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Notable Quotes Of The Month (December 2017)

Summary

We always closely follow what important market players communicate at the end of a bull market because they often say out loud what the really “big guns” silently believe.

Although the following list is non-exhaustive, here is what asset managers, analysts, bankers or institutional leaders communicated in client notes or in the financial media during the past month.

During December 2017, bearish declarations from Double Line's Jeffrey Gundlach and Allianz's Mohamed El-Erian, among others, caught our attention.

The following is extracted from the Black Diamond Stock Market Indexes Report for the month of December 2017. The remarks presented herein are independent of the calculation of our composite indicators.

  • Citi's credit strategist Hans Lorenzen in a market note on November 26: “There seems to be a growing fear among a number of central bankers that we have spoken to recently. In our experience, they too are somewhat baffled by the lack of volatility and concerned about the lack of response to negative headlines.”
  • The Bank for International Settlements (NASDAQ:BIS) in a statement via The Guardian on December 3: “The vulnerabilities that have built around the globe during the long period of unusually low interest rates have not gone away. High debt levels, in both domestic and foreign currency, are still there. And so are frothy valuations. What’s more, the longer the risk-taking continues, the higher the underlying balance sheet exposures may become. Short-run calm comes at the expense of possible long-run turbulence.”
  • JP Morgan in its Weekly Market Recap released on December 4: “The federal government liabilities increased almost 150% since 3Q 2008 and nearly reached household debt levels for the first time in modern history. the CBO projects that, even excluding the impact of tax cuts, government debt levels will continue to march upward over the course of the next 10 years, ultimately hitting $25.5 trillion by the end of 2027. While this does not point to an impending crisis, it does mean that, should another downturn occur, the government would be far less able to come to the rescue as it did in 2008.”
  • Bank of America's (BoA) Chief Investment Strategist Michael Hartnett in a market forecast note on December 5: “A top target of 2863 is forecast for the S&P 500 early in 2018, with the Nasdaq composite reaching 8000, before an anticipated 10 percent or greater correction, followed by slower growth for the remainder of the year.” “Our overall outlook for the year ahead is macro bullish, so much so that we’re ultimately market bearish.” “Investors are chasing growth and high-yielding assets in a bull market that’s been driven and enabled by central bank liquidity. We see an end to this Icarus trade and an aggressive downgrade of risk assets once profits peak, investor positioning becomes excessively enthusiastic and central banks start withdrawing liquidity as they scale back support.”
  • Bank of America Merrill Lynch Global Research in a report on December 6: "In every major market shock since the 2013 Taper Tantrum, central banks have stepped in (even if verbally) to protect markets. Following the Brexit vote, markets no longer needed to hear from CBs as they rebounded so quickly that CBs didn’t need to respond. Buy-the-dip has a become a self-fulfilling put”. “The Fed put strike is falling with rising rates even if markets don’t realize it.” “However, we still need to see a shock to know where the Fed put strike is.”
  • Bank of Canada (BoC) on December 6: “The global outlook remains subject to considerable uncertainty.”
  • BoA in a market note on December 6: “From a macro perspective, we continue to believe unexpected inflation is the kryptonite for volatility. It both drives fundamental risk higher and significantly impairs the protection markets have become dependent on. Rising rates volume is key to watch.”
  • Peter Schiff, CEO and chief global strategist of Euro Pacific Capital via USAWatchdog on December 6: “I think this bubble is too big to pop.  I think it’s the mother of all bubbles, and when it bursts, there is not a bigger one that the Fed is going to be able to inflate to mask these problems, meaning we can’t kick the can down the road anymore.”
  • Janus Henderson’s Bill Gross in his monthly outlook letter released in early December: “Our entire financed-based system – anchored and captained by banks – is based upon carry and the ability to earn it. When credit is priced such that carry can no longer be profitable (or at least grow profits) at an acceptable amount of leverage/risk, then the system will stall or perhaps even tip. Until that point, however (or soon before), investors should stress an acceptable level of carry over and above their index bogies. The carry may not necessarily be credit based – it could be duration, curve, volatility, equity, or even currency related. But it must out carry its bogey until the system itself breaks down. Timing that exit is obviously difficult and perilous, but critical for surviving in a new epoch. We may be approaching such a turning point, so invest more cautiously.”
