'Cleanest Dirty Shirt' Or Greatest Fool Standing?

Tyler Durden's picture

Typically, we humans will anchor on the most recent patterns - especially if they conform to our anchored inherently optimistic bias. It seems, once again, that just as in previous euphoric stages of equity market cycles, we are doing the same again. There are plenty of market movements that remove any hope for the 'who could have seen it coming?' herd: European stock and bond markets 'breaking' their positive contagion trends (core and periphery); US credit markets seeing very disturbing trends of selling pressure and technical outflows; and US equity valuations reaching multi-month highs in the face of declining earning, declining macro fundamentals, and declining GDP expectations. With US stocks at highs against a plunging US macro background and EU stocks slumping against a rising EU macro background, it appears good is bad and bad is good and while we do not know what catalyst stalls the can-kicking hope in the short-term, the longer the divergence from reality lasts, the bigger the fall to come.

 

US and European Macro are strongly divergent. We have seen this before, and US led the weakness. It is NOT decoupling, it is a lead-lag cycle...

 

We have also seen this disconnect between Europe and US in stocks before...

 

and while European macro appears to be surprising to the upside, the core of Europe's growth engine is sputtering (with Germany, France, and UK stocks and CDS selling off notably)...

 

and the periphery, for so long heralded as the fulcrum security upon which to base the view that tail-risk has been removed and there is therefore a floor under the markets... are fading rapidly...

 

But while US CDS is widening, reflecting concerns over the fiscal situation and longer-term devaluation risks, US equities contonues to surge...

 

and it seems US credit investors are already getting anxious... just as they did before...

 

and equity valuations appear simply re-rating to cover the 'nominal price' movements in the face of plunging macro (GDP) expectations...

 

and slumping micro (earnings-based) expectatations...

 

So the question is - do you believe in miracles? is it really different this time? will you be the first one out? Or does Europe, macro, micro, and US credit all have it wrong?

 

Charts: Bloomberg