Deutsche Bank: A 15%-35% "Hope" Premium Is Now Priced In

Tyler Durden's picture

Confused by the recent surge of capital into Europe (which somehow is supposed to indicate that all is well because local stock and bond markets are faring better)? Don't be: it is merely the latest and greatest manifestation of that most prevalent of New Normal investment strategies: hope. Hope that this time it is different, and that the latest injection of capital from the Fed via QE3 coupled with the OMT perpetual backstop of liquidity via the ECB (still merely at the beta stage: expansion to actual gold/production phase TBD) will kick start the European economies. Alas, it won't, at least not until Europe actually undergoes the inevitable internal devaluation which we described over the weekend (since an external one is impossible) and crushes local wages of the PIIGS, which in turn would lead to revolution, and thus will never happen. That, or somehow discharges about 40% of consolidated Eurozone debt/GDP, which it also won't as it would wipe out the global banking system. So what does this mean? Well, as Deutsche Bank explains looking simply at manufacturing output in the developed world, global markets are now overvalued anywhere between 15% and 35%. This is the hope premium now embedded in stock prices.

From Deutsche Bank:

Our view over the last two or three months has been that the great central bank liquidity promises of August/September (QE infinity and the OMT) has probably bought markets up to 6 months of grace where hope for a recovery can be as or more important than the hard evidence. However our view is that if growth doesn't materialise by around Q2 of next year markets could sharply decline again. One simple way to frame this is to look at our often used relationship between PMIs/ISM and the YoY change in equities in each country. At current PMI/ISM levels, US, Italian, German and French equity markets range between 15% and 35% overvalued using this very simplistic model. Put the other way round we are pricing in PMIs/ISM around the mid-50s level instead of the 49.5 (US), Italy (45.1), 46.8 (Germany) and 44.5 (France) we saw yesterday. Interestingly Spain's equity market is only 4% away from the -10% YoY that it's 45.3 PMI suggests it should be.


Overall as we always say these numbers should be treated with great caution but they are a useful broad guide as to whether markets are behind or  ahead of the data. At the moment they are way ahead and despite the simplistic nature of this relationship we're confident with the conclusion that if PMIs aren't comfortably above 50 as Q2 2013 progresses, markets will be notably lower than current levels. Given that most economists expect the recovery to be building by Q2 then maybe markets are right but it shows that there's not much room for error on this.

In other words: all those bullish sell side research reports saying the world may get better in 2013, if it doesn't get worse: they are all now priced in, and then some. If they don't materialize, the downside is now knows.

In other words: all those bullish sell side research reports saying the world may get better in 2013, if it doesn't get worse: they are all now priced in, and then some. If they don't materialize, the downside is now clear.

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GetZeeGold's picture



Looks like CNBC has it's work cut out for them this morning.


fonzannoon's picture

To say that the market has anything priced in is to imply that the market is anything resembling a barometer of the economy. It isn't. I would write more but gold is dropping and I should probably go sell everything before QE4 is announced because that would make sense.

Quinvarius's picture

Too many paper gold longs to resist running stops.  Maybe we can blow them out and get a nice outside reversal day.

fonzannoon's picture

Maybe. Who knows. Doodie.

disabledvet's picture

I would call this "confused panic buying" actually as somehow "credit revolvers are right around the corner." the EZ is fast becoming "the experiment" in every new fangled "victory of capital over labor" experiment. Needless to say "there are a lot of tools in that tool box."

101 years and counting's picture

i love it when one of the insolventest of all banks comes out their "analysis".  DB, GS, JPM, Barclays, etc...

Since the world is mired in a depression BECAUSE of them.

Tirpitz's picture

Maybe they're caught holding some large short position in equities?

Since most large corporations (both in the US, Germany and Italia) are pushing huge amounts of cash from export-oriented sales towards their respective tax-havens, I wouldn't be as much concerned about their profitability and their share price either.

Quinvarius's picture

We are replaying the 2009 bottom.  Complete with newsflow, money printing, and traders demanding you go into a fetal position.  Thats fine.  I will make another 100% while they prove once again why an inexperienced 20 something has no business giving financial advice.  Markets move on easy money and easy credit only.  How many bottoms are the kaminskyites going to short into before they get the picture?  You cannot have a bank panic when they are all getting free money.  No bank panic means no forced selling.  If you want out, there is only one thing you short vs.  I dare not speak its name. 

fonzannoon's picture

There has been easy money since way before 2009. Yet the market has gone NOWHERE in 10 yrs plus. That means that along the way bulls and bears got their ass kicked and a few got lucky.  If you step back you will see the casino managers smiling and rubbing their hands waiting for you to sit down.

Quinvarius's picture

I don't like to gamble.

Money has never been this easy on a macro level.  Every day I wake up and get smacked in the face with ZIRP and printing press reality.  It is the same reality from the day before.  But it never loses its meaning for me.  No matter how much the Fed tries to put out deflationary expectations, there is only inflation coming fast and hard.  I don't need sound bytes.  I don't need kaminsky yelling in my face.  It is never different this time.

fonzannoon's picture

I am neither bearish, nor bullish, so whether it's Kaminsky or Pisani I just see them as two minor actors in the big play.

poor fella's picture

"I don't like to gamble."

but?  .   .   .  

It's fine to play your hand - but picking stocks or trends today is like deciding which piece of shit on the lawn a particular fly is going to land on (and betting on it)...  at least with throwing darts, you have the tiniest of influences. 

On the other hand, if money is going to be as easy as you believe, it could be time to play the REAL dogs (shipping, solar, miners, AMD, etc. - if they don't go bust). Otherwise, this article seems right on, pretty much any large cap corp. people can easily name, are all overvalued by 30-40%. 

I'd also like to know why anyone would want to hold onto a company next year that is going to pay out those dividends in December? If short-term vision is the latest rage, corporations shouldn't have to pay big bucks to C-Suite. The janitorial staff could make those decisions if they were asked. 


Dr. Engali's picture

You go ahead and keep telling yourself that. There are a few million other suckers sitting around the world telling themselves the same thing, telling themselves that they are the contrarian. Easy money for the banks means pain for the insurance companies.

fonzannoon's picture

Everyone misses that point Doc. Go ahead with Zirp and Nirp. Goodbye pensions, goodbye hundreds of billions in annuities...Unless they are secretely investing in which case it is just a matter of whether they implode slowly or explode quickly. No matter which way they run they can't escape the eventual biting reality.

Dr. Engali's picture

I don't get why people don't understand that, or even mention it. It seems like insurance companies are filing every three months to change (reduce benefits) and they are all scrambling to raise cash for reserve requirements.

Wraithlord's picture

Never underestimate the capacity of the markets to price in more hope

youngman's picture

I think the play right now its the big pre fiscal cliff dividend plays.....36 companies now paying next year dividends this year....

I was reading the headlines buyback at a big haircut....and markets up and strength in their currencies..the Euro and and silver down......investing is quite funny now

VonManstein's picture

Its peak ponzi bitches!! cant you tell?

desperate action!

DXY down again, stocks flat, bonds down its getting funny.. wheels falling off


Yellowhoard's picture

Best to crash the economy early in the second term.

Leaves more time for imperial directives.