  • Axel Merk, President and CIO of Merk Investments, on December 7 via the website: “I can see Mr. Powell manage a financial crisis; but I do not think anyone knows how he will react when there are unforeseen surprises in the economy or the markets.” “The Fed, of course, will never admit that they are slaves of the markets.” “Equities? You be the judge. I don’t like where equities are, rather seek my returns elsewhere.” “Quantitative Tightening (QT) will push risk premia higher again, causing headwinds to risk assets. Read: there may well be a flight into Treasuries.”
  • Vanguard Founder Jack Bogle to Bloomberg on December 7, regarding the bond market: It is almost a given that it will end badly.
  • Ratna Sahay, deputy director of the IMF’s Monetary and Capital Markets Department, in its analysis of the Chinese financial system released on December 7: “Risks are large. The authorities are really aware of risks and they are working proactively to contain these risks.” “Three main risks: credit growth, the complex and opaque financial system and implicit guarantees which encourage excessive risk-taking.”
  • Saxo Bank in its annual contrarian market outlook report on December 8: “Our suspicion is that the complacency and low volatility in 2017 will not repeat and may indeed have stored energy for a spectacular and outrageous 2018.”
  • Deutsche Bank's Aleksandar Kocic in a report on December 11: “It is clear that the spiralling trajectory in terms of volatility and leverage cannot continue indefinitely; it has to stop at some point beyond which there will be no more bubbles. In many ways, it looks like the post-2008 represents the last lapse. A new game has to be reinvented for the old future to materialize, or a different paradigm altogether has to take over.”
  • Doug Noland, Portfolio Manager at McAlvany Wealth Management and specialist in credit cycles, to peakprosperity.com on December 11: “This is the granddaddy of all bubbles. We are at the end of a long cycle where the bubble has reached the heart of money and credit. When this bubble bursts, it will shock people how far the central banks will have to expand their balance sheet just to accommodate the deleveraging in the system. And they won't really be able to add new liquidity to the market; they're just going to allow the transfer of leveraged positions from the leveraged players onto the central bank balance sheets.” “When we get to that point when the central banks begin aggressively expanding their balance sheets (again) but the bond markets are not happy about it, then the central banks will finally have to decide if they want to continue to inflate or if they're going to focus on trying to keep market yields down. This will be a very, very difficult situation for central bankers when it unfolds.”
  • Joseph Borg, president of the North American Securities Administrators Association (a voluntary organization devoted to investor protection), to CNBC on December 11: “We've seen mortgages being taken out to buy bitcoin. People do credit cards, equity lines… This is not something a guy who's making $100,000 a year, who's got a mortgage and two kids in college ought to be invested in.”
  • James Grant, Wall Street expert and editor of the renowned investment newsletter “Grant’s Interest Rate Observer”, on December 11 via Finanz und Wirtschaft: “These radical monetary policies have postponed the tough decisions to bring unprofitable firms into profitability and to restore government finances to something resembling balance. In many parts of the economy there is more leverage than before the financial crisis. So, I think it’s wrong to judge these experiments in radical monetary policy in terms of success until we’ve seen the other side of the cycle and until we have seen the consequences of the balance sheets that we collectively have built up over the past ten years.”These policies have tended to sedate or narcotize markets. It’s not just central banks. The movement to indexation and to investing into ETFs has marginalized the securities analysts of the world. People don’t believe that security analysis adds much value these days because one particular security in a big index is of no great importance. So, another consequence, which is very much a financial one, is to dull the perception or to dull the responses of markets because they have been called to trust too much in the presence and in the action of central banks.” “The SNB now owns well more than $80 billion worth of American stocks which it buys programmatically. I’m not sure this is central banking. Central banking was meant to be about the stability of prices. But today, through its intention to stabilize, it paradoxically has become a source of great underlying instability and of risk.”
