Asia | China | Economics & Growth | Equities | Europe | FX | Monetary Policy & Inflation | Rates | US
It’s Halloween, so what better time to showcase some scary charts…
(1) US stocks at scarily high levels. Warren Buffet has often argued that broader US equities should follow US economic growth. The trouble is that US equities, covering a wide range of US companies from large to small, are trading at multiples to US GDP that previously marked a peak. To make matters worse, larger US companies are geared more towards foreign growth, which right now is looking less appealing than US growth…
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It’s Halloween, so what better time to showcase some scary charts…
(1) US stocks at scarily high levels. Warren Buffet has often argued that broader US equities should follow US economic growth. The trouble is that US equities, covering a wide range of US companies from large to small, are trading at multiples to US GDP that previously marked a peak. To make matters worse, larger US companies are geared more towards foreign growth, which right now is looking less appealing than US growth.
(2) Huge expectations on private equity. The darling asset class is all the rage. Even public pension funds are falling over themselves to invest. Being able to borrow cheap, leverage the target company, and value the companies with less public disclosure is a great model for private equity. The question is, are expectations of private equity gains overinflated? Estimates certainly suggest so.
(3) US budget deficit about to hit $1 trillion. It’s only happened once before: soon after the 2008 financial crisis. To cross that threshold – and to do so outside of a recession – is therefore quite an achievement. Markets have responded, but more at the very front end; surely it will only be a matter of time before investors get nervous.
(4) We’ve never seen negative term premia on long-dated US bonds. Investors should get paid a bit more for holding longer-dated bonds than simply the expected rate moves. That term premium for the US was as high as 5% in the late 1970s. Today it has turned negative, which implies paying to be locked into a longer-dated asset. Something isn’t right about that.
(5) FX volatility at all-time lows. FX markets are boring investors as the euro has been in choppy ranges for almost a year. Expected volatility has collapsed as a result. But if history is a guide, this is temporary. The question is whether the big move will be a dollar collapse, which could be inflationary, or a dollar rally, which could hurt US exports and anger President Trump.
(6) Terrible China demographics. People have long argued that China could get old before it gets rich. And this has started to happen. Japan had great demographics. That is, a larger working age share of the population during the 1970s and 1980s. But it started to turn down in the 1990s and has been trending that way ever since. China is now following suit. Add that to an increasing list of worries about China.
(7) European bank valuations are terrible. Deutsche Bank has alarmingly low valuations. Essentially, the market has no faith in the book value of the company. In any other industry, it would be taken over and turned around. But banking is different. It’s not just Deutsche, though. Other banks in negative-yielding regions are struggling as well. The more interesting question is what happens if US and Canadian rates start to fall? Should US banks like JPMorgan trade at such high valuations?7. European bank valuations are terrible. Deutsche Bank has alarmingly low valuations. Essentially, the market has no faith in the book value of the company. In any other industry, it would be taken over and turned around. But banking is different. It’s not just Deutsche, though. Other banks in negative-yielding regions are struggling as well. The more interesting question is what happens if US and Canadian rates start to fall? Should US banks like JPMorgan trade at such high valuations?
(8) Too many unemployed youngsters. A shocking one third of young workers in Italy and Spain are unemployed even after the euro crisis of 2012 has passed. Such structural weakness is a problem that no number of creative ECB solutions can solve. Instead, politicians need to act, and youngsters will become more activist. That’s a recipe for instability. 8. Too many unemployed youngsters. A shocking one third of young workers in Italy and Spain are unemployed even after the euro crisis of 2012 has passed. Such structural weakness is a problem that no number of creative ECB solutions can solve. Instead, politicians need to act, and youngsters will become more activist. That’s a recipe for instability.
(9) Chinese banks look vulnerable.The IMF recently estimated how exposed banks were to vulnerable segments of the economy (p.7 of this report). They found that, by far, Chinese banks had the most exposure. This shows an eerie parallel to Japan in the 1990s. It also probably explains why Chinese authorities have been reluctant to ease credit – it won’t work.
(10) Leverage loan machine is spluttering. The IMF has also found that new leverage loans are showing worse fundamentals (p. 39, here). The loans are associated with higher debt loads and have less cashflow to cover interest payments. This could prove costly for private equity firms that dominate these forms of lending.
(11) Everyone is in index funds… What could go wrong? The shift to passive investing has been remarkable in recent years. Who needs active managers when stocks have gone up year after year? Recently, it looks like there are now more mutual funds and ETFs in passive index trackers than active managers. And when do active managers do best? Typically during market corrections. Have they been ditched at the wrong time?
I hope you don’t get any nightmares after reading this…
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)