Massive liquidity injections from global central banks have sent stocks and bonds to record highs over the past years. The coming financial crisis may have a sharp impact on the crypto space. Investors may fly away from traditional assets and seek safe haven assets such as the US Dollar, precious metals, and top cryptocurrencies (Bitcoin and Ethereum). The transition between the traditional financial system and the new one may be nearer than we think.
We always closely follow what important market players communicate at the end of a bull market because they often say out loud what the really “big guns” silently believe.
Although the following list is non-exhaustive, here is what asset managers, analysts, bankers, institutional leaders, or important voices communicated in client notes or in the financial media during the past month.
Hedge fund manager Paul Tudor Jones in a letter to investors written on February 2 and released by Bloomberg a week later: “We are replaying an age-old storyline of financial bubbles that has been played many times before. This market’s current temperament feels so much like either Japan in 1989 or the US in 1999. And the events that have transpired so far this January make me feel more convinced than ever of this repeating history.”
BoA in a market note on February 2: “Our biggest sell signal in 5 years was triggered on January 30.”
Bill Blain of Mint Partners on February 2: “This week I can detect a shift – folk are looking to pick the winners and losers again. The return of some rationality, combined with a complacency check, might just see this market pause – but that’s not a bad thing.” “A good number of clients have told me recently they are increasingly concerned this US growth phase is running out of steam and we will be into economic slowdown as early as Q4 this year, triggering the end of this frothy global alignment of growth drivers.”
Deutsche Bank’s Binky Chadha in a note on February 2: “The tight correlation in the moves across the major asset classes suggests a pullback in one for idiosyncratic reasons would likely spill over to the others. The dollar has potentially the widest fundamental impact across assets”.
Nomi Prins, former Goldman Sachs managing director, via TomDispatch.com on February 2: “Amid the present financial euphoria of the stock market, big bank stock prices have soared. But one thing is certain: when the next crisis comes, it will leave the last meltdown in the shade because our financial system is, at its core, unreformed and without adult supervision. Banks not only remain too big to fail but are still growing, while this government pushes policies guaranteed to put us all at risk again. There’s a pattern to this: first, there’s a crash; then comes a period of remorse and talk of reform; and eventually comes the great forgetting. As time passes, markets rise, greed becomes good, and Wall Street begins to champion more deregulation. The government attracts deregulatory enthusiasts and then, of course, there’s another crash, millions suffer, and remorse returns. Ominously, we’re now in the deregulation stage following the bull run. We know what comes next, just not when. Count on one thing: it won’t be pretty.”
Janet Yellen, former Fed Chair, on February 3: “I don't want to label what we're seeing as a bubble. But I would say that asset valuations are generally elevated... For the stock market, the ratio of price to earnings is near the high end of its historical range.” “Americans should be careful and I would say diversified in their investments. What we look at is the likely resilience of the economy and the financial system... In that regard, we have a banking system that is much stronger and better capitalized and better able to withstand a shock than prior to the financial crisis. If we look at for example commercial real estate and other assets, we're seeing high valuations.” “Asset valuations could change I'm not predicting that that would happen and I wouldn't rule that out.”
Fasanara Capital's Francesco Filia in a chartbook to clients on February 3: “No escape does not necessarily imply a crash. However, treading water on the 'edge of chaos' is dangerous, as any small perturbation has the potential to trigger a critical transformation. An exogenous or endogenous trigger can easily push the equilibrium out of its small basin of attraction. A new equilibrium may be waiting to assert itself, nearby, through chaos. We are in a phase transition zone, where financial markets are fragile and sit on the ‘edge of chaos’. This is the zone where rare events become typical.”
Goldman's chief strategist David Kostin in a note on February 3: “Investors who are already long cash equities could instead consider purchasing puts as protection.”
One River CIO Eric Peters in its weekend notes on February 4: “Things had been too easy for too long. The market saw this coming.”
George Sokoloff and Ted Parkhill of Carmot Capital and Incline Investment Management via the official website: “The next crisis will be a black swan in the same exact fashion. We won’t know where it’ll strike the hardest or how exactly floodwater would navigate around hastily constructed dams of preventive measures. But it seems clear that now is much likelier than in the past nine years.”
White House official to CNBC in a statement on February 5: “We're always concerned when the market loses any value, but we're also confident in the economy's fundamentals.”
Société Générale's Andrew Lapthorne on a client note on February 5: “Asset markets have an inescapable problem.”
Blackstone's President and COO Tony James to CNBC on February 5: “Every historic norm says that stocks are very, very fully valued.” “If you’re worried about interest rates and inflation, the stimulus could be the thing that tips us over into a rate spike.”
