"...to be blunt, given the aforementioned fundamental risks and the poor risk/return skew, history is clearly not in favor of those who remain long equities banking on the Fed to continue to levitate valuations and prices with limited tools and faulty narratives."
Realized volatility in the US equity markets has been extremely low, and much discussed, but, as Deutsche Bank's David Bianco warns this is "the quiet before the storm." There are five catalysts for increased vol through Autumn but most worrying is the "High P/E, Low VIX" scenario is very risky having reached "mania" levels.
“...the only way gold loses is if normal business and private sector cycles come back. If that is the case, gold goes back $100 per ounce. The other outcomes: deflation, stagflation, hyperinflation are all good for gold.” As for a return to a gold standard, Shvets has more bad news: “Gold standards come back after the war, not before the war.”
"The current P/E expansion cycle is now one of the largest in history. Since September 2011, S&P 500 forward P/E has grown by 75% (from 10x to 18x). This expansion has only been surpassed twice since 1976, when the multiple rose by 111% from 1984-1987 (ending with the 22% Black Monday collapse) and by 115% from 1994-1999 (ending with the Tech Bubble pop)." - Goldman Sachs
Whether it is due to the recent speculation that Japan may usher in helicopter money, or ongoing concerns about what Brexit may do to the future of European asset returns, there has been a dramatic shift in fund allocation and as Bank of America reports, investors are rushing to vote with their wallets. They have done so in the latest week by continuing to plow money into EM stocks, allocating a record amount of cash to Emerging Markets, while yanking a similarly record amount of cash from Europe.
“Cash On The Sidelines.” is the age old excuse why the current “bull market” rally is set to continue into the indefinite future. The ongoing belief is that at any moment investors are suddenly going to empty bank accounts and pour it into the markets. However, the reality is if they haven’t done it by now after 3-consecutive rounds of Q.E. in the U.S., a 200% advance in the markets, and now global Q.E., exactly what will that catalyst be? However, Clifford Asness summed up the problem with this myth the best and is worth repeating...
For the rates market, the significance of this acceptance phase by pensions cannot be understated, in our opinion. A $3 trillion industry running a $500 billion funding gap and a significant duration gap waking up to reality is likely to have major implications for the market. In the extreme case, entire pensions could be offloaded from corporate balance sheets to insurance companies (increasingly like the UK, Exhibit 1)–generating significant demand for long-end duration during such transactions.
It is important to know your market well, and identify which catalysts are drivers for supporting a Reversion to the Mean Trading Strategy that you can assign probabilities, timeframe and position sizing around in constructing a viable investing model.
"As gamma exposure turned significantly short on Monday 6/27, it also contributed to a larger squeeze up on Tuesday and Wednesday (please note, these were even more prominent on 8/26 and 8/27 than this week)... We maintain the view that we have not yet seen the highs of VIX due to Brexit and related risks. The points discussed above suggest equity markets face elevated risk in the days and weeks ahead."
The big risk for the Fed has always been the market would “call their bluff” be unwilling to buy into the “forward guidance.”It is currently too soon to know for certain but reactions following yesterday’s announcement are not promising.
"I don’t want to alarm anyone but the facts are the facts, and the facts here is simply that this is precisely the sort of rundown we saw in November 1969, May 1974, December 1979, October 1989, November 2000 and May 2007. Each one of these periods presaged a recession just a few months later — the average being five months." - David Rosenberg
"Central bank distortions have exacerbated these movements, making investor interest more one-sided and leading one market after another to exhibit more bubble-like tendencies, rising exponentially and then falling back abruptly. As such, managers are struggling to justify their fees, while the sellside wonders whether it is really worth the continuing commitment to market-making in the face of increased capital requirements and legal and back-office overheads."