Citigroup: "We Almost Hope Those Forecasts Are Proven Wrong"

Tyler Durden's picture

... we almost hope those forecasts are proven wrong. They imply a widening gap between valuations and traditional fundamental relationships. They imply a dearth of yields and spreads that will almost invariably push more and more investors into positions they would ultimately rather not take. But if the old adage that markets move in the direction that causes the most pain to the largest number of people is anything to go by, then we suspect that this is what will happen. Depressingly, our instinct is that those new forecasts are more likely too conservative than too aggressive. Longer-term, sweet dreams really aren't made of this.

      - Citigroup

 

It’s the ECB’s world -- € fixed income investors just live in it.

Or at least that’s what Mario Draghi and co. would like the market to believe. With the EU set to become the latest arena to host the increasingly fragile confidence game that now passes for monetary policy, investors are about to find out what happens to credit spreads when a central bank hell bent on monetizing annual net fixed income supply twice over collides head-on with both geopolitical turmoil and newly-elected, anti-austerity governments handcuffed by the will of their constituencies to campaign promises centered around billions (or trillions) in debt restructuring. To let the sell side tell it, the printing press is likely to triumph -- at least in the short-run.

As we’ve explained previously, the market’s propensity to front-run Q€ has so far been sufficient to avert a return to 2012-style carnage in the market for non-GGB periphery sovereign debt, even as Greece seems to be one or two vacuous ultimatums away from being, to use Credit Suisse’s words, "digitally bombed back to barter status." Eventually though, the whole "pay no attention to the man behind the curtain" gambit will be exposed and indeed we’ve already seen some cracks in the CB facade courtesy of the SNB’s FX widowmaker last month, but as Citi notes, the ECB’s final push to once and for all strip the € fixed income market of its rightful role as a price discovery mechanism hasn’t even begun.

From Citi:

...the distortions in € fixed income that ECB QE will create haven’t even started yet. Unless issuance picks up substantially, the lack of growth in € fixed income implies the ECB will be buying more than €600bn from existing investor holdings net over the coming 12 months. Fed purchases never exceeded net supply in $ fixed income over the QE3 period.

As a reminder, net issuance over the last four years has only averaged around €340 billion in the eurozone, meaning the ECB is set to monetize more than twice the net supply going forward:

What this means is that in relatively short order, credit spreads on € fixed income will signal exactly nothing and the perversion of capital markets in the EU will be complete as not even Grexit and/or the realization that cease fires in Ukraine seem to only apply to areas where no one was fighting in the first place will be sufficient to offset the ECB’s trillion-euro bazooka.

Conveniently, Q€ may well spill over into U.S. markets just in time to ensure a Fed rate hike doesn’t shake things up too much, because, as Goldman notes,

...European investors were more focused on [Q€] and thus had reflected more of it into Euro credit spreads. We expect lower fixed income yields in Europe will push the search for yield into USD fixed income [and] we think the significant spread compression between the US and Europe has increased the relative appeal of US spreads given what we think are better current and future US fundamentals. [Finally] our FX team thinks [Q€] will continue to drive the Euro lower against the US dollar, which should further encourage investors to seek yield in USD over EUR.

So, lower yields everywhere and always just because. This rather surreal state of affairs has even the beneficiaries of CB money printing lamenting the absurdity of the situation. From Citi again:

We now forecast the iBoxx € IG index to reach 60bp (from 70bp) and iTraxx Main to reach 45bp (from 50bp) by the end of the year – implying another 15% or so of tightening from current levels, keeping us at the very bullish end of current consensus.

 

Similarly, our target for Crossover  is lowered to 245bp (from 295bp).

 

Truth be told, we almost hope those forecasts are proven wrong. They imply a widening gap between valuations and traditional fundamental relationships. They imply a dearth of yields and spreads that will almost invariably push more and more investors into positions they would ultimately rather not take. But if the old adage that markets move in the direction that causes the most pain to the largest number of people is anything to go by, then we suspect that this is what will happen. Depressingly, our instinct is that those new forecasts are more likely too conservative than too aggressive. Longer-term, sweet dreams really aren't made of this.