Guggenheim Partners CIO Scott Minerd to Barrons on February 3: “Bull markets don’t die from old age. They typically get shot in the head.”
Bridgewater Associates Founder Ray Dalio via LinkedIn on February 5: “Fiscal stimulation is hitting the gas, which is driving the economy forward into the capacity constraints, which is triggering interest rate increases that are hitting the brakes, first in the markets and later in the economy. This confluence of circumstances will make it difficult for the Fed to get monetary policy exactly right. This is classic late-cycle behavior (when it’s difficult to get monetary policy exactly right, which leads to recessions), though it is more exaggerated because the durations of assets are uniquely long, which means that when interest rates are low, prices of assets are more sensitive to changes in interest rates than when interest rates are high.”
JPM's head quant Marko Kolanovic in a note on February 5: “We want to highlight a strong probability of policy makers stepping in to calm the market.” “Rapid sell-offs, such as the one today, can also be followed by market bounce backs as liquidity gets exhausted by programmatic selling. With next year P/E on the S&P 500 now below 16, further positive impacts of tax reform and stabilization of bond yields (e.g., note the current record level of CFTC bond short positions), we think that the ongoing market selloff ultimately presents a buying opportunity.”
Standard & Poor’s on February 5: “Removing the easy money punch bowl could trigger the next default cycle since high corporate debt levels have increased the sensitivity of borrowers to elevated financing costs.”
Bloomberg macro commentator and former Lehman trader, Mark Cudmoreon, on February 6: “There is more pain to come for global equity markets. Don’t get too excited if we get a big bounce soon. Risk-averse markets see the most powerful short-term swings in these sorts of conditions, when liquidity is lower and wealth destruction means many traders have weakened hands and reduced conviction.”
Bill Blain of Mint Partners via their website on February 6: “You have to feel sorry for new Fed Head Jerome Powell starting his new job yesterday: Powell is going to find he has three jobs: Inflation, Jobs, and managing Trump who might well think a falling stock market is a Fed Plot to discredit him. Does that increase the risk of a policy mistake?”
White House Spokeswoman Mercedes Schlapp on Fox on February 6: “Obviously we’re concerned about setbacks that happened in the stock market. With that being said, we’re looking at the long term strong economic fundamentals.”
Billionaire investor Carl Icahn to CNBC on February 6: “This is something we've never seen before... I don't remember ever seeing a market with this kind of volatility over two weeks.” “The market has become a much more dangerous place (due to index funds and ETFs). It's like 2008 where everyone was buying mortgages and CDS.” “There is going to be a major, major, major correction.” “This is a manifestation of a real deep problem we have in our markets.” “There is a huge bubble of passive money flowing in... a sort of euphoria and a lot of people are going to pay the price just like in 1929.” “I do think the market will bounce back but these are the rumblings before the earthquake.” “The market is telling you something... it's telling you it's very dangerous...it's way over-leveraged.” “I am still concerned that one day you'll see a break like you had a few weeks ago...but it won't come back.”
Dallas Federal Reserve Bank President Robert Kaplan on February 7: “The recent selloff is basically a market event and these things can be healthy.”
St. Louis Fed President James Bullard to the Financial Review on February 7: “This is the most predicted selloff of all time because the markets have been up so much and they have had so many days in a row without meaningful down days. So it is probably not surprising that something that has gone up 40% like the S&P tech sector would at some point have a selloff. Before there was a selloff, people said repeatedly someday this will sell off. What is more interesting is it has been very fast, it's been possibly aided and abetted by technical trading -- algorithmic trading. I'd be interested to see an analysis and see what role that played.”
New York Fed's William Dudley at an event in New York on February 7: “This has virtually no consequence for the economic outlook. If it continued to go down sharply, that would affect my view. But this wasn't that big of a bump in the stock market and not a big story for central bankers yet.”
Donald Trump via Tweeter on February 7: “In the ‘old days’, when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!”
Société Générale's Roland Kalyoan to Bloomberg on February 7: “Equity investors have had an amazing time over the past four-five years but now, the surge in bond yields is reaching the pain threshold for equities.”
Jim Bianco, president of Bianco Research, via Finanz und Wirtschaft on February 7: “If we’re in an inflation environment in which both bonds and stocks struggle the whole risk parity trade is going to be problematic. It’s going to be very difficult to find a place that is going to perform well. This could be like the 1980s and 1990s: when markets went down, everything else went down as well, even investments like gold. So you really have to be careful in this environment.”
Doubleline CEO Jeffrey Gundlach on February 7 via Tweeter: “Low rate-low volatility market environment went on for so long that now the unwind will be turbulent and not over in a couple of days.”
