"It's Just Like 1998": Why One Bank Is Haunted By Visions Of Credit Tremors Bursting The Tech Bubble

Earlier this week, Goldman Sachs, whose market-timing calls leave much to be desired, declared that tech stocks are "not a bubble", and went so far as to predict that the secular increase in tech names could continue for decades, spawning vivid memories of Goldman predicting $200 oil months before the start of the second great depression, and before oil crashed by $100/barrel, wiping out a generation of muppets.

However, let's just say that not everyone agrees with Goldman.

Back in March, just as the tech sector suffered its first big rout of 2018, Bank of America had the gall to tell the truth and observe that the "e-Commerce" sector, which consists of AMZN, NFLX, GOOG, TWTR, EBAY, FB, was now up 617% since the financial crisis, making it the 3rd largest bubble of the past 40 years, and at this rate - assuming no major drop in the 6 constituent stocks - was set to become the largest bubble of all time over the next few months.

Fast forward to today, when in a dual-pronged attack, Goldman's ridiculous thesis was attacked again not once but twice, first by Leuthold Group's Jim Paulsen who said that tech ETFs now account for 30% of trailing 2 year net fund flows, which was the biggest since - you guessed it - the dot-com bubble. Paulsen, who traditionally has had a cheerful, bullish take on markets, even went so far as to slam FANGs as the de facto harbinger of the next tech bubble:

"Haven’t we seen this movie before? Technology takes over the stock market late in a recovery cycle, seemingly making the bull ageless, pushing portfolios toward a more concentrated new-era exposure, stimulating investor greed bolstered daily by watching a chosen few (FANGs) rise to new heights, and convincing many that tech is really a defensive investment against late-cycle pressures which trouble other investments."

A separate report from Bank of America's Michael Hartnett confirms Paulsen's fears. In his latest "flow show" report, the BofA CIO writes that in a year that has seen $140BN of inflows into stocks and $55BN into bonds, there have been 4 big flow losers in the second quarter:

  1. HY bonds (redemptions >$15bn),
  2. IG bonds ($2.2bn this week, largest since Dec’16),
  3. Emerging Markets (redemptions >$10bn in EM debt + equity past 6 weeks),
  4. European equities (redemptions >$33bn past 13 weeks)

However, more than offsetting this is, of course, the tech sector which has been the "big flow winner in Q2" with another $2.3bn in inflows this week - the 2nd biggest week of inflows ever - and $17.3bn YTD on pace for record.

No doubt, much of this has been the result of momentum and self-fulfilling prophecies such as Goldman's prediction that all is well. The result is that while numerous other assets have been hit badly already in 2018, including:

  • Brazil (EWZ) -34%,
  • Eurozone banks (SX7E) -29%,
  • Chinese real estate (SHPROP) -26%,
  • Argentine peso (ARS) -25%,
  • Turkish lira (TRY) -25%...

... which are all hedge fund "leverage plays", meanwhile FAANG stocks are up +29% as investors pursue scarce secular growth, in the process turbo-charging the 9-year “conscious decoupling” of US tech & growth from EM/EU
leverage & value, just as what happened in 1998-99. We all know how that ended.

In any case, so far it has been so good for FAANG and tech names, which have successfully charged right through every wobble, hitting new all time highs as recently as Wednesday, with the "conscious decoupling" from the rest of the world seemingly unstoppable.

But it will stop, and BofA sees the end as soon as this summer, which is full of "event risk":

  • June 8th = G7 meeting “Quebec Discord” on trade policy huge contrast with “Shanghai Accord” on credit stimulus 2016
  • June 12th = Trump-Kim summit Singapore
  • June 13th = FOMC...Fed expected to hike 25bps, but no change in dot plot
  • June 14th = ECB meeting...ECB could announce QE tapering begins Sept
  • June 22nd = OPEC…OPEC expected to raise crude production
  • June 28th = EU summit

As Hartnett writes, we are headed right into bad summer news for risk assets, first and foremost the vanishing of the QE security blanket.

