What If the Clients Are Right

FT Alphaville: This is nuts. But cheer up?

Covers a Credit Suisse report on unhappy (bearish) clients.

The wall of worry:
We find the list of client worries very long:

■ US corporate earnings appear to have peaked, with labour increasingly gaining bargaining power (relative to nominal GDP of just 3.3%);

■ Equities are not cheap in absolute terms. The trailing P/E ratio of the S&P 500 is c.28% above its 50-year average, while the Shiller P/E is about 33% above its 50 year average;

■ Some mixed readings on US growth (with a number of clients citing the Fed’s change in labour market conditions index having fallen to its most negative since 2009, although admittedly in the last month it has turned up);

■ The lack of rebalancing in China and ongoing weakness of the RMB (which is down c.2.6% YTD versus the USD);

■ The lack of policy weapons left if there is a shock to growth (into a recession, real rates have fallen by c.5%, on average) requiring, of course, fiscal QE;

■ Abnormally high political risk reflecting itself in increased protectionism, a desire to reduce immigration, and a boost to minimum wages to rebalance the economic rewards towards labour and away from corporates;

■ Significant business model risk. Some clients thought that the single biggest risk was disruptive technology shortening asset lives, creating price visibility, lowering barriers to entry and driving down demand (via the sharing economy). In addition, corporates are facing a growing competitive threat from China exporting its excess capacity on the wrong cost of capital (SOEs have an RoE of 3% but account for 55% of investment, against just 22% of GDP)
Normally going against the crowd is the right move, but what if as in the political market, the "smart money" is completely wrong? Very few people predicted Trump would win because they are inside an echo chamber that is almost completely separated from the reality experienced by most Americans. Furthermore, it is an echo chamber that demands obedience. Even if you support Trump or plan to vote for him as the least bad, you wouldn't say that publicly. Therefore, anyone within the echo chamber would come away thinking no one supports Trump or that his support is very shallow and would peak at 20 percent of the GOP base. (Then 30 percent, then 40 percent ceiling, then....)

In political market, the mass of people win because one-man, one-vote. In the market, voting in skewed: more money, more votes. The smart money can beat the masses back for a long time and create a self-fulfilling prophecy, but reality eventually intrudes once the money runs out.

I predicted a candidate such as Trump could win the presidency by running on the immigration issue 2 years ago, and I was proven exactly right. Which isn't to toot my horn, rather to say the evidence was there for anyone who wanted to look, but it was never discussed in any mainstream outlet. In fact, mainstream propaganda put out the opposite message, such that most people wouldn't even think to look for contrary data. A good question is whether the financial markets, typically far more objective, aren't also compromised as an information source. What if the bulls have lost the majority of market participants? What if the evidence is correct, the market is overvalued, and it should fall, but the "experts" get more votes and have central bank support? If that's the case, market prices will prove to be as accurate as the near universal dismissal of Trump among the "expert" class.

1 comment:

  1. I read an interesting comment this morning elsewhere (don't remember the source) re: overvalued stocks, the thesis being that risk parity funds are the main driver of the new highs: they were forced sellers when volatility was high and are now forced buyers because volatility is low. Buying high and selling low...