January 2018 was the peak and we are now at the beginning of a new bear market?”