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 (Bitcoin and Ethereum). 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.
Greenlight Capital's David Einhorn in an interview with ValueWalk on December 26: “If you look at all the obvious problems from the financial crisis, we really kind of solved none of them.”
Byron Wien, vice chairman of Blackstone's Private Wealth Solutions group, in a publication on January 2, presenting his ten surprises for 2018: “1) China finally decides that a nuclear capability in the hands of an unpredictable leader on its border is not tolerable. 2) Populism, tribalism and anarchy spread around the world. 3) The dollar finally comes to life. 4) S&P 500 drops toward 2300 but ends 2018 above 3000. 5) WTI moves above $80. 6) Inflation becomes an issue of concern. 7) Interest rates begin to rise. 8) Both NAFTA and the Iran agreement endure in spite of Trump railing against them. 9) The Republicans lose control of both the Senate and the House of Representatives in the November election. 10) Xi Jinping, having broadened his authority at the 19th Party Congress in October, focuses on China’s credit problems and decides to limit business borrowing even if it means slowing the economy down.”
Eurasia Group’s Ian Bremmer (political scientist specializing in global political risk): “2018 is by far the greatest geopolitical risk environment that we’ve ever seen”.
Société Générale’s Alain Bokozba in a note entitled “Be ready for the end of Goldilocks” on January 3: “We began reducing our allocation risk profile in September and continue to do so. Asset valuations range from high to very high, but for emerging market (EM) assets, risk-taking and momentum-investment are at their peak. We think resynchronisation of global growth leaves the door open for a number of central banks to implement faster exit strategies than generally expected, especially the ECB and (later) the BoJ. The US economy is late cycle and impacted by perceived poor political leadership: we recommend sticking to a structurally bearish view on the still-expensive USD, which does not augur that badly for EM and commodities overall.”
FOMC minutes released on January 3: “In light of elevated asset valuations and low financial market volatility, a couple of participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability.” “With regard to financial markets, some participants observed that financial conditions remained accommodative, citing a range of indicators including low interest rates, narrow credit spreads, high equity values, a lower dollar, and some evidence of easier terms for lending to risky borrowers.”
Former Fed insider Danielle Di Martino in an interview with USAWatchdog on January 3: “We have gone from $150 trillion (in global debt) in 2007 to $220 trillion and counting today. If you delude yourself into thinking a rising rate environment can be good when we have tacked on $70 trillion of debt in the last decade, you are fooling yourself. It is an accident waiting to happen, and anyone who doesn’t think that it will take the stock market down with it is more optimistic than I am by a country mile.”
Jeremy Grantham, chief investment strategist of Grantham, Mayo, & van Otterloo (GMO) in a letter on January 3: “As a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market.”
Appaloosa Management’s David Tepper to CNBC on January 4: “There's no inflation. The market coming into this year doesn't look rich, in fact, it looks almost as cheap as coming into last year.”
One River Asset Management’s Eric Peters in a letter to investors published on January 7: “Given the unprecedented volatility-selling in this cycle, this market is exposed to a historic reversal somewhere along the path to policy normalization. Which has now begun.”
Mint Partners’ Bill Blain in a publication on January 8: “Whatever – risky assets are yieldy, so folks are buying them. Aside from such blisters of risk versus return doubt, what we do know is simple: as financial asset values rise, their return decreases. The thing is that nothing has changed. The basic problem across the financial asset markets remains too much money chasing too few assets. That’s why financial assets are costing more and returning less.”
Doug Ramsey, chief investment officer at Leuthold Group, in a report on January 8: “Optimism about US stocks among investment advisers is so prevalent that investors may end up disappointed this year.”
Gina Martin Adams, chief equity strategist at Bloomberg Intelligence on January 8: “It’s getting reminiscent of the great stock market “melt-up” of the 1990s, or maybe a “blow-off top” characterized by extended readings in momentum indicators.”
Donald Selkin, New York-based chief market strategist at Newbridge Securities, on January 8: “No one wants to buy the market when it’s low, they only want to buy it when it’s high. It’s very easy to buy stocks when they are going up, so that’s why people are piling in.”
David Rosenberg of Gluskin Sheff in its 2018 outlook released on January 8: “In terms of our highest conviction calls, given that we are coming off the 101-month anniversary of this economic cycle, the third longest ever and almost double what is normal, it is safe to say that we are pretty late in the game. The question is just how late. We did some research looking at an array of market and macro variables and concluded that we are about 90% through”.
NFIB (National Federation of Independent Business) President and CEO Juanita Duggan and Chief Economist Bill Dunkelberg, both on January 9: “We’ve been doing this research for nearly half a century, longer than anyone else, and we’ve never seen anything like 2017”. “The 2016 election was like a dam breaking. Small business owners were waiting for better policies from Washington, suddenly they got them, and the engine of the economy roared back to life.”
Peter Cecchini, a New York-based chief market strategist at Cantor Fitzgerald, to the WSJ on January 9: “I haven’t seen hedging activity this light since the end of the financial crisis.”
