GFI's John Spallanzani came on CNBC today and decided to make the case that there is a bubble. But not a bubble in stocks which are trading 1% off their all time highs, at a 20x real P/E multiple, [6]and 1400 days without a 10% correction, mind you, but a bubble in pessimism.
Here is his "argument", deconstructed in its several key components.
- "If there's a bubble in bonds, there has to be a bubble in pessimism."
Apparently, Mr. Spallanzani does not quite grasp that the only reason bond prices are as high as they are (to him, that means a bubble), is because the central banks are now buying more than 100% of all net issuance.
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It also appears that the very logical conclusion that if there is a bubble in bonds, then there is clearly a bubble in stocks, because once the bond bubble bursts and interest rates soar, what happens to earnings? Or perhaps GFI employees just haven't covered yet the arcane linkage between the balance sheet and the income statement.
Ironically, in the very next sentence the CNBC guest says that "there is a shortage of quality assets in the world" (which actually is spot on as we showed in May of 2013 [8]), but apparently another class not discussed at GFI is that "quality assets" are bonds, not 100x (or Div/0) biotech stocks.
Then there is a lot of even more confused words, followed by this pearl: "the only way the Fed is going to hike is basically the S&P going toward 2200. If we stay at 2100 or below, the Fed doesn't go in September."
Then comes even more confusion: "the only game in town right now are equities to drive the balance sheet of the individual investor and also the consumer."
Uh, what?
Unwilling to risk a subdural hematoma from trying to decipher what, if anything, that sentence even means, we trudge on:
"If you take energy out right... energy really cratered... the earnings are not that bad", and when someone interjects that revenues are bad, John's response is: "obviously we can debate that."
Actually, no we can [9]'t:
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... and as Factset notes [11], "Revenue Growth Not Expected to Return Until 2016"
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But ignore reality because John plows on: "the trajectory of earnings is up, we're not going into a recession, therefore all the liquidity that's sitting on a sideline has to go somewhere and that place that it's eventually going to is equities, that's what happens."
Uh, what... again? Some circular argument which is made whole not because of some cause-effect link but because "that's what happens"?
At this point we are getting concerned that Mr. Spallanzani has absolutely no idea what he is talking about.
For better or worse, his CNBC hosts did too, and the camel's back finally broke when asked if he has any clue about ETF flows (he does because "I trade ETFs all day") he, surprisingly accurately, notes that "flows are going into IWM, into biotechs and going into QQQs", which incidentally are only the story stocks, those trading in triple digit or higher PE, Spallanzani totally cracked, and having no response at all, came out with the following absolute stunner:
- "There's a bubble in pessimism worldwide, come on you read Zero Hedge."
And cue laughter.
So there you have it: when you are fresh out of any legitimate arguments, what do you do? You name drop Zero Hedge and use its readership as a benchmark of rationality or, as the case may in this particular very, very confused case, hope it's sufficient to "prove" that there is a bubble in pessimism... or something. It wasn't exactly clear by this point in the interview what John's point was, or if he even had one.
And while we probably should be grateful for that assessment, because for whatever reason Zero Hedge traffic was indeed an all time high in July, the fact that it originates from someone as confused, albeit a religious reader of this website, as Spallanzani we'll just avoid commenting altogether.
