JPM's Kolanovic Warns Upcoming Recession Could Be Comparable To 2008 Crisis; Says "Buy Gold, Cash And VIX"

Tyler Durden's picture

By now all of our readers should be familiar with JPM's head quant Marko Kolanovic whose unblemished track record of accurate market calls is not only second to none, but is the equivalent in absolute value terms of Dennis Gartman's consistently wrong calls, which is why we won't spend time introducing him.

Instead we cut right to the chase with the highlights of his latest note released moments before the market close today, in which he lays out the biggest risks to the market, which are as follows:

  • deterioration of sentiment and fundamental selling (hedge funds, pensions, wealth funds, retail, etc.).
  • deleveraging of Equity Long-Short hedge funds is an overhang
  • quant funds may pare gross leverage.
  • increased volatility, deleveraging, rotation out of momentum, and weak sentiment will continue to be a headwind

Kolanovic then explains how to hedge against this ongoing storm ("increased allocation to gold, cash and VIX"), with the section on gold particularly delightful for his crucifixion of the strawman created by the most famous Obama tax advisor and crony capitalist from Omaha:

The arguments against gold that we have heard were along two lines: The first is what can be loosely called “Warren Buffet’s” argument: “Gold is a relic of past; aliens visiting earth would be puzzled why people hold it at all.” As the argument is non-quantitative in nature, one can only address it as such. If indeed aliens could overcome space-time barriers, they would also know that the metal was used as a store of value longer than any other real asset. Since the beginning of written history, countless currencies and governments emerged and failed while gold kept approximately the same purchasing power (albeit with some volatility, and positive correlation to levels of risk).

All we can say here is that when JPM employees viciously attack Buffett for his position on gold, hold on tight.

Kolanovic also crushes Wall Street's penguin momentum train:

The second argument was that of Momentum: “if an asset was going down, it will keep on going down,” We have concluded that many of our competitors rely on momentum in their commodity forecasts (e.g., when oil is $150, they forecast $200; when it is $30, they forecast teens). This type of trend following can always be rationalized (e.g., oil will go down because it is very difficult to store it – so it has to be sold; and Metals will go down because it is very easy to store them – so production will not slow down). While a simple momentum prescription does work most of the time, the key is to assess the likelihood of market turning points during which one can lose years of profits in a matter of days (less painful for a sell-side analyst and more for an investor).

More apropos to the current global bear market and economic slowdown, is Kolanovic' warning that a recession as a result of the market's loss of trillions in market cap now seems inevitable:

Global markets are now facing a significant ‘negative wealth effect’ that has a potential to result in a recession. This negative wealth effect of low commodity prices and a strong USD combined with the slowdown in China could be comparable to that of the 2008/2009 crisis (it involves diverse effects ranging from layoffs in the Global Energy sector to a lack of EM Sovereign wealth flowing into developed market equity hedge funds). While the economists were debating if the low-priced oil is good or bad for the economy, the equity markets never had any doubts – Oil and Equities were moving down together.

Finally, to our applause, Kolanovic concludes by slamming ole' crony uncle Warren one final time (no point in wasting too much time on the senile billionaire).

Finally, we think the aliens from the previous section would likely be surprised: not with the gold price, but with markets and an economy that are driven by a handful of central bankers taking active market views.

The aliens would quickly understand, however, when they realize they are dealing with a banana planet in which the central bankers only serve a handful of billionaire oligarchs, while leaving billions of people to fend for themselves.

* * *

Kolanovic's full note:

EQUITIES: Exposure of systematic strategies (CTA, Risk Parity, Vol Targeting) to equities is relative low, which reduces some downside tail risk for the S&P 500. Currently, the main risk comes from deterioration of sentiment and fundamental selling (hedge funds, pensions, wealth funds, retail, etc.). Deleveraging of Equity Long-Short hedge funds is an overhang as well, given the poor performance YTD (see, for example, HFRXEH index). Quant funds took a significant hit with the momentum sell-off during the first week of February (see HFRXEMN index) and may pare gross leverage. A market-neutral portfolio of Momentum stocks declined ~6% in the first week of February and has been recovering slightly over the last two days. Increased volatility, deleveraging, rotation out of momentum, and weak sentiment will continue to be a headwind for the S&P 500 in coming days.
 