Morgan Stanley in a market note on January 9: “Our team has observed a dramatic shift in sentiment since we initiated coverage in April. In April, it felt as if people were looking for a reason for the market to fail. Now, we have seen a total reversal with people having a hard time even imagining how the market could decline."
Bill Gross to Bloomberg on January 9: “We've gone short bonds”. In a tweet via Janus Henderson: “Bond bear market confirmed today. 25-year long-term trendlines broken in 5yr and 10yr maturity Treasuries.” In a report published the next day: “There is recent evidence showing that China is liquidating treasuries. We predict that the US 10Y yield could reach 2.7%-2.8% by year end.”
Société Générale’s forex strategist Kit Juickes regarding rising yields in a market note released on January 10: “I don't think there's enough inflation, or indeed enough growth, for the Fed to risk a proper market tantrum, so I fully expect them to stand in the way of a meaningful move higher in yields, but the big question for 2018 is, without a doubt, whether there's anything central bankers can do to prevent markets reacting to balance sheet normalisation (other than just not do it)."
Warren Buffett, chairman and CEO of Berkshire Hathaway, to CNBC on January 10: “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending. But I know this: If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it but I would never short a dime’s worth. But I get into enough trouble with things I think I know something about. Why in the world should I take a long or short position in something I don't know anything about?"
Moody’s warning Washington on January 10: “US tax law is credit negative. Any boost to economic growth from the new US tax law will be modest and depend on how businesses and individuals deploy tax savings; growth is unlikely to offset negative impact on government deficits.”
On January 11, BofA's strategist Barnaby Martin wrote that there may be four things that could provoke a more hawkish-than-consensus narrative from central banks: 1) a higher than expected inflation; 2) a clear lack of reflation; 3) rising financial stability concerns, and 4) protectionist politics (leading to either supply-side inflation or a push for corporate re-leveraging).
Byron Wien, vice chairman of Blackstone’s Private Wealth Solutions Group, to CNBC on January 11: “The year will end higher than it started no matter what happens along the way.” “I would absolutely buy stocks on a correction because underlying fundamentals remain strong. When investors think they can't get into trouble, they usually do.” “We're vulnerable to a correction and the market needs to have one. There are some excesses in it. So, I fully expect it to happen.”
NY Fed president Bill Dudley in a note entitled “The Outlook for the US Economy in 2018 and Beyond” published on January 11: “I am less worried because the financial system today is much more resilient and robust than it was a decade ago. Thus, even if financial asset prices were to decline significantly—which presumably would occur if the economic outlook were to deteriorate—I don’t think such declines would have the destructive impact we saw a decade ago.”
Bank of America's Michael Hartnett, in his weekly Flow Show report on January 12: “What level of bond yields will cause equity markets to fall? Better question is ‘what level in SPX causes Fed to start hiking 50 basis points?’”
David Rosenberg, chief economist and strategist at Gluskin Sheff on January 12: “The elephant in the living room remains the central banks. The prevailing view is that balance sheet tapering will be mild and that Jerome Powell will prove to be a dove. This may well be the most important psychological driver for the market — that a new and inexperienced Fed will not take the punchbowl away in the coming year."
BofA Chief Investment Strategist Michael Hartnett in the bank’s Global Fund Manager Survey released on January 16: “Investors are long, unprotected, and say equity bull market continues to 2019.”
Michael Wilson, head of equity strategy at Morgan Stanley, on January 16: “We have entered the late cycle euphoria stage we predicted a year ago. Because the tax cuts occurred earlier and are larger than we expected, it is more likely the S&P 500 will reach our bull case of 3,000 before it's over.”
Chicago-based investor Sam Zell to CNBC on January 16: “There is more optimism in the business sector now (since Donald Trump’s election).” “I think the opportunity for the country to grow at 3% is real. I think the current situation seems like irrational exuberance."
Bill Blain of Mint Partners on January 19: “I see three threat vectors that could see the current gentle slippage in bonds become an avalanche. The first is unanticipated inflation drivers catching markets unaware. The second is overly active central banks making policy mistakes (think another dose of taper tantrum). The third is contagion as rising rates trigger weakness in stock markets and a raging unstoppable tide of Zombie defaults, leading to a blow out among high yield names setting off wider spreads right the way up the credit ladder.”
JPM's Nikolaos Panigirtzoglou in a market note on January 20: “Momentum is approaching extreme levels in the S&P 500, along with the Nikkei as well as crude oil futures. Equities are vulnerable to near-term profit taking.”
One River Asset Management’s Eric Peters on January 21: “Today, we’ve become so complacent about central bank policies that we’ve quietly tolerated a rise in financial asset prices to the point where even a little inflation would devastate portfolio returns. Nearly all financial assets are ultimately priced off the US 10yr yield”. “And treasuries are being priced at extraordinarily low yields because of negative term premia. So, in fact, investors have made one gigantic inflation bet.”
Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, via USAWatchdog on January 21: “The reality is if you look at the actual activity of the central banks, beyond the Fed raising rates by a little bit, there hasn’t been and there isn’t being a reversal of course because they are scared to death that too much of a reversal is going to cause a major crash throughout the financial system. Everything is connected. All the banks are connected. Money flows around the world in less than nanoseconds, and all of it has the propensity to collapse if that carpet the central banks have created is dragged from beneath the floor of all this activity.” “Debt will ultimately be the destructor of the system. In order for that to happen, the cheapness of money that allow states, municipalities and corporations to continue to borrow at these cheap levels has to go away...” “At some point, there will be a mistake. There might be a tiny smidge of an interest rate hike at some central bank, probably the Fed, which ripples throughout the system as a mistake, not because real growth has happened, and that’s why interest rates have been raised. That will incur defaults throughout the system. People will incur personal defaults, and that will cause problems in the mortgage market... then it becomes a knock-on credit crisis, and then banks start not to lend... Then we have the makings of a broad crisis.”
Goldman's Ian Wright in a note on January 23: “Risk appetite is now at its highest level on record, which leads to the question of what future returns can be.”
Nobel Prize-winning economist Robert Shiller to CNBC on January 23: “People ask 'well what will trigger [a market correction]?' But it doesn't need a trigger, it's the dynamics of bubbles inherently makes them come to a sudden end eventually...”
TD Ameritrade CEO Tim Hockey on January 23: “In both of our [retail and institutional] businesses, we're seeing historically low levels of cash to assets under management.”
Peter Schiff, CEO of Euro Pacific Capital, to Info Wars on January 23: “I think that they (the Fed) have to go back to zero, they have to launch QE4 in order to keep interest rates from really spiking and to prop up the market, but that will set off a currency crisis. The dollar will plunge, not just make new lows. That will set of an economic crisis that’s far worse than the financial crisis or the recession that we are trying to avoid.”
Professor William White, former chief economist for the Bank for International Settlements, via the Brisbane Times on Januray 23: “All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten.” “Central banks are now caught in a debt trap. They cannot hold rates near zero as inflation pressures build, but they cannot easily raise rates either because it risks blowing up the system. It is frankly scary."
Citigroup Chief Executive Officer Michael Corbat expressing his worries regarding debt to Bloomberg on January 24: “There is a numbness out there, there is an ambivalence out there that’s concerning. When the next turn comes -- and it will come -- it’s likely to be more violent than it would otherwise be if we let some pressure off along the way.”
Jes Staley, CEO of Barclays, to Bloomberg on January 24: “I do feel it’s a little bit like 2006, when we were all talking whether we’ve solved the riddle of economic crises. We’ve got a monetary policy that’s still in the remnants of the depression era. We’ve got very little capacity in the capital markets to deal with a real move in interest rates.”
Carlyle’s David Rubenstein to Bloomberg on January 24: “The biggest concern I have is that most people think there’s no problem of a likely recession this year or early next year. Generally, when people are happy and confident, something wrong happens.”
Harvard University professor Kenneth Rogoff to Bloomberg, in Davos, on January 24: “If interest rates go up even modestly, halfway to their normal level, you will see a collapse in the stock market. I don’t know how everything from art and bitcoin to stock prices will react as interest rates go up.” “China is probably the place most at risk of having a significant downturn in the near term. It’s certainly the leading candidate for being at the center of the next big financial crisis.”
Bridgewater Associates CEO Ray Dalio to Bloomberg on January 24: “It would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash.”
BofA strategist James Barty in a market note on January 25: “The bull run in equities is likely to continue, we think, until inflation starts to pick up triggering a more aggressive response from central banks. If the market continued to melt up then central banks might be tempted to hit the brakes without a pick-up in inflation in order to dampen down asset price inflation. We think that would require the current run to continue for a while yet as central banks would want to be a lot more convinced that it was getting out of hand before risking such a move without price inflation picking up first.”
Deutsche Bank in a market report on January 25: “Monetary policy and regulations/oversight could, like in the last financial crisis, come too late to prevent an expansion of the asset bubble."
Goldman Sachs in a market note on January 29: “Whatever the trigger, a correction of some kind seems a high probability in the coming months.”
Scott Mather, managing director at Pimco in an interview with Finanz Und Wirtschaft published on January 29: “Now is not the time for investors to be counting on asset price inflation to infinity and low volatility. It’s time to start betting the other way.”
John Hussman, President of Hussman Investment Trust, in his weekly market comment published on January 30: “I expect the S&P 500 to lose approximately two-thirds of its value over the completion of this cycle. My impression is that future generations will look back on this moment and say ‘this is where they completely lost their minds’.”
Peter Schiff, CEO of Euro Pacific Capital, in an interview with Kitco News on January 31: “They (central bankers) actually made the bubbles bigger than the ones that popped. So now, the dollar’s collapse is going to be that much bigger, because it’s now a bigger bubble with more air to come out of it. And I think they have no more tricks up their sleeves. When this happens – it’s over.”
Alan Greenspan on Bloomberg TV on January 31: “There are two bubbles. We have a stock market bubble and a bond market bubble. At the end of the day, the bond bubble will be the big issue.”