The Bond bubble is not only an overcrowded trade, a bubble of historic proportions but it will cause the entire crash of the financial system.
Rich valuations point to the likelihood of low returns across asset classes. [W]e develop a cross-asset approach to risk premia and implement it across the asset classes. The results show that valuations are rich across the board. This indicates markets may become shaky as we get closer to the first Fed rate hike in nine years.
Dear Mr. Market,
I’m writing to you about the sharp lift in equity valuations over the past month...
Should a tail event such a deflationary spiral or Grexit occur, limits on ECB asset purchases will put Mario Draghi at a disadvantage as other central banks race to the bottom. JP Morgan says this will force the ECB to cut interest rates for cash deposits to minus 3% while the dollar will appreciate by 20%, reaching parity with euro in 2015.
Are we on the verge of a major worldwide economic downturn? Well, if recent warnings from prominent bankers all over the world are to be believed, that may be precisely what we are facing in the months ahead.
"Greek Fin Min Varoufakis said the euro will collapse if Greece exits, calling Italian debt unsustainable. Markets may gain the impression that Greece may not opt for a compromise, instead opting for an all or nothing approach when negotiating on Wednesday. It seems the risk premium of Greece leaving EMU is rising. Our scenario analysis suggests a Greek exit taking EURUSD down to 0.90."- Morgan Stanley
One of the bigger problems facing the new, upstart Greek government, which has set before itself the lofty goal of overturning 6 years of oppressive European policies and countless generations of Greek cronyism, corruption and tax-evasion is not so much the concern about deposit outflows and bank runs - even though it most certainly will be in the next few days unless the Tsipras government finds some resolution to the dramatic standoff with Merkel and the ECB - but something far more trivial: running out of money.
It will be politics rather than economics (or Q€) that drives the shorter-term outlook in Greece. Goldman Sachs warns that the new Greek government’s position is turning more Eurosceptic and confrontational than most (and the market) had anticipated ahead of last weekend’s election. This increases the risk of a political miscalculation leading to an economic and financial accident and, possibly, Greek exit from the Euro area (“Grexit”) and while many assume European authorities have the 'tools' to address market dislocations arising from this event risk, Goldman expects significant market volatility. Rather stunningly, against this background, and in spite of Q€, recommends closing tactical pro-cyclical exposures in peripheral EMU spreads (Italy, Spain and Portugal) and equities (overweight Italy and Spain).
The Tulip Lunacy in the Bond market is just off the charts stupidity at its finest! The U.S. 2-Year Bond is currently pricing in no rate hike, and in fact, a negative rate of inflation over the next two years....
Due to the principal-agent problem in the asset management industry, most money managers rationally have a propensity to use a negatively skewed payoff distribution. This kind of behavior, in aggregate, is also evidenced in the historical data, which shows significant losses for professional investors during the largest market downturns. Most investors and asset allocators, in addition to these negatively skewed positions, further view the returns of hedging strategies in a vacuum, rather than as a holistic part of their broader portfolio. Thus, they are likely to consider portfolio hedging programs to be a drag on their performance numbers and further undervalue them. We believe these factors, among others, contribute to a market segmentation that creates an undervaluation in tail-risk hedges.
Blind faith in policymakers remains a bad trade that’s still widely held. Pressure builds everywhere we look. Not as a consequence of the Fed’s ineptitude (which is a constant in the equation, not a variable), but through the blind faith markets continuing to place bets on the very low probability outcome – that everything will turn out well this time around. And so the pressure keeps rising. Managers are under pressure to perform and missing more targets, levering up on hope. Without further delay we present our slightly unconventional annual list. Instead of the usual what you should do, we prefer the more helpful (for us at least) what we probably wouldn’t do. Five fresh new contenders for what could become some very bad trades in the coming year.
Goldman's Sven Jari Stehn answers the 11 most critical questions regarding to day's "most-important-FOMC-meeting-ever."
"There is virtually no 'bullish' argument that will currently withstand real scrutiny. Yield analysis is flawed because of the artificial interest rate suppression. It is the same for equity risk premium analysis. Valuations are not cheap, and rising interest rates will slow economic growth. However, because optimistic analysis supports our underlying psychological 'greed,' all real scrutiny to the contrary tends to be dismissed. Unfortunately, it is this 'willful blindness' that eventually leads to a dislocation in the markets."
About That 2100 S&P Target For 2015, Goldman Was Only Kidding, Now Sees Even More Ridiculous Multiple ExpansionSubmitted by Tyler Durden on 12/06/2014 16:14 -0400
It was just one short month ago when, on the back of the soaring dollar (which has since soared even more), as well as "diminished global GDP growth and lower crude prices", Goldman's David Kostin cut his EPS for 2015 and 2016 from $125 and $132 to $122 and $131. Then, it was just two short weeks ago, the same David Kostin said "we expect the P/E will contract and the index will slip during the second-half of 2015 as the Fed takes its first step in the long-awaited tightening cycle. Our S&P 500 year-end 2015 target of 2100 implies a modest 5-10% P/E multiple compression to 16.0x our top-down 2016 EPS estimate or 14.6x bottom-up consensus earnings estimates." And then, with the S&P now about 20 points away from Goldman's 2015 year end target (and just 120 points from the government-backed hedge fund's 2016 year end target!), the very same David Kostin admits that he was only kidding and that the S&P may in fact rise to a whopping 2300 in the coming year...
Goldman Sachs' 2015 global equity views and themes note is out and its title "The Long Grind Higher Continues" says it all... it's muppet slaughtering time...