Yesterday, Janet Yellen said this:
First off, my position is that a global markets mega crash was underway in late 2015 early 2016 but was rescued for one last overthrow high by global coordinated central bank intervention. Meaning that Social Mood was systematically gamed by Central Banks and Algorithmic momentum trading. Subsequently, market bears have been hunted to extinction. Hence the opportunity for "surprise" is far higher now than it was two years ago. Knowing that the markets were on the verge of collapse back then, we already know what is the recipe for implosion. I divided the risk factors into three categories:
Fundamentals:
1) Deteriorating economic fundamentals
2) Overvaluation
Social Mood:
2) Rampant speculation
3) Mass complacency
Technicals:
4) Lack of hedging
5) Stock to bond rotation
All of these risk factors, with the exception of #5, were in evidence when the S&P 500 rolled over in 2015, but are far more in evidence now. Number five is critical to the mega crash hypothesis because it means that there is nowhere left to hide in the stock market. In 2016, recession stocks (staples/utilities) essentially saved the market.
On point (1) deteriorating economic fundamentals, we have the mass implosion of retail in broad daylight, auto sales and auto leases rolling over, Commercial and Industrial loan growth imploding, the U.S. deficit widening, global commodity re-collapse, gasoline demand falling, and payroll growth slowing. All while the Fed is still raising interest rates. This hubristic complacency we are seeing from the Fed is due to the echo reflation I have spoken about many times before, deriving from the coordinated central bank intervention in 2016 which fed back to the CPI via transitory commodity price levitation:
Overvaluation:
Back on June 8th, BofA via Zerohedge reported that the Tech Sector is the most overweight it's ever been, surpassing the DotCom bubble. One day later Goldman reported that the "big 5" tech stocks (shown in the first chart above), account for 55% of the Nasdaq's gains year to date.
"Momentum, as a factor, has built a valuation air pocket underneath it creating cause for pause."
Meanwhile, relative to GDP, market capitalization is the highest since Y2K:
Social Mood: Speculation and Complacency
There were multiple rolling asset bubbles leading up to the 2015/2016 "correction". Subsequently several new bubbles have now inflated into the S&P's overthrow high giving bulls the false sense of invincibility. Notably, IPO issuance peaked at the S&P 500 top in 2015 and has yet to fully recover, however THIS WEEK is the highest issuance since June 2015:
Speculation and Complacency Visualized:
June 25th, 2017 The IPO Buzz
As the Good Ship IPO cruises into the New York Harbor, it will close out 2017’s first half with the heaviest weekly traffic in two years
This week’s IPO calendar has 10 names. A flip back through the history books shows that the last time more deals were done was during the week of June 22, 2015, when 13 IPOs got out the door.
Bueller?
Similar to Y2K hedging has become "impossible" for professional money managers worried about career risk, which has led to a tsunami of cash rotating from actively managed funds into passive ETFs. In general, the eight year 0% regime has led to unprecedented reach for yield and risk:
Regarding point #5 and flight to safety, Trump's election led to the biggest bond to stock outflow in decades as investors rushed into the "reflation" trade. As I mentioned above, stock market investors "hid" in recession stocks during the 2016 selloff, and hence inflated those stocks to unsustainable valuations. Now indications are of the final rotation, as money rebalances from stocks back to bonds amid rising deflation:
Financial advisory firms are putting investors at risk even as banks are rolling over with the ending credit cycle:
"Shares crash, hopes are dashed
People forget, it's a put on
Bullshit! bullshit!"
Bullshit! bullshit!"
