When Do We Know These Are Delusional Markets

Latest Investment Outlook

In his latest investment outlook, Fasanara Capital’s Franceso Filia, who two months ago explained in one chart how the “fake market” operates…

… discuss what happens when a “Twin Bubble meets quantitative tightening” and answers why record-low volatility breeds market fragility and precedes system instability. We’ll have more to share on that shortly, but for now, here is Filia with his take on ‘when do we know these are delusional markets‘:

Signs of complacency and disconnect from fundamentals abound. So to sanity check, it may still be helpful to periodically remind ourselves of a few recent ones. In no particular order:

• Argentina uses defaults as a recurrent macro-prudential policy, to tackle debt overloads from time to time. Most recently in 2014, 2001, 1989. Yet, this year, the country issued a 100-year bond for 7.9% yield. Red-hot demand. It was oversubscribed 3.5x.
• The Bank of Japan now owns almost 75% of the entire Japanese ETF equity market. As a result, the BoJ will likely be the major shareholder in 55 companies by the end of 2017 (read). To entrench firm buy-the-dip reflex in the investment community (and their algos), “the BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute (read).
• The Swiss National Bank bought $ 100bn between US and European stocks. It now owns 26 million Microsoft shares (read).
• Easyjet is a great company. Still, 1% yield for 7 years is a stretch. Clearly, ECB programs are behind it. However, but, still, come on… The recognition that EasyJet’s bonds owe their valuation entirely to the Central Bank is widespread. Yet, when it comes to equity markets, such recognition is missing, and claims of bubble valuations are easily dismissed.
• US equity at 30X P/E CAPE, despite political/economic policy uncertainty, and 5yr German Bunds sub-zero despite 1.6% inflation and 2.8% PPI, have every right to belong to this list.
• Leverage to buy stocks at the NYSE (margin debt) hit an all-time record of $549bn this year (read), and went up in lockstep with the S&P as both doubled up since 2009.
• Is it 2007 all over again in CLOs? No, way better than that. Covenant-lite loans are over double what they used to be in 2007 (read, read, read). Assuming 2007 was a credit bubble and covenant-lite was one of the thermometers taking temperature, this is twice a bubble, and the thermometers burned.

Markets Cycle

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European Leveraged Loan Issuance, 2006 - 2017

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