As a result, investors are targeting weak credit stories, with a focus on Emerging Markets, which are now in a tightening cycle, which as shown in the chart below, have undergone 33 rate hikes past 9 months... 

... and the ECB (who else?) threatening a QE taper policy mistake in autumn.

As such, the return of "a true summer bid for distressed EM/EU" requires big stuff, including:

  • May China export growth >12% YoY to allay fears Asia export slowdown (Chart 5) precipitates China FX depreciation (very EM negative)
  • EU concessions to Italy (since 2000, German GDP +24%, Italy +4% - Chart 6; note German youth unemployment rate = 4%, in Italy it’s 33%)
  • Consensus “higher US yields/US dollar/crude oil” trade reverses (CTFC data show HFs/CTAs 1.9sd long oil, 1.4sd short 10yr Treasuries)

That's the bullish case. Meanwhile, according to BoFa, "the big risk is, as in 1998, credit tremors spread and investors forced to deleverage from risk assets, raise cash (private client cash levels at new lows of 9.9%)."

But to Hartnett, and going back to the tech bubble theme, the biggest risk  is a "quick, deep tech selloff as investors continue to run an unambiguous barbell - “owning deflation, trading inflation”, “owning US, trading RoW”, “owning tech, trading everything else” - and that when investors delever, they can only sell what they own.

Or, as Bloomberg's Andrew Cinko puts it, "if the times get tough and investors must delever they will sell "what they own," as BofA says. Those who are rotating to financials and banks this week and away from tech may simply be trading the frying pan for the fire."

Putting it all together, Hartnett stance remains unchanged:

We remain defensive & happy to sell risk assets into strength until the Fed forced to pause.

Or, translated: sell, or simply stay out, until stocks crash, then buy ahead of the next Fed easing/QE cycle.


Deep Snorkeler Dirtnapper Fri, 06/08/2018 - 11:17 Permalink

I am prepared

I sold all my stock.

I sold all my real estate except the house I live in.

I have a good stash of food and water.

I cancelled my gender transformation surgery.

I have a supply of hallucinatory medications,

a library of half-read books.

I reject primitive religious superstitions.

I'm ready for 2008 again.

God's love for Man never existed.


In reply to by Dirtnapper

Jtrillian 1 Alabama Fri, 06/08/2018 - 12:38 Permalink

Repeat after me...

There are no markets, only CENTRAL BANKS.

The central banks nationalized the markets after 2008 and continue to collectively inject "stimulus" to this very day.  They are the market makers and the market takers.  The markets will not crash until they decide to take away the punch bowl. 

In reply to by 1 Alabama

JohnGaltUk Fri, 06/08/2018 - 11:30 Permalink

Stocks are fine, the problem is where the big money is; the bond market.

When the herd flees the bond market they will park it in equities so everybody needs to calm down.

harrybrown Fri, 06/08/2018 - 11:36 Permalink

And the Zionist financial cabal....rubs its hands in glee
ready for the next monetary transfer of the goyim's stored labour

Death to the Zionist Money Changers

Fantasy Free E… Fri, 06/08/2018 - 11:58 Permalink

The dynamics in play are almost universally misunderstood. As long as the elite are engaged in a leveraged buy up of the entire equities market, not much else matters. This is really a great deal for the elite. Use free money to buy and then have the public bear any losses they incur. What makes it easy is that the public doesn't mind.


If stocks are all is strong hands, managing the stock market is greatly facilitated. Things like this are normally not noticed until 40 years after the fact. Look at the economy without the handicap of viewing it through the prism of fantasy and it is completely clear.

the Dood Fri, 06/08/2018 - 12:56 Permalink

The US economy is the only driver of growth as liquidity continues to tighten. Nobody expects a slowdown in US economy or recession in 1-3 years but nobody expected the Spanish Inquisition either! Get out now and avoid the rush.

Trader Maximus Fri, 06/08/2018 - 13:23 Permalink

Good article.  Shepwave was not calling for an island reversal today so the gaps filled.  Easy money.

Shepwave has a key date in late June which will be important for traders.