Is Financial Argmageddon Bullish For Stocks? One Bank's Surprising Answer

Everyone knows that after nearly a decade of capital markets central planning by the world's central banks, "good news is bad news." But did you also know that financial armageddon has become the most bullish catalyst to buy stocks? That's the understated take-home message from the year ahead preview by Macquarie's Viktor Shvets published last week. It is also the conclusion that One River Asset Management's Eric Peters reached in his latest weekend notes.

While we will have much more to comment on Macquarie's rather macabre 2018 preview, which is arguably one of the most honest, comprehensive, and objective predictions of what to expect from the "central bank/market confidence boosting nexus", we will highlight the one argument that has served to promote countless BTFD algo-driven stock rips, summarized in the following blurb, which is a sublime explanation by Viktor Shvets the worst things are, the more you should buy:

If volatilities jump, CBs would need to reset the ‘background picture’. The challenge is that even with the best of intentions, the process is far from automatic, and hence there could be months of extended volatility (a la Dec’15-Feb’16). If one ignores shorter-term aberrations, we maintain that there is no alternative to policies that have been pursued since 1980s of deliberately suppressing and managing business and capital market cycles. [T]his implies that a relatively pleasant ‘Kondratieff autumn’ (characterized by inability to raise cost of capital against a background of constrained but positive growth and inflation rates) is likely to endure. Indeed, two generations of investors grew up knowing nothing else. They have never experienced either scorching summers or freezing winters, as public sector refused to allow debt repudiation, deleveraging or clearance of excesses. Although this cannot last forever, there is no reason to believe that the end of the road would necessarily occur in 2018 or 2019. It is true that policy risks are more heightened but so is policy recognition of dangers.

 

We therefore remain constructive on financial assets (as we have been for quite some time), not because we believe in a sustainable and private sector-led recovery but rather because we do not believe in one, and thus we do not see any viable alternatives to an ongoing financialization, which needs to be facilitated through excess liquidity, and avoiding proper price and risk discovery, and thus avoiding asset price volatilities.

Translation: central banks remain trapped by the mountain-sized bubble they have blown with years of QE and ZIRP/NIRP, and once volatility returns, and risk assets plunge, CBs will have no choice but to scramble right back and prevent the pyramid from keeling over and undoing a decade of fake "wealth creation" which was pulled from the future to the tune of $15 trillion in central bank asset purchases, which while still rising is about to go into reverse in just over a year's time.

 

If that's not enough, here is One River's Eric Peters, with the exact same conclusion:

Anecdote

 

“The market has an accident, the Fed returns to QE, slashes interest rates, bonds surge, stocks recover,” said the CIO, high atop his prodigious pile, alone. Staring into the distance. Squinting, straining.

 

“The correlation between bonds and equities remains negative, the risk parity equity/bond portfolios are dented but not destroyed. And we descend to the next lower level in real interest rates. US bond yields turn negative. In essence, we prolong the paradigm that has driven markets for a few decades.”

 

Far below, economies hummed in harmony, capitalists collecting their expanding share. “A continuation of this paradigm is what everyone believes. And I just doubt that outcome so sincerely.” Hidden within the distant economic whir, labor strived, struggled. Their wage growth anemic, their children indebted, career prospects uncertain.

 

“It has taken time, but the political context for a regime shift is now established; populism is evident in recent elections. And the academic context for a seismic economic policy shift is in place too.”

 

The extraordinary response to the global financial crisis prevented depression. But the price of salvation is proving to be as profound as it is impossible to precisely measure -- unexpected election outcomes, political paralysis, an isolationist America, de-globalization, fake news, opioid epidemics.

 

And connecting it all, a corrosive, woven thread; injustice, unfairness, inequality, hypocrisy, distrust, endemic, growing. “We are on the cusp of great change, the old paradigm is set to shift,” he said, at altitude, the air crisp, clear.

 

“The market has an accident, monetary policy is seen to be bust, the models have been wrong, we have to change what we do, we can’t go down the same route, we need to move to a different policy mix. Fiscal expansion, infrastructure, labor over capital. We’re moving to something that may be great for the economy, but no good for asset markets. New Regime -- end of story.”

Comments

junction Sun, 11/19/2017 - 20:11 Permalink

Bring it on, a real crash like everyone has been predicting.  Besides that, I am waiting for someone to prove that the $450 million Da Vinci painting "Salvator Mundi" is a phoney, a scam on the art world.

NoDebt buzzsaw99 Sun, 11/19/2017 - 21:20 Permalink

Agreed. Watching somebody else come to roughly the same conclusion I did years ago is both satisfying and troubling.  Satisfying because I feel somewhat vidicated.  Troubling because it means I have to figure out the next game after this one before it starts being played.  And my crystal ball is pretty damned cloudy these days.  I think I'm all out of original ideas.  

