In parallel to the now standard question of "how high can rates go before it all comes crashing down", the one other thing the investing community desperately wants answered (as this Bloomberg piece notes), is where are we in the business cycle? According to the latest report by BofA's Michael Hartnett, we are now so "long in the vermouth", the late-cycle is starting to get "tipsy." Consider the following points:
- 2017: Bitcoin’s rip from $300 to $19,600 in 3 years made it the biggest bubble ever
- 2017: Da Vinci’s Salvator Mundi sold for $450mn (would take average American 7,500 years to earn)
- 2017: Argentina (8 defaults in 202 years) issued a (oversubscribed) 100-year sovereign bond
- 2017: European high yield bonds were priced as less risky than US Treasuries
- 2017: the market cap of Facebook (25k employees) exceeded that of India (1.3bn people)
- 2018: US, UK, German, Japanese unemployment rates are at multi-decade lows
- 2018: the global stock of negatively-yielding global debt remains >$10tn
- 2018: S&P 500 trailing price-to-earnings ratio >20X…a level exceeded in just 12 of past 120 years
- 2018: S&P 500 price-to-book ratio >3X…a level exceeded in just 5 of past 70 years
- 2018: US tax cuts of $1.5tn will coincide with US corporate bond issuance of $1.5tn and US equity buybacks of $0.9tn
- 2018: QE “winners” (REITs, credit, EM assets) have started to underperform QE “losers” (volatility, US$, commodities, cash)
- Aug 22nd, 2018: S&P500 bull market becomes longest of all-time
- Dec 2018: Fed will be 9 hikes into tightening cycle & G4 central bank liquidity will be contracting
- May 2019: global profits are forecast to be 1/3 higher than their prior 2008 peak (IBES $3.3tn vs $2.4tn)
- July 2019: the US economic expansion will become the longest since the Civil War
And a few bonus charts, first looking at the 3 Deflationary Ds of Disruption, Debt and Demographics which continue to cap interest rates
- Disruption accelerating: AI, VR, CRISPR, EV...greatest disruption of all = supply of labor (robots) reducing price of labor (wages)
- Demographics aging at record pace: by 2025 working population of Russia set to fall by 9mn, Japan by 6m, Southern Europe by 5mn
- Debt @ all-time highs: global debt @ $233tn = 318% of global GDP
As a result of these excessive 3D-eflationary forces, deflation has been in a bull market, while the inflationary bear market continued:
- Bull market leadership has been in assets that provide scarce “growth” & scarce “yield”
- Deflation assets, e.g. bonds, credit, growth stocks (315%), have massively outperformed inflation assets, e.g. commodities, cash, banks, value stocks (249%) since QE1
Next, a chart we have shown previously, showing the 3rd largest investment bubble of all time: e-Commerce, i.e. tech:
- Dow Jones eCommerce index (AMZN, NFLX, GOOG, FB…) up 617%, 3rd largest bubble of past 40 years
- US tech market cap ($6.0tn) exceeding that of all companies in the Eurozone ($5.0tn)
- Facebook (25k employees) market cap > MSCI India (1.3bn people)
* * *
Then we re-visit the 3 Peaks, starting with...
Peak Positioning, where according to BofA "Icarus fever" has now passed.
- The “Icarus euphoria” of Jan’18 has calmed, e.g. BofAML Bull & Bear Indicator @ 4.7
- For the fever to return the Fed needs to pause monetary tightening
- But investors are still “long stocks”, e.g. BofAML private client equity allocation 61% (all-time high 63%), cash allocation at all-time low of 9.8%
- US EPS positives = tax cuts & oil prices, negatives stronger dollar
- Peak global PMIs + Asian exports+ yield curve BofAML global EPS model says growth slows from >20% to <10%
- South Korean export growth, a great lead indicator of global EPS, just turned negative
Peak Policy stimulus:
- US deficit @ 5.1% of GDP, unemployment < 4%...only comparable period = late 1960s
Finally, the only two charts that really matter, first is...
The end of the Liquidity Supernova
- Liquidity supernova peaking: central bank asset purchases drop from $4tn 2016 & 2017 to $0.4tn in 2018
And last but not least...
It’s the Fed, stupid!
- The Fed typically hikes until something breaks
- By end-18 the Fed will be 9 hikes into a tightening cycle
- EM, credit, tech are all candidates in the cycle
BofA'a conclusion: "Central bank liquidity = #1 driver of asset prices past decade." And the liquidity is almost over.