GOLD: Since the end of last year, we have been advocating increased allocation to gold, cash and VIX. Specifically on gold, we have argued that it would benefit from the main market concern, which is the rising risk of a global recession, as well as potential mitigation of these risks: the Fed turning more dovish and a weaker dollar removing pressure from emerging markets and the commodities sector. In an unlikely tail scenario that we see as a temporary loss of confidence in central banks, gold would likely benefit as well. The arguments against gold that we have heard were along two lines: The first is what can be loosely called “Warren Buffet’s” argument: “Gold is a relic of past; aliens visiting earth would be puzzled why people hold it at all.” As the argument is non-quantitative in nature, one can only address it as such. If indeed aliens could overcome space-time barriers, they would also know that the metal was used as a store of value longer than any other real asset. Since the beginning of written history, countless currencies and governments emerged and failed while gold kept approximately the same purchasing power (albeit with some volatility, and positive correlation to levels of risk).

The second argument was that of Momentum: “if an asset was going down, it will keep on going down,” We have concluded that many of our competitors rely on momentum in their commodity forecasts (e.g., when oil is $150, they forecast $200; when it is $30, they forecast teens). This type of trend following can always be rationalized (e.g., oil will go down because it is very difficult to store it – so it has to be sold; and Metals will go down because it is very easy to store them – so production will not slow down). While a simple momentum prescription does work most of the time, the key is to assess the likelihood of market turning points during which one can lose years of profits in a matter of days (less painful for a sell-side analyst and more for an investor). We have written on market turning points from a theoretical perspective, as well as in the context of recent market moves, specifically in terms of positioning, gold CTA signal turning positive, etc. For a further rationale behind the gold thesis, see notes from our Metals strategist (here and here). 
 
CENTRAL BANKS AND OIL: Central banks outside of the US have been trying to push on a string recently with negative rates. It has not produced desired results (e.g., a sell-off in the banking sector). Our view is that over the past 18 months, the Fed has been too concerned with the risk of inflation, and perhaps too little with global deflationary pressures and a crisis outside of the US. This has contributed to a rapid strengthening of the USD and put additional pressure on Emerging Markets and certain segments of the US economy. As a result global markets are now facing a significant ‘negative wealth effect’ that has a potential to result in a recession. This negative wealth effect of low commodity prices and a strong USD combined with the slowdown in China could be comparable to that of the 2008/2009 crisis (it involves diverse effects ranging from layoffs in the Global Energy sector to a lack of EM Sovereign wealth flowing into developed market equity hedge funds). While the economists were debating if the low-priced oil is good or bad for the economy, the equity markets never had any doubts – Oil and Equities were moving down together.
 
So, if the negative rates and more bond purchases are losing effectiveness, what else could central banks do at this point? Could they buy commodities (other than gold)? Should they urge for a fiscal stimulus (they are governments’ biggest bondholders)? Perhaps as a start, a hold could be placed on all planned rate hikes. Finally, we think the aliens from the previous section would likely be surprised: not with the gold price, but with markets and an economy that are driven by a handful of central bankers taking active market views (on inflation, oil, etc.). Last but not least, they may wonder how the current levels of oil production outside of the US make any economic sense.
 

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SILVERGEDDON's picture

Write " You are fucked " on your forehead, so you see it every morning as inspiration for action to protect the value of your savings.

Otherwise, curl up in a fetal position when your paper world burns, investment wise.

AND, BANKS WORLDWIDE HAVE CREATED THIS SHIT STORM - THIS IS NOT AN AMERICAN PROBLEM, IT IS AN IMF WORLD BANK lizard infestation.

markmotive's picture

Kyle Bass:

"banking system losses - which could exceed 400% of the US banking losses incurred during the subprime crisis - are starting to accelerate"

http://www.planbeconomics.com/2016/02/kyle-bass-letter-on-china-34-trill...

