The core thesis presented earlier by Fasanara Capital, is that what is taking place in the market right now is the blowing of arguably the biggest asset bubble in history, or rather twin bubbles - impacting both equities and bonds...
... created by trillions in central bank liquidity injections, and characterized by unprecedented equity valuations...
... concurrent bond bubbles, especially in Europe...
... defined by a "fake markets cycle"...
... which relies on narratives created daily to justify the "fake markets"...
... thus avoiding any discussion of the unstable, or "metastable" equilibrium...
... which makes for tremendously fragile markets with:
- LARGE POTENTIAL FOR HOT MONEY FLOWS / WEAK HANDS TURNING WHEN MOMENTUM DOES
- UNCERTAIN DIVERSIFICATION, CROWDING EFFECT, NARROW EXITS
- UNCERTAIN LIQUIDITY
- SMALL DISTURBANCE ENOUGH TO PROVOKE LARGE ADJUSTMENT
And, more importantly as discussed earlier, "where the liquidity tide that created it all starts petering out."
And like every unstable equilibrium, there are various, specific triggers that could result in the puncture of the "Twin Bubbles", where are as follows:
- LIQUIDITY TIDE PETERING OUT: The Global liquidity tide from Central Banks is soon to be past its peak. Flows work in reverse, for the first time in 10 years. First real crash test for momentum.
- RATES RISING: It started raining. Over-indebtedness may have closed on to Minsky point.
- (IL)LIQUIDITY EVENT: The liquidity in markets is deceptive and ephemeral, likely to dissipate as markets move lower.
- VOLATILITY SPIKING: Volatility is like a balloon held underwater. Its rise may trigger a chain effect across major market players (Risk Parity funds, Short Vol ETFs, Low Vol ETF, momentum strategies, etc.)
- GEOPOLITICS / POLITICS: From populism in developed countries (Germany, Catalonia, Italy, Brexit, Trump latest cases in point) to confrontations in North Korea / Middle East (end of Pax Americana)
* * *
How can one test if Fasanara is right? As the fund itself proposes,"assume for a second this is indeed a major market bubble, and an unstable equilibrium about to snap... What would you be on the lookout for as confirming signs?
Here are just two potential catalysts:
- CENTRAL BANKS PANICKING at the first signs of market weakness, and
- A growing list of DISLOCATIONS across markets.. Happening with increasing frequency..
Addressing the first takes nothig more than a google search:
And, of course, countless market anomalies. Fasanara writes that given the frequency with which market anomalies come up, a point of adjustment may be imminent. Some examples:
- The BANK OF JAPAN NOW OWNS ALMOST 80% OF THE ENTIRE JAPANESE ETF equity market. The BoJ will likely be the major shareholder in 55 companies by the end of 2017. BOJ holds 39% of Japan's govt debt, equates to 79% of Japan's GDP
- The SWISS NATIONAL BANK BOUGHT $ 100BN BETWEEN US AND EUROPEAN STOCKS. It now owns 26 million Microsoft shares
- The listed stock of the SWISS NATIONAL BANK ROSE 120% IN THE LAST 2 MONTHS; up almost 400% in 1 year
- USD-DENOMINATED RUSSIAN BOND YIELD TRADING BELOW TREASURY YIELD, as ETF buy indiscriminately and irrespective of valuations
- ARGENTINA uses defaults as a recurrent macro-prudential policy, to tackle debt overloads from time to time. Most recently in 2014, 2001, 1989. Yet, this year, the country ISSUED A 100-YEAR BOND FOR 7.9% YIELD. Red-hot demand. It was oversubscribed 3.5x.
- LEVERAGE TO BUY STOCKS AT THE NYSE (MARGIN DEBT) HIT AN ALL-TIME RECORD of $549bn this year (read), and went up in lockstep with the S&P as both doubled up since 2009.
- Is it 2007 all over again in CLOs? No, way better than that. COVENANT-LITE LOANS ARE OVER DOUBLE WHAT THEY USED TO BE IN 2007. Assuming 2007 was a credit bubble and covenant-lite was one of the thermometers taking temperature, this is twice a bubble
- Anomalies in ETF land - CLOSE TO 90% OF EQUITY FLOWS (from 7% 15 years ago) ATTRIBUTABLE TO PASSIVE FUNDS or ETFs
And of course, inside ETFs...
- As of end January, ETFs and passive funds represented almost 30% of AUM in the US. Close to 90% of equity flows in the US (from 7% 15 years ago) is attributable to passive funds or ETFs
- The product is so hot that Vanguard, to compete, felt compelled to cut fees 3 times from late January to mid-February, in a race-to-zero against rivals.
- An ETF on ETFs was launched in April: TETF will be composed of stocks of companies driving the growth of the ETF industry
- A sought-after Junior miner gold ETF got larger than its index recently. So much so that it was forced to buy other ETFs. Incredibly, there are 10 Canadian companies that this ETF owns where its ownership percentage is more than 18%
- The ETF Select Dividend lost 35% during August 2015 at a time when its constituencies lost just 2.5% on average, showing that disconnections work both ways when the time comes. ETFs are not always synonyms of liquidity.
- One of the largest US Energy ETF has 50% of the fund invested in just four stocks. ETFs are not always synonyms of diversification.
- Low Vol ETFs are filled with tech stocks. Passive aggressive ETFs.
- JPM here explains that 37% of the NYSE trading volumes YTD taking place during the last 30 mins of trading, because of passive funds that rebalance at the end of the day
- Researchers showed that “a single percentage point increase in ETF ownership has demonstrable effects on an individual stock. Over the ensuing year, correlation to the share’s industry group and the broader market ticks up 9%, while the relationship between its price and future earnings falls 14%.”
But the best indicator may be the simplest one: what is Warren Buffett doing with all his cash...
And while others may have their doubts, Fasanara is putting their portfolio where their mouth is.