Two months ago we first showed what Deutsche Bank dubbed "a quite fascinating statistic" namely that as of the end of October, 89% of assets that the German bank collects data on for its annual long-term study, had a negative total return year to date in dollar terms. This was the highest percentage on record based on data back to 1901, eclipsing the 84% hit in 1920.
Commenting on this striking observation of a market in which quite literally nothing worked, Deutsche Bank said that "this is what happens when the vast majority of global assets are expensive historically due to extreme monetary policy. When the tide goes out you’re more likely to get en masse negative months rather than rotation from day equities into bonds or visa-versa."
Fast forward to today, when picking up on the theme of ebbing liquidity tides, in his last Early Morning Reid for 2018, Deutsche Bank's Jim Reid writes that "2018 has been like a rebellious teenager suddenly aware of their own mind, independence, and the world around them after years of being guided and cajoled in everything they do." He also notes that for him "peak QE moving to QT and the Fed raising rates four times this year has been enough to reverse a significant amount of the liquidity-inspired asset price returns of the pre-tightening era. A bit like Road Runner galloping off the cliff only to suddenly look down."
But most importantly, Reid notes that the chart in question showing the percentage of global assets down on a dollar adjusted basis each year since 1901 was "the most requested chart we’ve ever been involved in", and as updated below, 2018 continues to the be the worst year on record on this measure with 93% of assets currently down -worse than the years of the Gread Depression - and up from 89% at the end of October.
The record bearish print is made all the more fascinating, considering that just one year ago, 2017, was the 'best' year ever for markets on this measure, when just 1% of assets finished with a negative total return in dollar terms (only the Philippines bond market was negative).
Putting these two extreme years in context, since 1901 the average has been that 29% of assets finish a given year with a negative total return, leading Deutsche to exclaim that it's been "an amazing couple of years nonetheless as we swing from one extreme to the other. It's perhaps not a surprise that in this time major DM central banks have moved from peak global QE to widespread QT."
Picking up on this theme, Morgan Stanley recently also noted that 2018 was a "historically bad year", pointing out that every asset class - except for cash - is down, and adding that "if one is looking for a reason why it’s been hard to be a multi-asset investor this year, look no further; there’s been no place to hide."
That said, Reid - who is traditionally is quite bearish - looks ahead with some hope, and the expectation that the market has priced in a little bit too much of the bad news:
We think 2019 will again be difficult for the same reasons we thought 2018 would be, but believe that, in the short term, markets have overreacted and gone too far too quickly.
Whether a downturn materialises or not after the end of next year, markets could price it in increasingly as 2019 develops, which would be a problem. However, nothing is preordained and perhaps the most likely way this cycle could be extended for longer is via a policy error from the Fed (not tightening into higher inflation) or if inflation genuinely rolls over here. If they end up not raising rates in 2019 for either reason then this could steepen curves, help risk, and prolong the cycle. So all to play for still. Nothing is set in stone
For the sake of all the bulls out there, he better be right.