Citi Warns "Everything Is Expensive - Pretty Much"

Tyler Durden's picture

Citi's credit group is bullish; but, as they admit, for all the wrong reasons. Bullish, because they still believe that the extraordinary liquidity environment which has dominated the last four years will remain in place this year (despite tapering) and for the wrong reasons because aside from their doubts about the foundations of much of the economic recovery itself, nearly all the factors that they would normally base their view on the markets on seem to be pulling in the opposite direction. In their own words, "everything is expensive; and the market is driven purely by a variant of the Greater Fool's Theory."


Via Citi's Credit group:

...We are bullish...

For the wrong reasons, because aside from our doubts about the foundations of much of the economic recovery itself, nearly all the factors that we would normally base our view on credit on seem to be pulling in the opposite direction:

Credit fundamentals are deteriorating. Although the fragile European and global recovery should support earnings, we expect leverage to rise further as companies push shareholder value.


Valuations are increasingly unattractive. Scored against 20 different fundamental metrics, credit spreads come in as 'Tight' or 'Very tight' on every single one of them at the moment. The yield offered by € IG corporate credit is in the 4th percentile looking at the last ten years – hardly a compelling case for investing if you look at credit from a total-return perspective.


The marginal money is going elsewhere. Judging by our survey, inflows into corporate credit have been on a falling trend for 18 months and are now close to neutral at a five-year low. This weakens the technical that has so often left the credit market almost impervious to negative headlines in recent years.


Market composition is deteriorating. We think the European credit market should see a record volume (~€90bn) of subordinated debt issuance next year. While some of that (the AT1 issuance) will remain outside the indices for now, the market will still have to absorb a lot of additional risk.


And to top it off, positioning in the credit market is very different. The rush into beta may have further to go, but already the rally we have seen since September has created a vulnerability through higher-beta exposure in the market. We reckon that it is at least comparable to the one that was exposed by the Fed's change in tone on tapering in May.

We'd argue that markets may be driven by a variant of the Greater Fool's Theory, where the underlying rationale for many would in essence be:

"I don't like credit here, but I don't like other assets very much either (other than, perhaps, equities). I don't see what turns the market any time soon and I can't afford to sit and wait for a better entry point, especially while central banks are backstopping everything. I'll have to take more risk and then sell to someone else when I see a trigger ahead. Worst case, I'll be in the same boat as everybody else."

We are not arguing that this is irrational – on the contrary, for individual investors whose performance is tracked on a monthly, weekly or daily basis, this argument seems entirely rational – especially against the perception that central banks can no more afford to let the prevailing equilibrium slip today than they could in 2009.

But the sum of that individual rationality is a market with a very obvious vulnerability.

When no one sees an immediate risk of losing, when positions get ever longer and when valuations are stretched further and further as a result, less and less is needed to eventually topple the consensus. Longer-term, it is a recipe for breeding black swans.

So the inherent challenge is to predict how long the Greater Fool's game goes on.

However, the more tension that builds up between market valuations and fundamentals and the more stretched positions get, the more likely a subsequent selloff becomes.

Where's the value? Spreads look tight to fundamentals on every single one of the 20 metrics

By our metrics non-financial leverage has been rising for the past two years now (spreads are ignoring that)...

To strengthen the case for that link between central bank actions and market performance, we’ve regressed US credit spreads (in differences) against 1) the Fed’s holdings of long-dated securities (in differences), 2) US GDP5, 3) non-farm payrolls, 4) US economic surprises and 5) US earnings revisions. It’s pretty clear from Figure 29 below that most of the cumulative contribution to spread tightening in this simple framework is coming from the Fed’s balance sheet, rather than the fundamental economic variables.

Even in the darling asset class of the day – equities – attractive opportunities are getting harder and harder to come by.


To be clear, we do still prefer long equity versus credit strategies, where possible, but there too valuations are full, if not stretched already in many places. The rally in small-caps, for instance, has left valuations at historical extremes versus large caps in both Europe and the US.


