"This Is The Elephant In The Room": Even SocGen Is Now Calling It A Bubble

Two weeks ago, Janet Yellen finally - and shockingly - admitted that neither she, nor her Fed peers, "fully understand inflation" and that the "shortfall of inflation this year is more of a mystery." This, after engaging for nearly a decade in actions designed to stimulate said "mysterious" inflation, including injecting nearly $4 trillion in liquidity into the economy. We quickly came to aunt Janet's rescue, showing in one chart that while the Fed may have failed to stimulate inflation in real economic prices - and especially wages - it had unleashed hyperinflation in asset prices.

Today, it is SocGen's turn to follow up on what we said, and in a report from SocGen's Arthur van Slooten, the strategist writes that "while traditional inflation measures may not call for aggressive tightening, we believe high valuation (e.g. cyclically adjusted price-earnings, or CAPE, multiples above 30x) is a sign of inflation in financial assets that is hard to miss. This is the elephant in the room."

Slooten then slams the vol-selling activity of central banks, pointing out that "high valuation was supported by the drop in volatility, but now that volatility has reached near-historical low levels, further drops may even be dangerous. This situation would not have existed without the  unprecedented liquidity support from central bankers over the last few year. "

Luckily, it's all coming to an end:

As the pressure on the ECB is increasing to provide a perspective on tapering, very soon the Fed will no longer be alone on tightening, which makes it easier to firm up. Also, the latest push by the Trump administration to cut taxes is likely to be embraced by the Fed as another reason to step up tightening.

And while SocGen is battening down the hatches, the French bank is surprised by how little credibility the Fed's stated tightening intentions have in the market, because as it writes, when looking at its monetary newsflow indicator "Nobody seems to believe the Fed dots" and with good reason. To wit:

The latest Fed dots point to four rate hikes until the end of 2018 but our US monetary newsflow indicator suggests that few market participants will expect the full implementation of these tightening intentions. The Fed only has itself to blame for this loss of credibility, as it has regularly delayed and toned down its initial forecasts.

And while stocks remain oblivious, expecting to be bailed out the moments there is even a 3% "crash", bonds are starting to get nervous: "the odds of at least one rate hike before September next year have risen in the last four weeks, as have 10-year US Treasury yields (chart below)."

SocGen's conclusion: "In this context, we have reduced our risk exposure."  For now, nobody else is, in fact as we wrote yesterday, "There Are No Bears Left... None... Not A Soul."

Fonte: qui

"Dancing On The Rim Of A Volcano": Speculators Have Never Been More Short Volatility

With VIX ending Friday at its lowest weekly close ever, lowest monthly close ever, and lowest quarterly close ever - after the quietest September stock market in history - SocGen warned last Friday that the current situation is a "dangerous volatility regime" citing the strong mean-reverting tendency of uncertainty as a big reason for investors to brace themselves for trouble ahead.

Of course, judging by the new record short in VIX futures - extending last week's surge - the speculative public is as levered-long and complacent as it has ever been...

What could go wrong? SocGen's Arthur van Slooten explained late last week: "compare that with dancing on the rim of a volcano. If there is a sudden eruption (of volatility) you get badly burned"

Indeed, if CNN's Fear and Greed Index is anything to go by, investors are close to the 'most extreme' levels of greed in history...

However, it's not just volatility that is collapsing. Correlation has crashed, as JPMorgan's Marko Kolanovic recently pointed out.

Decline in correlations and parallels to 1994 and 2001

Over the past year, correlation of stocks and sectors declined at an unprecedented speed and magnitude (see figure below). A similar decorrelation occurred on only two other occasions over the last 30 years: in 1993 and 2000. Both of those episodes led to subsequent market weakness and an increase in volatility (in 1994, and 2001). The current decline in market correlations started following the US elections and was largely driven by macro (rather than stock-specific) forces. Expectation of fiscal measures, deregulation and higher interest rates set in motion large equity sector and style rotations. For instance, the correlation between Financials and Technology dropped to all-time lows (similar level during the tech bubble). The correlation between equity styles also dropped (e.g., Value was lifted by rates, and Low Volatility was impacted negatively). Declining correlations pushed market volatility lower (see here), and the ~25% market rally further suppressed correlations and volatility. To investigate what are potential implications for the future price action, we look at the 1993 and 2000 decorrelation events.

