You can feel it every time a White House official steps to the mic with a “just kidding” walk-back when stocks dip.
You can hear it in the desperately-looking-for-justification tone of mainstream business media’s efforts to comfort investors that unprecedented retail flows into tech as financials collapse is “great news” because it’s different this time.
And you can see it in almost every historical chart…
The chase for growth stocks relative to value has been unprecedented…
And the chart below from John Hussman, presents several valuation measures we find most strongly correlated with actual subsequent S&P 500 total returns in market cycles across history. They are presented as percentage deviations from their historical norms. At the January peak, these measures extended about 200% above (three times) historical norms that we associate with average, run-of-the-mill prospects for long-term market returns. No market cycle in history – not even those of recent decades, nor those associated with low interest rates – has ended without taking our most reliable measures of valuation to less than half of their late-January levels.
All of which is not going unnoticed by some of the world’s biggest hedge fund managers (despite the great unwashed masses zombie-like additions to their passive-index-pumping 401(k)s).
As Bloomberg reports, Greg Coffey, the former star manager at Moore Capital Management who started trading at his own firm this year, is comparing the turmoil in May to the end of dotcom bubble in 2000. Horseman Capital Management’s Russell Clark, one of the most bearish hedge fund managers in Europe, invoked memories of the financial crisis of 2008 in a letter to clients.
The two managers, among the best-known in Europe, join a growing chorus of investors predicting an end to the decade-old rally in asset prices, as central banks move to normalize policies and the rise of populism threatens trade across the globe. Billionaire George Soros in May warned of a looming financial crisis and an existential threat to the European Union.
“The ghosts of 2000 are upon us,” Coffey wrote in a May investors letter for his Kirkoswald Capital Partners. “Make no mistake, this is the current investment environment we are in, and will be through 2018.”
Odey, a vocal critic of central bank policies, cited this evidence for possible troubles ahead: The stocks investors bet against most heavily have risen by almost 30 percent in two months, according to Odey. The correlation between this happening and a market correction within six weeks is more than 80 percent, the hedge-fund manager wrote in his May letter. Odey has made money every month this year.
“The last five years of quantitative easing has floated all assets and all strategies. Investors were rewarded for both inactivity and buying the dip in everything,” Coffey wrote.
“That approach will be challenging this year.”
And sure enough, as we detailed previously, 2018 is now very different from the last few years…
And it’s getting worse…
For sure, the euphoria bubble in US stocks (measured by Forward S&P P/E divided by VIX) has popped and from here it’s a one way street, eventually, to a more ‘normal’ world.
Still, obviously, not everyone sees the potential risks of a global synchronous slowing in economic data with record debt and record high stock valuations at a time when The Fed is tightening and China is devaluing the Yuan…
“Since the global financial crisis, the number of doomsayers has risen exponentially,” said Philippe Ferreira, a Paris-based senior cross-asset strategist at Lyxor Asset Management, which oversees about 73 billion euros ($85 billion) in so-called alternative and active strategies. “But aside from political risks, the global economy is doing well.”
Which we couldn’t help but think about Mrs.Lincoln “other than the shooting, how was the play?”
But, judging by the collapse in the equity prices of the world’s most systemically important banks (GSIBs), it is about time that US stocks caught back down to the rest of the world…
We leave you with the following quote that sums up everything we see right now…
Financial disaster is quickly forgotten. There can be few fields of human endeavor in which history counts for so little as in the world of finance.
– John Kenneth Galbraith
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