Overnight, Credit Suisse released an aptly titled report which author Andrew Garthwaite called “Client perspectives: lost and bearish” in which he writes that “two words summarise client marketing in the past month: ‘lost’ and ‘bearish’. This is the first time that we have come across so many people who say they are completely ‘lost’ in the current environment.”
Garthwaite notes that “the wall of bearishness was extreme in the US – roughly 80% of meetings – but much more balanced outside the US (maybe because markets started to rally in the meantime). Often in the US, the question was ‘why isn’t this a bear market?’. In Asia, on the other hand, most investors were less concerned about China (though, we have always found the closer you get to China geographically, the less concerned investors are about China).”
CS then breaks down the global wall of worry into the following 12 components:
1. Global growth decelerating
“Most of the clients we met were pessimistic on global growth. In fact, in our investor survey, which was conducted during the same time, respondents were almost the most negative on the growth outlook than they have been at any other time since we started the survey. China and emerging markets were identified as the main source of growth weakness, however, there were increasing concerns about an inventory-led soft-patch in the developed world, in particular the US.”
2. China facing the risk of a hard landing
“Unsurprisingly, this was the number one topic of discussion in every meeting. China accounts for 15% of global GDP, a third of GDP growth and 30% of global capex (which it exports as it slows) and thus it has never been so important for the global macro outlook.” The focus was essentially in the following areas: 1) Weakness in the real estate sector; 2) The degree of ‘zombie capital’; 3) Chinese policymakers losing their credibility; 4) Growth weakness extending beyond investment/manufacturing related variables; 5) Chinese wage growth not as sustainable as clients believe; 6) The Renminbi (Most clients believe that the currency will eventually fall significantly); 7) The lack of unwinding of foreign debt.
3. Credit blowing out
The worries here are that 1) The notion that US households are still overleveraged; 2) GEM private debt being high; 3) High yield credit spreads widening;
4. The risk of the Fed hiking too early
“Around two thirds of the clients we met believe, like ourselves, that a rise in Fed Funds rate in the current environment would be a policy mistake. A third believe it would remove the uncertainty, give a vote of confidence in the economy and ultimately it would be a ‘dovish tightening’, giving the Fed some capacity to ease policy into the next recession. However, most clients acknowledged that the Fed communication has been confusing recently and thus the chance of the market misunderstanding Fed policy was higher than usual.”
5. Policymakers running out of weapons – QE being proven ineffective
“Many clients argued that QE does not work. Interestingly, in the past such concerns have preceded a market rebound.”
6. Global FX reserves falling
“Global FX reserves have fallen by c$0.5trn since their peak (although after valuationadjustments they have fallen by only c$100bn, according to our FX strategists). Many clients claim that this is a bear signal and is, in effect, monetary tightening. We worry that this is an asymmetric argument, as it was never used as a bull signal when global FX reserves were rising.” ZH: Actually considering stock markets hit all time highs when FX reserves were rising, it most certainly was a bullish signal, it was just that nobody put two and two together.
7. Equities valuations being expensive
“We had a few clients asking questions about appropriate measures of valuations for equities, with earnings-based measures perceived by a few as a distorted metric. Equities are not cheap in absolute terms – on our four main valuation measures they are about 20% expensive… We do acknowledge, that when sentiment is poor, investors feel more comfortable with something that is cheap in absolute terms.”
8. Earnings revisions have fallen sharply
“Many clients were concerned about earnings revisions, which have, on a 4-week moving average basis, fallen close to a 4-year low. Nevertheless, we would highlight that 12-month forward EPS excluding resources have actually held up. Historically a decline of 5% or more in earnings is required for a bear market. We do not see this happening unless US GDP is sub-1.2%, wage growth rises above 3%, corporates overinvest or the interest charge rises by 100bps or more.” US GDP will be sub 1% in Q3.
9. The political landscape becoming less corporate-friendly
“There were concerns among clients that we are moving into a less capitalist-friendly environment. Corporate tax used to be a third of total tax in 1960, now it is only a fifth, so there could be more pressure on governments to increase corporate contribution. The living wage in the UK is also an example of governments trying to shift the burden of social responsibility onto the private sector.”
10. Limited signs of underinvestment
“A popular concern amongst clients is under-investment as a a result of buybacks, with this under-investment is resulting in lower productivity growth.”
11. Risk of lower oil prices
“We received surprisingly few questions on oil. One interesting question we got was whether Saudi Arabia may push the prices even lower than the level needed to stabilise its market share, for political reasons, in order to cause distress in an emergent Iran/Iraq.”
12. Recent rotations have hurt a number of our clients
“There has been a clear rotation in the past few weeks, which has been painful for many investors. This rotation is evident in the roll-over seen in momentum as an investment style, and we would note that, historically, momentum reversals tend to last longer than the current episode.”
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Naturally, Credit Suisse’s intention is to calm investor nerves and to disagree systematically with every single one of the points raised above: after all, when traders are paralyzed by fear, CS trading desks can’t make any commissions and no deals are done leading to a plunge in i-banking revenues; we already saw the damage to Goldman’s institutional trading bottom line in the third quarter as a result of this particular wall of worry.
On the other hand, one can far more correctly point out that all these 12 points are merely the “wall of worry” finally coming home to roost, as all of these trigger points have been all too clear for the past 7 years, and while never actually resolved, were simply swept under the rug since 2009 with bout after greater bout of trillions and trillions more in central bank liquidity. It is only now that the liquidity tide is coming out that the world will finally see who was nakedly scrambling in “fear of missing out” (virtually everyone), and who actually did their homework (virtually nobody).
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So while we realize that laying out trader fears will hardly help traders overcome said fears – as they realize everyone else shares them too – here, courtesy of BofA are the two major trading camps currently in the market.
First the consensus trade:
- Consensus is currently: low growth/low EPS/low rates here to stay, but no recession; trading ranges hold (SPX 1850-2050, GT30 2.8-3.2%, DXY 93-100); sell rallies into strength; own (sensible) growth, (safe) yield, (high) quality; rent EM/resources/commodities.
- Contrarian trader: FMS/flows argue for rotation to “weak dollar” plays e.g. CRB, EM resources/FX, industrials; breach of SPX 2050 requires ECB/BoJ to boost growth expectations without FX devaluation.
Which trade should one pick? Just flip a coin: after all that’s what the great and powerful, if now totally clueless, Fed does every single day…