Citi Asks A Striking Question: We All Know How This Ends, So Why Are We So Slow To Price It In?

Earlier today, we showed that on the 9th anniversary of the so-called "bull market", central bank balance sheet accounted for over 40% of global GDP, amounting to no less than $21 trillion. That in itself, should explain why the "most hated bull market" of all time is not a bull market at all, but the world's biggest experiment in central planning. 

Yet the time of this unprecedented monetary experiment is coming to an end as we are finally nearing the point where due to a growing shortage of eligible collateral, the central bank support wheels will soon come off (the ECB and BOJ are still buying massive amounts of bonds and equities each month), resulting in gravity finally regaining control over the market's surreal trendline.

It's not just central banks, however: also add the one nation which 5 years ago we first showed  has put the central bank complex to shame with the amount of debt it has injected in the global financial system: China.

Appropriately, this central bank handoff is also the topic of the latest presentation by Matt King, in which the Citi credit  strategist once again repeats that "it's the flow, not the stock that matters", a point we've made since 2012, and underscores it by warning - yet again - that "both the world's leading marginal buyers are in retreat." He is referring to central banks and China, the world's two biggest market manipulators and sources of capital misallocations.

And yet, we all know this, and that's precisely the problem, one which has served as a persistent source of confusion for one of Citigroup's brightest minds in the past decade. And, as Matt King puts it in a slide titled announced ≠ discounted, "we know what central banks are doing, so why are we so slow to price it in" especially since the marginal buyer - central banks - sets the price, and the marginal buyer will be gone by this time next year?

Translation: we all know how this ends, so when will we finally admit it?

This is shown in the two charts below which suggest that both the global stock and bond markets are headed for a major crash as a result of the slowdown in central bank purchases.

King previously opined on this paradox last July, when he suggested that not only have markets lost their ability to discount future news, but that central banks - unable to grasp this - believe that in a perverse case of reflexivity, the market is actually giving the "all clear" to their actions, when it is their actions themselves that have broken the market, which effectively encourages central banks to break it even more. To wit:

central banks still cling to the textbook model in which the market discounts all available information ahead of time, meaning that by the time they actually come to do their reduction, provided they’ve telegraphed it beforehand, the effect is already priced in. Unfortunately they seem to have neglected the textbook footnote that states that markets function this way only when they are deep and liquid. That might have been a reasonable description of pre-crisis markets; it seems a deeply unreasonable assumption for post-crisis markets in which leverage is constrained and one set of buyers have come along and absorbed virtually all of the world’s net new issuance.

So where does that leave markets?

According to King there are 5 key lessons investors appear to have forgotten, so here is a reminder.

1. "Mind the flow, not the stock", which of course refers to the ongoing slowdown in central bank purchases as shown in the charts above.

2. "Announced  already discounted", or why just because markets have had time to "price something in", never means that they have priced it in. Also see: markets are deeply irrational (especially if you are trying to stay solvent as a bear).

* * *

King's third "reminder" is to "think global not local."

In a slide showing that "everything is interconnected", he makes another point we frequently discuss, namely that when it comes to the global economy, it's all about China, and specifically its credit impulse. Here King notes that whereas trailing growth numbers look great, their drivers likely lie elsewhere... like in China, for example...

... where the Li Keqiang index has posted a sharp drop in recent months, and could be the catalyst behind the recent topping in German manufacturing and export sentiment. Here's Citi: "The latest decline in German manufacturing sentiment follows 6 months after the Li Keqiang (LKQ) index, which tracks Chinese growth, peaked last summer. Likewise, the previous surge in German industrial confidence began in spring 2016, 6 months after the LKQ troughed."

Germany, China – Li Keqiang Index (YY %), Ifo Index (Index), 2011-2018

* * *

King's 4th lesson is that "a diverse market is a resilient market", pointing to the Italian BTP market specifically, where he urges investors to "beware markets with only one buyer", in this case the ECB, something we also noted three months ago. Here, King also warns that volatility may have slumped in the past year as VIX crashed to all time lows before its recent vol flaring episode, risk remains as seen by the Skew between ATM and OTM volatility, and which is near all time highs.

Citi's words of caution here: "herding begets fragility."

This then takes us to the 5th and final lesson from the Citi strategist: "beware of circular logic", in this case as referring to the US Dollar, because while $ weakness does make for a risk on environment, that trend is about to be challenged. Or said otherwise, enjoy the recent move while you can, because "self-reinforcing processes can run in both directions."