That is almost the same as if another famous Citigrouper had said, nearly a decade ago, that he hoped the music would finally stop playing.

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Arius's picture

We are AWESOME

kliguy38's picture

translated...........we're fully short and we're gonna slaughter you peeps

Headbanger's picture

"meaning the ECB is set to monetize more than twice the net supply going forward"

WHAT!!??

Doesn't ANYBODY see something wrong with that!?

Translation:   The ECB has hit a fucking brick wall and is about to go up in flames!

KnuckleDragger-X's picture

They are the smart ones, not like all those other people who destroyed their economies.... this time it's different.....

Bossman1967's picture

Insanity run riot. So why not triple it. If the people stand for it then why wouldnt they. Just like Greece if the people dont do something this weekend about what.thier new govt is about to sign then they deserve to continue suffering. You know we are as bad or worst than anyone else in the world just look at the markets records accross the board and we are paying for these stock holders to get rich while our prcious metals take a bath. When will we do anything about it. I am sick and tired of this bullshit how many of you are????? The up or downs will say it all

LooseLee's picture

"The ECB has hit a fucking brick wall and is about to go up in flames!
"

We can only hope...then followed by the USSA!

sun tzu's picture

Yet the euro is getting stronger and Greek stocks are soaring 10%

fed_depression's picture

They are leaving room to buy USTs

knukles's picture

Next thing'll be sumptin' like negative interest rates or printing a whole lot MOAR
       -favorite demented economist named Paul

maskone909's picture

it all boils down to either how much the average citizen can withstand, or when the first greedy banker runs for the exit.  heads or tails?

winflation's picture

Mmmmm, lookit all that financial debt issuance.  Trickle down at it's finest!

ThroxxOfVron's picture

We will collateralize and monetize bad 'debt', new 'debt', transform stuff that isn't and can never be 'debt' into 'debt' and monetize that, too!

Utility of debt goes fully negative!  

Yes!  Negative!  

..& we will have to issue ever increasing amounts of it just to keep from being vaporized by the existing stock of bad debt that cannot be absorbed or written off without destroying OUR system and bankrupting WE the oligarchs and elites!

Fiat credit/debt machine runs in reverse and destroys 'marginal productivity' at ever increasing rates!  

YOU are 'marginal' and YOU are 'marginal' and YOU are 'marginal' and YOU are 'marginal'....

NO.  Absurd!!!

WE the oligarchs and elites that have become wealthy and pampered by the expansionary phase of the system WE engineered could never be considered marginal like the rest of YOU.  

WE are not going to devalue any of OUR property or securities of OUR debt instruments or rental/toll/tax-sheltered income streams!

IF WE are forced to devalue ANY of OUR property or securities WE will force these properties or securities or debt instruments that are diminished or impaired or defaulted onto the treasuries of the nation states and onto the backs of YOU damned stupid unwashed tax donkeys!

Just because WE are running the credit/debt fiat machine in reverse and destroying 'marginal' productivity doesn't mean WE are giving up the wealth and power WE accumulated during the expansionary phase! 

 

http://www.youtube.com/watch?v=nsXXLOxElTk

SheepDog-One's picture

Why even worry about anything at all? Even worst case scenario can always be kicked a year to send stawks soaring.

Spungo's picture

Does Krugs run a hedge fund? I'm sure his strong understanding of economics could be highly profitable since the stock market reflects the actual underlying economy.

LooseLee's picture

Many of you were not around in 1999 right before the market tanked. There were Bulltard Fools everywhere saying the very same things they are saying today. My brother lost has &^%$ and would not listen to me. Many of you are going to repeat the same mistake---thinking you are cute and have an upper hand now. Fact is, the value of all paper assets will revert to the mean. That is an economic law. So, enjoy your phony fiat 'wealth' while you can. Soon it will evaporate quicker than you can log-on to your Etrade account...

I Write Code's picture

Citibank, hah, they were respectable up to about 1990, but certainly not since 2008.

prudent_investor's picture

Time to short US stock market? 

Here more on possible good shorts:

http://prudentvalueinvestor.blogspot.com