Antifaschistische's picture

"could be comparable to that of the 2008/2009 crisis"

lol...that's it!  All we learned in 2008 is that the FED will always save the day and the stock market will go up by 80%...is that the comparison he's talking about?  Holy cow...

qweston content's picture

History doesnt repeat itself but it does rhyme. Maybe if Aliens come they can BTFD

Uchtdorf's picture

You know how we always say on ZH, "Beware of the nail gun!" or some variation thereof? Well, how is it Kolanovic, a guy at JPM, the belly of the beast, so to speak, doesn't need to worry for saying things like we read in this article?

cheka's picture

doing what he/she/it is told to do

KesselRunin12Parsecs's picture

Comparable SINCE LEHMAN doesn't sound as bad as WORSE SINCE LEHMAN. So this idea will never fly.

 

It would be like the BLS coming out and saying that this months jobs report is the most comparable of all time!

JamesBond's picture

Layoffs happen in severe recessions.  Lots of them.  Then, those people flood the federal programs for assistance at a time when revenues decline. This lack of incomes injecting into the economy hits the service section fast and hard resulting in more layoffs.  City, State, and Federal layoffs follow including the military.  Then we hit stagflation.  

 

This is what the waits us by the end of 2016.  

 

jb

NoPension's picture

City, State and Federal layoffs. Haha! That's a good one.

eforce's picture

It's going to be a lot worse than 2008...

..because UN Agenda 21/2030 comes next.

Nutsack's picture

What could possibly go wrong by letting greedy lying socialist jews run 90% of the world's financial and banking systems? Jesus kicked them out of the Temple for Moneychanging, and look what happened!

East Indian's picture

If aliens come here, Fed will bail out their banks also.

lakecity55's picture

"Hi, Lucky Lloyd here again! Have you heard of the promising new penny stock, Goldman Sachs? Imagine this soon to be huge valuable stock in your portfolio!"

qweston content's picture

The patients are running the assylum 

__Usury__'s picture

coming recession????

David Stockman.............''David Stockman, who was the Director of the Office of Management and Budget under Ronald Reagan, sees the actual unemployment rate at an astronomical 43 percent, based on a calculation predicated on reported labor hours per year. According to Stockman, if all adult Americans were working full-time, they would generate 420 million labor hours per year; however, only 240 million labor hours is what’s currently being generated, according to the BLS. This means, per Stockman, that with the “missing” other 180 million labor hours representing roughly 43 percent of the 420 million labor hour “whole,” that the real unemployment rate is at that figure, 43 percent.''

http://blog.christianmoney.com/2015/07/economist-says-the-real-unemploym...


NoPension's picture

What this country needs is a massive infrastructure overhaul plan.

Chinese rebar, Komatsu excavators and Mexican labor. Should do the trick.

LowerSlowerDelaware_LSD's picture

Be sure to write it backwards so that you can read it in the mirror.

WonderDawg's picture

You're one of those guys that thinks of everything, aren't ya? A clever one, you are.

LowerSlowerDelaware_LSD's picture

No, I just know that I'd wake up in a fog (my normal waking up state), see something in the mirror written on my forehead, and not be able to figure out what the hell it says.  Then I'd have to go find a hand mirror to reverse that mirror.  Next I'd have to do contortions with it on the bathroom sink counter so I can read what's on my forehead.  Just not the way that I want to start my day each day, that's all.

Mr Pink's picture

Those are the biggest risks he could come up with?

UNCOMPROMISED's picture

Meanwhile the coin languishes at $386.499 ahhhhhhhhhhhhhhhhh! says some hedgers who bought in during the FBI fevered march toward $1000.

Ahhhhhhhhhhhhhhhhh! I should have bought stawks! Stawks and vix etn'z!!

thetruthhurts's picture

Think what the price of gold would be if all investors had 10% of their wealth in gold......

Kirk2NCC1701's picture

"Buy gold, cash"?  

Uhm, you need cash to buy gold, and "buying cash" is called "having a good job".

Of course if you're in the "Cashish" business, then you're set for getting either, as well as "Happy Endings" from talented Working Girls.

slaughterer's picture

Kolanaovic's first wrong prediction amounts to not much more than "deleveraging, deterioration in sentiment ... buy gold".  He is leaving out too much of the quanititative picture for the first time, lured to make war on Buffet, and neglecting the role that HFTs and buybacks will play in the next period.  