In reply to by buzzsaw99

GooseShtepping Moron Sun, 11/19/2017 - 20:19 Permalink

We went around and around this barn 3 years ago with the whole "bad news is good news" meme. At a certain level it seems to make sense, but it does not take proper account of the reality of Peak Debt. There is a hard limit to the amount of monetary stimulus that can be applied, because even if the Fed decides to print more money, that doesn't mean that the private sector can afford to service more loans at any reasonable rate of interest. Sure, you can lower the interest rate to zero or even make it negative, but once that rate is applied to commercial and personal loans, it just means going full Weimar. Any further attempt to kick the debt can down the road results in hyperinflation and the collapse of the currency.If you do not believe we will get to that point, then you must believe rates have to normalize. There is no other way out of the box.

buzzsaw99 GooseShtepping Moron Sun, 11/19/2017 - 20:37 Permalink

Sure, you can lower the interest rate to zero or even make it negative, but once that rate is applied to commercial and personal loans, it just means going full Weimar...you answered your own question there in part.  i understand that logic and used it myself for awhile but it hasn't worked that way in practice except in the stratosphere as you call it.  sure jets and art and gold and stuff is high but in the real economy oil is still $55/bbl.  some of the weimar effect has leaked back from china in the form of real estate purchases but so far that's about it.however, every single fire the central banks have fought in the last thirty years has been a deflationary fire.  much of the stratospheric wealth is notional, (along with real economy pension money) in stocks and bonds, not in actual clownbux.  there are like $13T in bank deposits in the usa but as you well know there is a shitload more debt than that to be serviced so it balances out in the red.  As hard as it is to believe even an inflationary shitstorm would turn into a long term deflationary shitstorm all by itself at this point.  god i can't believe i'm talking like this but it sure looks like that's where we are. 

In reply to by GooseShtepping Moron

buzzsaw99 GooseShtepping Moron Sun, 11/19/2017 - 20:59 Permalink

+1funny, probably our only point of disagreement is our assessment of what the central bankers will do next.  what a stupid thing to argue about, straight out of the prole handbook.  it would be interesting to watch what would happen if the central bankers did nothing for the next ten years but it would also be really, really, messy.  i hate to admit this but i too benefit from their largesse so it would not be pain free i assure you.  i constantly gripe about the billionaires getting free wealth insurance but that extends to my (comparitively meager) investments, banks accounts, real estate values, and so on as well.  there are self professed anarchists on here but i wonder how many of them, if they were honest, benefit likewise? best

In reply to by GooseShtepping Moron

JibjeResearch buzzsaw99 Sun, 11/19/2017 - 20:59 Permalink

Sure, what ever....., it doesn't matter... You and he are correct...; however,Liquidity is life... without it... everybody is poor.. fighting for food.As long as the liquidity is good... it's good enough... to move on..Fiat (CBs)  is on its last leg... the platform can be burned down.. without much effect...Credit cards are already here...Cryptos are taking over... as we speak...

In reply to by buzzsaw99

Clock Crasher Sun, 11/19/2017 - 20:30 Permalink

https://www.occ.gov/topics/capital-markets/financial-markets/derivative… Sachs  Assets 0.9 Trillion - Derivatives 45.5 TrillionCiti                    Assets 1.8 Trillion - Derivatives 54.8 TrillionJPM Chase          Assets 2.5 Trillion - Derivatives 48.5 TrillionB of A                 Assets 2.2 Trillion - Derivatives 35.8 trillionMost derivatives are interest rate swapsThe hyperlink PDF is interesting.  The summary table is all the way at the bottom. Total Derivaties between 25 US banks are 242 Trillion against 14.5 Trillion of assets

CHX13 natxlaw Mon, 11/20/2017 - 04:05 Permalink

That won't be allowed bcs a) the issuers of the debt (be it companies, communities, states or nations) would go bankrupt overnight and b) various "asset bubbles" would immediatly pop as the derivative's casio main collateral (bonds) go worthless. Remember what Bernanke said... "I don't think interest rates will normalize in my life-time..."

In reply to by natxlaw

Clock Crasher Sun, 11/19/2017 - 20:31 Permalink

We are in strict binary territoryEither the debt will be serviced with (rounds of) devaluation, QE, ZIRP, NIRP, Derivatives, Swaps, Bail in's/out's.  In this case the stock markets will continue to go up and Gold (maybe years/decades) will outpreform stocks N-times. OrThere is a sequence of money cycling out of growth (stocks/bonds/debt) and into value (commodities/gold).  In this case rates increase.  Rate increases will nuke those interest swap derivatives and blow up the balance sheets on the realestate and debt portfolios of the big 4 banks.  Then counter parties start to fail and the system has 4 simultaneous heart attacks like Homer Simpsons.  Trump reforms western finance as we know it and everyone gets ten cents on the dollar when its all said and done.  

ReturnOfDaMac Dragon HAwk Sun, 11/19/2017 - 21:12 Permalink

Why in the hell would they do anything like that?  Worthwhile projects like fixing roads, bridges, infrastructure, schools, and rebuilding 'murica?  Why that would only create jobs, make 'murica great again and improve the efficiency of our economy!!  That would NOT benefit the 0.1%.  They don't need these things.  They have their own planes, are driven in Limos, and attend only the finest schools.  Raping the nation is much more profitable in the short run for them.  Silly dragon, tricks are for kids.

In reply to by Dragon HAwk

hooligan2009 Sun, 11/19/2017 - 21:13 Permalink

hmmm... does this mean that we hae moved from funding spending from income (the save and invest model)tofunding income from spending (perpetual deficts and libtard socialism)and are bowspending income from funding? (eroding capital)the big wheel has turned to making capital disappear into virtual reality that has zero value to anyone except those in its excited misery 

zzzz88 Sun, 11/19/2017 - 21:39 Permalink

the stupid arrogant central banks will be foreced to eat their own shit very  soon. but very sadly, we are going to pay for it.