  • Nassim Nicholas Taleb, statistician, risk analyst and former hedge fund manager via Twitter on December 12: “There is no way to properly short the bitcoin “bubble”. Any strategy that doesn’t entail options is nonergodic (subjected to blow up). Just as one couldn’t rule out 5K, then 10K, one can’t rule out 100K.”
  • Société Générale's Albert Edwards in a weekly note published on December 12: The current situation is even worse than in the run-up to the 2008 crisis. At least back then rate hikes did not lead to easing financial conditions the way they do now! The Fed's desire to soothe the nerves of the financial markets has made a mockery of their tightening cycle.”
  • Cybersecurity pioneer John McAfee in a tweet regarding the crypto space on December 12: “Those of you in the old school who believe this is a bubble simply have not understood the new mathematics of the blockchain, or you did not care enough to try.”
  • Cameron and Tyler Winklevoss, bitcoin billionaires and co-founders of the Gemini exchange, to CNBC on December 12: “We think it’s the starting gun to a whole new phase of liquidity and price discovery and sophisticated entrance to the market. Bitcoin is like Gold 2.0”. “We're just waiting for Jamie Dimon. Put your money where your mouth is."
  • Stanley Druckenmiller, CEO of the Duquesne family office, to CNBC on December 12: “I would have to say it’s probably the worst year I’ve had relative to the set of opportunities out there, I can never recall.”
  • Fed Chair Janet Yellen responding to CNBC regarding stock market valuations, on December 12: The stock market has gone up a great deal this year and asset valuations are elevated. We see ratios in the high end of historical ranges”. "Economists are not great at knowing what the right valuations are... We don't have a terrific track record.” “Low interest rates support higher valuations.” “The risks in the global economy look more balanced than they have in recent years.” “The Fed is trying to think through how economy would be impacted if there were a reassessment of stock valuations. There is nothing flashing red or possibly even orange.
  • JP Morgan CEO Jamie Dimon discussing the Tax Plan at a conference in Ann Arbor, Michigan on December 13: “You need a competitive tax system... Companies will retain more capital and start to use it over time.” “Some will raise wages. Some will buy companies. Some may do dividends and buybacks. Don't act like that is a bad thing. That is their money. Think of it as a QE4. That money gets recirculated in the American system.”
  • Double Line Capital’s Jeffrey Gundlach to CNBC on December 13: “Investors should add commodities to their portfolios. There is a really remarkable relationship between a market cap or the total return of the S&P 500 and the total return something like the Goldman Sachs commodities index. The cyclicality is really repetitive.”
  • Stephen Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, via Project Syndicate on December 14: “The world is set up for the unwinding of three mega-trends: unconventional monetary policy, the real economy’s dependence on assets, and a potentially destabilizing global saving arbitrage. At risk are the very fundamentals that underpin current optimism. One or more of these pillars of complacency will, I suspect, crumble in 2018.”
  • JP Morgan's Marko Kolanovic in the bank’s 2018 outlook for equities and volatility: “Our price target for S&P 500 at the end of 2018 is 3,000 and our earnings forecast (including tax reform) is $153. We think that risks for equities will start rising significantly mid-next year as the monetary accommodation is reduced and the level of interest rates increases.”
  •  Jeffrey Gundlach in a webcast presentation on December 16: “As central banks reverse their quantitative easing and raise rates, this “Goldilocks era” will come to an end.”
  • Hiromichi Mizuno, Executive Managing Director and CIO at Government Pension Investment Fund (GPIF), to Bloomberg on December 15: “I won’t be surprised if Google and Amazon become asset managers, but I think a lot of people in this industry will be. I take it for almost granted that they will come into this market because they have cutting-edge AI technology and they now capture all the big data of what’s happening in the market.”
