Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Citi strategist Matt King speaks heresy,
“Trying to time a market bubble wouldn’t normally be a good idea. But the near-explicit endorsement of the price action by the Fed leaves investors with little choice … Consensus holds that while valuations are frothy, investors should have little to fear unless central banks taper prematurely. We think the situation is more complicated – more bullish now, but also more vulnerable later… [Fed support] makes it almost impossible for investors not to participate. The central banks seem not only to be providing the proverbial put; they themselves are actively goading prices higher… bubbles occur when price rises, rather than deterring investors, lead to more money coming in, i.e. when traditional value-oriented mean reversion gives way to momentum trading and herding… At an aggregate level, fund inflows are seemingly no longer driven by the cheapness or expensiveness of their assets but instead by the expensiveness of the risk-free alternative.”
This is an admittedly choppy introduction to this perspective , I will be providing more details and explanation next week. For now, investors should focus on Mr. King’s belief that markets will drop significantly once investment inflows slow.
" @SBarlow_ROB Citi’s King pokes the hornet’s nest, stating that investors will have no choice but to try and time the market” – (research excerpt) Twitter
BofA Securities global economist Ethan Harris is concerned about what happens to markets when the pent-up U.S. savings starts getting spent. Apologies for the long excerpt but there’s a lot of good perspective here (my emphasis),
“A lot of pundits argued that the long equity market rally was over and stocks would fall as the Fed tapered. In a piece called “Does QE cause everything?” we argued investors should ignore this [Fed balance sheet versus S&P 500] chart, as tapering would have a small direct impact on the markets and the economy and would be a strong sign of a healing economy … To a large degree excess [bank] reserves are dead money. Banks are willing to hold them because they pay a small interest rate and they help meet liquidity requirements, but they have virtually no impact on lending decisions. The binding constraints on lending are capital requirements and the bank’s appetite for risk. The Bank of Japan was the first to learn this lesson … Since the start of the COVID crisis there has been a dramatic surge in liquid saving, particularly in bank deposits. This surge reflects: (1) precautionary behavior at a time of high uncertainty, (2) constraints on spending on services and (3) massive unspent fiscal stimulus in some countries. Bank deposits are bulging everywhere, but the US is on its own planet … The three trillion dollar question is: what happens to all these liquid savings when (1) the service sector reopens and (2) people become increasingly confident about the outlook? Our forecast assumes a sharp acceleration in spending, with the Fed achieving both of its short-term goals next year—full employment and 2% core PCE inflation. Keep in mind, however, that our current baseline assumes only $1tr in additional stimulus and a much higher number is becoming increasingly likely. It’s getting interesting.”
“@SBarlow_ROB BoA’s Harris: “we think the monetary aggregates could be making a brief, but spectator comeback.” – (research excerpt) Twitter
Diversion: “Apple Watch Can Detect Covid-19 a Week Early, Study Finds” – Gizmodo
Tweet of the Day:
The Great Corporate Bond Yield Evaporation. pic.twitter.com/VcsGVIzMZg— Robin Wigglesworth (@RobinWigg) February 12, 2021
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