So you decide - play the game knowing you're a greater fool... or exit now?

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fonzannoon's picture

Things would not be so expensive if they had let Citi fail.

Everybodys All American's picture

Goldman, Morgan Stanley, Merryl Lynch and JP Morgan.


Timmay's picture

Awesome, this is the setup to Market-crash 2.0 but this time the BIG BOYS are allowed to retain some credibility by saying "Told you so?" Sweet.

CarrierWave's picture

The Market is expensive? - Come back in a month after the SP500 breaks above 1850 and closes in on 1900, and then read this same article again.

Point is that this sort of articles is useless in determining when the market will really top before the next Bear market.

And.. No one ever knows beforehand when Markets Top.

Conclusion? - Stay with the trend. Thanks to the FED, I am grateful to having seen my 401K going 50-80% higher since Nov-2011.

No matter how many articles of this sort ZH will keep posting, it's the FED who drives this market higher still.

kaiserhoff's picture

There goes your invitation to the Fourth of July bash at the Hamptons;)

More_sellers_than_buyers's picture

Fonz!!! Iwish I could plus a billion

q99x2's picture

How dare they say anything. Citi is my bank. Citi has no credit. I hate my bank.

Rainman's picture

" Nobody gets paid until the fiat goes in your pocket ".


Sinnedi's picture

This is my first comment on here thank you zerohedge for bringing the truth of the economy to me. I am getting into economics thanks to you guys. I just want to know When its coming down.

Rainman's picture

...and it's a looong line

Umh's picture

Two drunk friends on the phone in 2006. I know it's going to crash! When do you think it will crash? If I knew that I'd get rich..............

lotsoffun's picture

end of year taxes, i was going through the old paper work, tossing what wasn't anymore needed.  i fooled myself and thought in the 2006 era i had been doing well with djx puts.  but - when i looked, i did really well going long some stocks and selling when i'd made 10 - 15% profit in short period, almost any stock was going stupid higher, and i was making really nice, 4 - 5% dividends on a lot of sp500 staples, and then looked at how i'd given almost all of it back selling djx puts.  in the end, i was right, but timing is everything.  i was two years early.  bernake and now yellen still have long legs on this '5 year old recovery'.  i still think anybody goes short stocks or credit is going to get crushed.  the markets have never been more manipulated.

cynicalskeptic's picture

They can prolong the fiction far longer than you can wait for the reality to kick in.  

I was waiting for the housing collapse for over a decade.  Went from 8+% interest and 20% down  (payments no more than 36% of income) to NINJA.  Easy to seen how that was going to turn out but it took forever cause too many people had a vested interest in keeping the bubble going.

balanced's picture

"I just want to know When its coming down."

I think that pretty much sums it up for everyone here. I've started to wonder if that day will ever come -- if there will actually be a day. My fear is that things will just drag on, getting a little worse, year after year, as they've been doing. I find myself looking for news that gives me hope that this corrupt-to-the-core system will eventually collapse into a big pile of freedom.

I now think that the best outcome to hope for is that more and more people (and businesses) start adopting Bitcoin (and/or other crypto-currencies) as a means of exchange (not as a store of wealth - we have PMs for that), starving the financial system more and more as it becomes less and less relevant.

silverserfer's picture

buying physical silver right now is like buying gas at $2.50/gallon. Diluted buy paper replicas. Sentiment is in the gutter, weak hands crying like little bitches.




NoWayJose's picture

And you don't have to dump Stabil onto your phyzz either...

NoWayJose's picture

Everything's expensive -- 'cept gold and silver....

jtz5's picture

What are the chances all these Wall St firms are coming out and saying everything is overvalued so the Fed can offload their treasuries to individuals?

object_orient's picture

@ Sinnedi: As soon as you give up hope, join the crowd, and go long.