  • Jeff Hussey, CIO at Russell Investments in its investment outlook report released mid-December: “2017 delivered better-than-expected global equity returns, but the cycle is old and the Fed is set to step up the pace of rate hikes. The current bullish momentum will face strengthening headwinds as 2018 progresses. Running with the bulls can be dangerous. It’s easy to get swept up in the elation of the crowd and underestimate the risks.”
  • Société Générale's Andrew Lapthorne in a market note on December 18: “We’d argue that every bit of good news looks priced in.”
  • Tuomas Malinen, CEO of GnS Economics, on December 21 via the Huffington Post: “When China starts to remove its debt-stimulus (or it becomes ineffective), it will take away a key support for global growth. Global macroeconomics indicators will start to tumble followed by dwindling corporate profits. The overbought asset markets with diminishing central bank support is likely to catch the drift quickly (the high-yield market is my ‘favorite’ for the actual inflection point). With the global central banks and China planning to tighten, 2018 looks a lot like a year when the market economy finally returns. For the artificially propped asset markets, it means a crash.”
  • Joseph Tanious, investment strategist at Bessemer Trust, to Bloomberg on December 21: “I don’t think the bears have left the market. I just think they’re very quiet after a year like this. Bears will always be bears and bulls will always be bulls, but they may go dormant from time to time, or they may be less vocal.”
  • Bank of England (BoE) head Mark Carney to Reuters on December 21: “At present, we don't view bitcoin as a financial stability issue.”
  • Janet Yellen to CNBC on December 13: “Bitcoin, at this time, plays a very small role in the payments system. It is not a stable store of value and it doesn't constitute legal tender. It is a highly speculative asset. The Fed doesn't really play any regulatory role with respect with Bitcoin, other than ensuring banks are being prudent.”
  • Mohamed El-Erian, Chief Economic Adviser at Allianz, in an interview with Finanz Und Wirtschaft published on December 28: “The New Normal has sown the seeds of its own destruction. When a sophisticated market economy like the one we have in advanced countries grows for a very long time at a slow pace and that growth is also not very inclusive, things start to break. They break economically, they break socially, they break politically, and they break financially. In order to say that the New Normal will last another five years, you have to say that these breakages won’t matter, but they do matter. Rather than seeing the New Normal continuing I think the world is nearing a tipping point. We are heading toward a T-junction which has three fundamental implications: One is, that the road we’re on is going to end. The second message is that what comes afterwards is very different from what we’ve had. And the third message is that it can be one of two things. So, it’s a bimodal distribution with two modes: really good or really bad. We either tip into high and inclusive growth or we tip into recession with renewed financial instability. I think within the next two years we are going to tip one way or the other.” “Markets have been conditioned to buy every dip, regardless of how elevated asset prices are and regardless of how decoupled asset prices are from fundamentals. That can continue for a while. It takes a lot to derail this market because that strategy to keep buying the dips is very simple and it has been very profitable repeatedly – and there is nothing that markets like more than a simple strategy that is repeatedly profitable. But when it stops, there’s an air pocket that comes afterwards. The question is what it takes to change the conditioning of investors: the belief that every dip is a buying opportunity. This conditioning is so deep that you need not just a shock but a major shock to shake people. One possible source for that could be a big geopolitical shock or a policy accident. Most economists would agree that today they understand less about three important things than they ever have in their careers: Productivity, wage determination and inflation which outgoing Fed Chair Janet Yellen called a “mystery”. These three things which are critical to the economy and to policy making are very uncertain. So when you have this high degree of uncertainty the risk of a policy mistake goes up.”
  • Former politician Ron Paul in an interview with the Washington Examiner on December 26: “We’re on the verge of something like what happened in ’89 when the Soviet system just collapsed. I’m just hoping our system comes apart as gracefully as the Soviet system.”
  • Doug Casey, founder of Casey Research, in an interview published on the firm’s official website on December 27: “The whole banking system is screwed-up and unstable. It’s a gigantic accident waiting to happen.”

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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