XAU XAG's picture

the key is to assess the likelihood of market turning points during which one can lose years of profits in a matter of days (less painful for a sell-side analyst and more for an investor).

 

 

Read it

Learn it

Bangin7GramRocks's picture

Every "market" is green today. The people need some good news for the Valentine's Day weekend. We can resume Armageddon on Monday. This shit is more scripted than Three's Company. And it's gayer than Jack Tripper!

NoPension's picture

Oil is up 42 cents! Everything is fixed!

open-range's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.wallstreet34.com

TradingIsLifeBrah's picture

Buy Cash? A better trio might be "Buy Gold, Food and Ammo"

Dr. Engali's picture

Many of us have been saying that for 5+ years here.

cheka's picture

redux of 2008?  how about something....anything, different?  US pipeline co's are looking interesting

cash holders got f-ed though.  at the exact time that their cash should have lept in value....frbny comes in destroys them

the leveraged nyc idiots should have had to pay DEARLY to get to use the cash holders' money - we're talking double digit interest rates

but didn't

that criminality is off the charts

Pool Shark's picture

 

 

Cash & Bonds, yes.

But I hope you didn't buy Gold 5 years ago, Dr...

 

Policraticus's picture

At some distant point in the past people use to think that "Dollar Cost Averaging" was a sound way of investing in stocks and that over a long period of time they would out perform the market.  That of course was when markets were normal.  Now that approach is not a sound approach for stocks.  It is however still an interesting approach to investing.  Purchasing gold or silver is one area where that strategy historically and recently seems to be effective.  So yes, purchasing gold or silver 5, 6 or 20 years ago, seems to be something that will work out well for those individuals who have been accumulating precious metals.

thinkmoretalkless's picture

Been doing it for 6 years....side effect has been that the past six years have seemed like a lifetime.

BlueStreet's picture

Reading that brings a tear to the eye it's so beautiful, hope his unblemished record continues. 

ebworthen's picture

"Comparable"?  Twice as worse!

Just gets bigger each go-'round.

Stormtrooper's picture

I just don't understand where Mr. Kolanovic is coming from.  I mean, the US economy has replaced all of those jobs lost during 2008/2009 with at least 5 million bartender/waiter jobs.  What's with all the gloom and doom?

Savyindallas's picture

Yeah really  -bartenders can make good money. Waitresses can too  -especially if they are good looking and do tricks on the side. 

NoPension's picture

My buddy's girlfriend worked three months last year. She's getting a
"Refund" of $14,000. Winning.

Masked Man's picture

I don't think aliens would be at all surprised to see gold being highly valued, since it is such a rare element universe-wide.

What they would find puzzling is that earth inhabitants value small green pieces of paper with numbers on them stating they are worth as much as the number printed on them.

yellensNIRPles's picture

Even the title '...upcoming recession...' shows just how fucking clueless most people still are. Upcoming? Are you fucking kidding me? Right, right, the fundamentals are all still sound, and it's going to happen soon, but it's not happening right now... you're not in the middle of it...

I guess people believe what they want to believe.

Going Loco's picture

This one won't be a recession. Or a depression.

This is the reset.

if the whole package is dumped on us (NIRP, cash banned, WWIII to distract us and dsetroy "surplus" stuff) we will emerge at the other end with no effective national giverments, just local warlords, and everything looking kind of dirty and uncared for including ourselves.

cheka's picture

no reset.  just more of same - with likely higher inflation (rising price variety)

we'll all be dead before any reset

Cloud9.5's picture

Three days without water and three weeks without food you might be right.

lakecity55's picture

Ok, well, he has a job. Pays big fiats.

Nutsack's picture

Even the title '...upcoming recession...' shows just how fucking clueless most people still are. Upcoming? Are you fucking kidding me? Right, right, the fundamentals are all still sound, and it's going to happen soon, but it's not happening right now... you're not in the middle of it... I guess people believe what they want to believe.

 

 

I upvoted your comment. Then I saw your name, threw up in my mouth and changed to a down vote... THEN I ran to the toilet and spit the puke out.

matermaker's picture

rough seas indeed when you have highly esteemed members wandering so far outside the party lines and narrative.

surf0766's picture

Did JPM make the same call before 2008? I do not remember.