More_sellers_than_buyers's picture

Everything and I mean everything is overvalued if there is no faith in the system.  With selective law enforcement, they have effectivley killed risk.  Its too late to fix it now, there are not enough people with an understanding of what is happening and there is no way to educate them as our system has failed.  Now , those with power will go for the blood in the water.  We are no better than a central African republic.  Human nature I guess.  I just hope I live long enough to tell the stories of what we once had to my grandkids........

cynicalskeptic's picture

I just hope I live long enough to tell the stories of what we once had to my grandkids........

Providing there's anything/anyone left after the fall..... dirty faced munchkins gathered around the campfire after a day hunting ground squirrels - roasting them on a stick and happy for the meat.... listening to your wizened visage, pitying your lack of teeth as they sit disbelieving stories of HUGE places where you could get ANYTHING you wanted to eat... places to live with lighting whenever you turned on a switch, with stoves for cooking and things to keep food from spoiling, places that had heat in the winter and cooling in the summer, vehicles that you rode vast distances......  'why, men once walked on the moon... ' as they laugh at your delusions.

Me..... glad I won't be around for much more.  Pity my kids even though they're far better off than most, good educations, a wide range of skills and starting life with some capital instead of debt.  Worked my ass off my whole life - at least I go tto enjoy the last decade or so.  You kind of want to go downoutside the Stock Exchange and scream "HOW COULD YOU IDIOTS SCREW THINGS UP SO BADLY?"  

You'd just get arrested and sent to Bellevue for an evaluation though......

MFLTucson's picture

The price of equities given the economy and the ability of the fed to stimulate growth are totally ridiculos and belong back at 2008 levels.

Oxbo Rene's picture

Maaaaaan ! !
I'm starting to get scared ! ! ! !

Hindenburg...Oh Man's picture

NASDAQ up another .28 percent after 1800 futures open. yee haw. 

Solarman's picture

El Erian quit for a reason.

disabledvet's picture

To me this is the best time ever to be a global money center bank. God awful to be lending into the US economy...but that's what Morgan Stanley is for. Just drop your business cards all around Caracas, Ankara, Delhi, Shanghai, Rio, Moscow...

I mean that's a pretty long list right there.

Indonesia, Canada, Australia, Tokyo, Paris, Berlin, Johanessburg,

Just hire an airline pilot and tell him to "keep the engine running."

FieldingMellish's picture

Even gold appears expensive... at least the paper variety. Getting spanked again tonight.

Vendrell's picture

I feel at some point the liquidity will slosh into cryptocurrencies in 2014 since Bitcoin etc has started to go mainstream e.g. Wells Fargo services and accelerating adoption... "Let no stone go unturned for asset yields" -Blackstone et al.


Disclosure: I have no position in cryptocurrencies and do not have a strong opinion other than to wait and see on the evolution, so not trying to start a sh!tcoin debate <3

cynicalskeptic's picture

At what point does the NSA start generating Bitcoins by the millions?

cynicalskeptic's picture

Actually, if you think about it... what if Bitcoins was an elaborate government sponsored con job?  Let the interest build, pretend to be upset with it, take superficial action and wait for a huge rush into Bitcoins - people trading $US for Bitcoins.  

Then BOOM!  

Bitcoins collapse after sucking up a few trillion dollars.  Gov has been able to manipulate most any other market so why not?  Gov sells Bitcoins covertly taking $US out of circulation and then the crash is in Bitcoins instead of $US.  

balanced's picture

He just said that he wasn't looking to start a Bitcoin debate. You're a putz.

besnook's picture

everyone is calling for a market correction. are they right or is this the ultimate contrarian play. any inflation tic will send the market to the moon al a venezuela, zimbabwe, argentina. the usa will be the greatest faded empire in the world with the s&p traded at 10 grand.

TheRideNeverEnds's picture

They only seem expensive because Yellen hasn't announced the next QE program yet.