JPM's head quant Marko Kolanovic in a market note released on February 8: “From the aspect of systematic flow and electronic liquidity, the current crisis has played exactly the same as the August 2015 crisis.”
New York Fed President William Dudley to Bloomberg TV on February 8: “Clearly the market is adjusting to the fact that the global economy is growing quite quickly, and as a consequence of that, monetary authorities around the world are either starting to remove accommodation or are thinking about starting to remove accommodation. So far, I’d say this (recent sell-off) is small potatoes. The little decline that we’ve had in the equity market today has virtually no implications for the economic outlook.”
Peter Schiff, CEO of Euro Pacific Capital, via SHTFplan.com on February 8: “They (the Fed) can’t tell the truth that it’s really a bubble, and if we raise rates, we’re gonna prick it, so they’re kinda in this bind. And they are still telegraphing that they’re gonna raise rates three or four times this year. And that is the problem.”
Amundi’s Raphael Sobotka to Bloomberg on February 8: “Tactically, we had been reducing our exposure to equities since December, and we further sold stocks over the past week. The market isn’t cheap yet, and given that rates will continue to rise, the pressure on equity valuation ratios can continue to increase from here.”
JPMorgan in a note on February 9: “If these equity ETF flows, which JPM believes are largely driven by retail investors, start reversing, not only would the equity market retrench, but the resultant rise in bond-equity correlation would likely induce de-risking by risk parity funds and balanced mutual funds, magnifying the eventual equity market sell-off.”
Moody’s warning the US again on February 9: “The stable credit profile of the United States (Aaa stable) is likely to face downward pressure in the long-term, due to meaningful fiscal deterioration amid increasing levels of national debt and a widening federal budget deficit.”
Universa's Mark Spitznagel to Bloomberg TV on February 11: “We are living in a reality distortion. When it comes to what happened this week, and what will happen ahead, all roads lead to the central bankers at the Fed.” “We have been here before. Let's remember The Great Moderation of the mid-2000s - we have seen this play out before and it will do the same thing again.” “The S&P is a risky thing to hold. It does not feel that way, but it is... I expect in the coming years we will take back a decade..."
Austrian central bank Governor and ECB member Ewald Nowotny on February 11: “Behind (the drop) there is an expectation in markets that central banks will increasingly raise interest rates, and there are certain good reasons for that. The US is expanding. However, one has to say that the task of central banks isn’t to satisfy markets but to ensure overall economic stability. So if necessary, interest rates will have to rise and markets will adapt to that.”
Bob Prince, co-chief investment officer at Bridgewater, to the Financial Times on February 11: “There had been a lot of complacency built up in markets over a long time, so we don't think this shakeout will be over in a matter of days. We'll probably have a much bigger shakeout coming.”
Brian Levine, co-head of global equity trading at Goldman Sachs, in an email to clients reported by the Financial Times on February 12: “The ‘buy on the dip’ mentality needs to be thoroughly punished before we find the bottom.”
Bill Blain of Mint Partners on February 12: “The unintended consequences are now coming back to bite us. Yield tourists find themselves sitting on financial assets they barely understand, except to worry they look... overpriced. Now that QE is over - or soon to be over – they are wondering where we go next, and that’s fuelling the current fear and uncertainty.”
Société Générale's Andrew Lapthorne in a market note on February 12: “When markets correct, the standard retort is that in the long-term it pays to stay invested and that the fundamentals remain strong and supportive.”
Ray Dalio, CIO of Bridgewater (the world's biggest hedge fund, and biggest risk-parity fund), via Linkedin on February 12: “There is such a big gap between the haves and the have-nots (which creates social and political sensitivities). The powers of central banks to reverse contractions are more limited than they have ever been (because interest rates are so low and QE is less effective). I worry about what the next economic downturn will be like, though it is unlikely to come soon.”
Pierre-Henri Flamand, CIO of Man Group Plc’s GLG unit, to Bloomberg on February 12: “The instinctive inclination to ‘buy-the-dip’ may be strong. As the past week has shown, this may not work so well. Indeed, I think what we have seen in the past week could continue for some time.” “While the fifth (Elliott) wave can last for weeks, months or even years, it inevitably precludes a significant market correction, on average giving up between 38 percent and 50 percent of all gains.”
Fed Chair Jerome Powell on February 13: “We will remain alert to any developing risks to financial stability.”
Société Générale's Albert Edwards in a note on February 14: “We just had a small taste of coming financial collapse. Still feeling lucky?”
Economist John Williams via SHTFplan.com on February 14: “It’s the long-term insolvency of the US government that the markets don’t like.”