• 1993/1994: Following the 1990-91 recession, interest rates declined and the market rallied. By late 1993, the market reached its highs (60% above recession lows) and volatility plummeted (VIX hit a record low on 12/22/1993). This also marked the low point of equity correlations. As interest rates increased in 1994, the market experienced a ~10% correction and posted a negative return for the year. Volatility and correlation increased, but the crisis was contained given the acceleration of growth (US GDP increased from 2.6% to 4.3% in the first half of 1994), and subsequent decline in bond yields.
• 2000/2001: Following the 1998 crisis (LTCM, Russia), the market recovered and continued to rally. When the internet bubble was inflated, the market was 60% above 1998 lows. This period was marked with a strong decoupling of sectors (e.g., tech vs. financials), distorted valuations, elevated volatility and gradually rising interest rates. It ended with the tech bubble in March 2001, which marked the low point of equity correlation and start of recession. Subsequently, the market declined ~30%, bottoming in late 2002.

The current episode of correlation decline shares some similar features with both 1993 and 2000. The decline of correlation was in part driven by the market rally and elevated valuations; after a period of falling, interest rates are expected to rise (as in 1993), sector valuations (e.g., Internet) and sector rotations play an outsized role in market price action (similar to 2000), and record low levels of volatility increased the level of risk taking (as in 1993). Normalization of monetary policy will most likely lead to an increase of correlations and volatility, and that will at some point result in market weakness. While it seems that the 1993/1994 analogy is more appropriate (implying an orderly price action), investors should be aware of hidden leverage and tail risk of a more significant correction, such as the one in 2001.

Kolanovic concludes that "strategies that boost leverage when volatility declines, such as option hedging, CTAs and risk-parity, share similar features with the dynamic ‘portfolio insurance’ of 1987,” which “creates a ‘stop-loss order’ that gets larger in size and closer to the current market price as volatility gets lower.”  Additionally, growth in short-vol strategies suppresses both implied and realized volatility, and with volatility at all-time lows “we may be very close to the turning point.”

Fonte: qui

Morgan Stanley: S&P 500 a nuovi record, poi crollo 

Per Wall Street la fase Orso arriverà presto, ma non prima aver toccato nuovi record. 

Ne è convinto Mike Wilson, analista di Morgan Stanley che, in un’intervista alla Cnbc, ha detto si aspettarsi che lo S&P 500 raggiunga il record di 2.700 punti a inizio anno, ovvero 200 punti oltre i livelli attuali. Per poi, a metà del 2018, ritornare a scendere, con un deprezzamento atteso intorno al 20%.

Una correzione di questa ampiezza – dice l’esperto – è normale per un mercato toro che dura ormai da otto anni. Un declino del 20% da 2.700 punti significa che lo S&P 500 raggiungerà quota 2.250 punti. In ogni caso, il target 2.700 rappresenta un incremento del 300% da marzo 2009, ovvero dal picco dell’ultima crisi finanziaria.

A sostenere la nuova ondata di rialzi, secondo Wilson, saranno soprattutto i risultati di bilancio relativi al terzo trimestre, che dovrebbero confermare una fase di espansione degli utili anche la riforma fiscale di Donald Trump, i cui primi dettagli sono emersi ieri durante un comizio del presidente Usa nell’Indiana. A questo proposito, l’analista ha detto:

“questo creerà euforia solo nelle prossime due settimane, ma non è escluso che dopo un paio di settimane ci sia l’inevitabile delusione”.

Per lo strategist di Morgan Stanley, lo S&P 500 riuscirà a toccare il target di 2.700 all’inizio del 2018, soprattutto se la riforma fiscale sarà approvata.

“Dopo il raggiungimento dell’obiettivo, l’inizio del mercato orso potrebbe verificarsi in qualsiasi momento”.

Fonte:  qui