As we showed earlier [7], at this point any debate whether or not the S&P500 is driven purely by the "outside money" injected by the Fed, is over: financial markets are now down since the end of QE3, while cash is the only asset that is rising because the Fed is no longer actively debasing the US currency (it will again, but not right now). Feel free to ignore and/or mock any so-called expert who still idiotically argues it is anything but money printing.
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But while we know what happened in the past, what everyone wants to know is what will happen, and whether the recent correction will morph into a far more serious bear market (such as the one that just slammed the recently bubbly biotech sector).
Here, according to BofA's Michael Hartnett, are the key bear market catalysts that everyone should be watching.
1. Peak in liquidity
QE & zero rates reflated financial assets significantly. The only assets that QE did not reflate were cash, volatility, the US dollar and banks. Cash, volatility, the US dollar are all outperforming big-time in 2015, which tells you markets have been forced to discount peak of global liquidity/higher Fed funds. Frequent flash cashes (oil, UST, CHF, bunds, SPX) tell the same story. Peak in liquidity = peak of excess returns = trough in volatility.
2. Deflationary recovery
The QE loser that has remained a loser is the bank sector. The banks have underperformed in 2015 because the economy has disappointed and the recovery has remained exceptionally deflationary. The bank recovery in 2013/14 therefore has not been validated by a move higher in bond yields (Chart 4)
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3. Manufacturing recession
More recently, investors have witnessed weak manufacturing activity and profits, led most visibly by negative growth in Chinese exports (which partly caused the Chinese devaluation). Investor hopes of a much-awaited handoff from a (storming) liquiditydriven bull market to a (calmer) EPS-driven market have been dashed, and fears of a global manufacturing recession are on the rise.
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4. Capitulation of the "strong $" & "TINA" trades
Fear of US/global EPS recession & thus abject “Quantitative Failure” after 601 rate cuts and zero/negative rates and $15trn of asset purchases and a multitude of currency devaluations…have caused a big recent reversal of two of the most stubborn trades of 2015:
- The “strong $ trade”…investors have been forced to reduce longs in Europe & Japan
- The “TINA trade”…investors have been forced to reduce longs in Equities, Discretionary, Tech, Banks).
Indeed, despite the fact that EM/commodities/resources continue to visibly discount a “deflationary bust”, the “longs” revealed in the Sept FMS have actually underperformed the “shorts” (Chart 6) in the recent crash. The “longs” are down 8.0% since Aug 19th, while the “shorts” are down 5.4%.
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