Brandon Smith via Alt-Market.com on February 15: “My question is, if the Fed is not going to feed cheap fiat into banks and corporations to fuel stock buybacks, then WHO is going to buy equities now?” The system is too far into debt and too far gone for infrastructure spending to make any difference in the economic outcome.” “I think anyone with any sense can see the narrative that is building here. The Federal Reserve is going to let markets crumble in 2018. They are going to continue raising interest rates and reducing their balance sheet faster than originally expected. They will not step in when equities crash. And, they don’t really need to. Trump continues to set himself up as the perfect scapegoat for a bubble implosion that had to happen eventually anyway. Now, the central banks can sufficiently avoid any blame.”
Eric Peters, CIO of One River Asset Management, on February 17: “This shift in the Fed’s stance from actively interventionist to passive - which is necessary for the central bank to position itself to react to the next crisis - is one factor that could contribute to a marked drop in equity valuations.”
Doug Casey, chairman of Casey Research, via CaseyResearch.com on February 18: “As a group, commodities are 50% below their 2011 highs. It’s been a deep bear market as well as a long bear market. As a result, commodities have never been cheaper relative to financial assets like stocks and bonds. It’s a great time to be in commodities. And gold is the foremost commodity. It’s historically been used as money. And it will continue to be used as money because none of these governments should, or do, trust each other. Or each other’s phony paper fiat currencies.”
Deutsche Bank in a report on February 19: “If fundamental trust in monetary and political stability were lost, people would probably turn away from any form of the sovereign currency in favour of other alternative assets or private cryptocurrencies.”
Guggenheim Partners' Global CIO Scott Minerd on February 20: “Investors are coming to terms with the idea that the Fed will keep raising rates because of inflation and economic pressures. The market is finally getting the joke... moving from complacency about the Fed to a realization that it may be behind the curve.”
Dallas Federal Reserve Bank President Robert Kaplan on February 21: “I believe the Federal Reserve should be gradually and patiently raising the federal funds rate during 2018. History suggests that if the Fed waits too long to remove accommodation at this stage in the economic cycle, excesses and imbalances begin to build, and the Fed ultimately has to play catch-up.” “While addressing this issue involves difficult political considerations and policy choices, the US may need to more actively consider policy actions that would moderate the path of projected US government debt growth.”
St. Louis Fed President James Bullard to CNBC on February 22: “Everything would need to go perfectly (for Fed four rate hikes in 2018).”
Fed Chair Jerome Powell in a policy report on February 23: “Valuations are still elevated across a range of asset classes.”
New York Fed's William Dudley in his remarks at the 2018 US Monetary Policy Forum published on February 23: “Large-scale asset purchase remain useful to have in the toolkit for those times when the short-term interest rate tool may not be available.”
Goldman Sachs in a report on February 25: “A rise in rates to 4.5% by year-end would cause a 20-25% decline in equity prices.”
BoA's Ritesh Samadhiya in a market note on February 25: “We are getting more concerned about a global policy error, of too much expected monetary tightening in the US, even as Chinese monetary policy is already turning south.”
IceCap Asset Management in its monthly view on global investment markets released on February 25: “This recent bad spell for the bond market is a nothing burger. The real show hasn’t even started.”
BoA in report on February 26: “In our 2018 Year Ahead, we compiled a list of bear market signposts that generally have occurred ahead of bear markets. No single indicator is perfect, and in this cycle, several will undoubtedly lag or not occur at all. But while single indicators may not be useful for market timing, they can be viewed as conservative preconditions for a bear market. Today, 13 of 19 (68%) have been triggered.”
Morgan Stanley in a market note on February 26: “History has shown that consensus estimates for Treasury yields are usually wrong. We don't feel compelled to join that crowd yet.”
Nomi Prins, former Goldman Sachs managing director, via The Daily reckoning on February 26: “Every time dark money looks like it will be removed, the markets fall, and then when major central banks indicate that’s not really the case, markets rise again. While this may not be the end of the storm, expect rising volatility to present opportunities in the future.”
Daniel Lacalle, PhD Economist and Fund Manager, via his website on February 26: “The end of the era of cheap money highlights the risk of “Enron-style” bankruptcies in many sectors, including renewable energy.”
Fed Chair Jerome Powell to Congress on February 27: “The US is not on a sustainable fiscal path.”
JP Morgan chase in its annual report released on February 27: “Both financial institutions and their non-banking competitors face the risk that payment processing and other services could be disrupted by technologies, such as cryptocurrencies, that require no intermediation. put downward pressure on prices and fees for JPM’s products and services or may cause JPM to lose market share.”
Ron Paul, former politician, on February 28: “Times are getting much worse now. This next downturn is going to be a serious one and the Fed doesn’t have any magic whatsoever… Central economic planning never works no matter how long they get away with it.”
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