This brings us to Matt King's conclusion, which comes in three very simple parts:

  • strong markets can make a strong economy...
  • and bubbles bring in new buyers...
  • what happens when the music stops?

As for King's chilling assessment of how this all ends when "the music stops" and central banks lose control and can no longer inflate another bubble to offset the bursting of the last one, namely that "markets need backstops, but are being given bubbles", something tells us that just like Marko Kolanovic, King is a closet fan of both the "barbaric relic" and one or more cryptocurrencies.


Pearson365 Sat, 03/10/2018 - 18:04 Permalink

Another stunning question:  Why does Citi even exist?

LOL.  Now it's a striking question, not stunning.

Striking or stunning, it's central bank largesse that bailed out Citi and keeps all "markets" propped up.

Quantify Sat, 03/10/2018 - 18:27 Permalink

Bottom line: Since you can't print money like a central bank there is little other choice but to invest in corporations that make a profit.

Davidduke2000 Sat, 03/10/2018 - 18:37 Permalink

the answer is simply , it's a game played by a dozen of central banks that are buying each other's stock markets with money printed without the knowledge of their citizens which explain why the central banks do not want to be audited.

RabbitOne Sat, 03/10/2018 - 21:58 Permalink

These articles never discuss “reality”. At my age of 72 they think I am going to invest all my capital in 10 year treasuries to get a whopping return of 2.9% or less? At that rate you need at least $2 million to get anywhere near what I should have as income for retirement. I don’t have those kind of bucks. Take a look at the rates in this table:

Through most of the 80s and 90's the 10 year was above 5% on the 10 year. This is what they sold us on what we could expect as a return. The last time it was this low was during the great depression.

So the ONLY alternative is to invest in 3% dividend stocks and expect at least a 3% return on your equity over 10 years. This is happening so all the money is flowing into stocks. This way I am happy with my  return and the fed is happy to give the politically elite their kickback.

The only problem with this method is stocks like Amazon (AMZN) with their 250 plus PE ratios have not had any realistic corrections in years. So yeah we all know how it ends. So give me an alternative...

Batman11 Sun, 03/11/2018 - 04:17 Permalink

They found the problem with being governed by the markets the last time they tried it in the 1920s. The markets showed how well the economy was doing and they thought it would never end.

“Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.

This neoclassical economist believed in price discovery, stable equilibriums and the rational decisions of market participants.

The markets were being driven to these levels by margin lending and were detached from all reality.

Soon the majority lost faith in the markets and capitalism, the markets had deceived them.

How the same nonsense managed to come back again is a mystery.

The dimwit central bankers have forgotten everything and artificially inflated the markets with QE.

We know what happens when it ends.


Batman11 Batman11 Sun, 03/11/2018 - 07:08 Permalink

Where did neoliberal globalisation go wrong?

In the planning stage.

Once they had selected neoclassical economics as the gold standard for globalisation it was doomed.

It isn’t new; it began life in the 19th century.

The early Classical Economists soon realised the then ruling class were economic parasites. It wasn’t hard as the Aristocracy lived in luxury and never did anything economically productive (they haven’t changed).

The old money, aristocratic rentiers were a big problem for the early productive, capitalist class who had to pay their rents either directly or through wages. The employees only source of income was wages and so the employer paid their rents through wages, raising costs and reducing profits.

What would the classical economist say about housing costs in the West?

This is a nightmare for the productive capitalist class who have to cover these costs in wages.

Today’s capitalists and investors move off-shore to where the cost of living is lower and they can pay lower wages for higher profits, hollowing out western economies.

The early neoclassical economists hid the problems of rentier activity in the economy by removing the difference between “earned” and “unearned” income and conflating “land” with capital”. To ensure thinking didn’t stray down unwanted lines, they took the focus off the cost of living.

Disposable income = wages – (taxes + the cost of living)

The neoclassical economist can see the “taxes” variable but not the “cost of living” variable.

It starts off badly and gets worse.

The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics.

These problems are contained within the economics and will gradually wreck neoliberal globalisation.

Neoliberalism has been running on private debt, while its neoclassical economists remain blissfully unaware.


1929 and 2008 are the same problem, which is unseen due to private debt blind, neoclassical economists.

In reply to by Batman11

Pareto Sun, 03/11/2018 - 12:28 Permalink

I have a poem - courtesy Citi.


strong markets can make a strong economy...

and bubbles bring in new buyers...

what happens when the music stops?

lost fortunes of assholes and liars.