16.12.2020 – Special Report. Dr. Frankenstein created a monster out of corpse parts, which he patched together and brought to life with lightning pulses. Then the monster ran amok. The parallel to the financial market: the world’s central banks push up share prices with endless amounts of money. And they boost the demand for new shares – the market for IPOs has never been stronger than in this year of the pandemic. The biggest stock market of all time was also created. A monstrous bull – Bank of America called it “Frankenbull”.
Too much euphoria
The bulls have been almost unstoppable lately. No wonder – according to Knowledge Leaders Capital, there has seldom been better fodder on the stock market: three vaccinations against Corona are likely to be available soon, 42 percent of investors believe that a vaccination will positively support the economy from the second quarter, 28 percent even see Q1. So stock market investors have ticked off the recession. In addition, interest rates are at zero, the government is running up debt at full speed and soon Janet Yellen will return as Treasury Secretary with probably even more money.
Warning against the “Frankenbull”
Chief Investment Officer Michael Hartnett of Bank of America recently did not mince his words in this context: in his opinion, the central banks are currently creating a real market monster – the “Frankenbull”, drawing a parallel to Frankenstein.
Here are some of the dangerous facts from the BoA: Since March, central banks have bought $1.3 billion in assets – every 60 minutes. The world saw 190 central bank rate cuts this year – four cuts every five trading days. In 2020, $3.4 trillion of US Treasurys were also issued – an all-time record. Global market capitalisation had risen by $39 trillion from the lows. A record $139 billion had flowed into equity funds globally in the past six weeks – surpassing the previous peak set in January 2018. This year, 9,730 IPOs worth around $1.1 trillion have already taken place globally – the best year ever. We think: Many of these companies would never find investors in normal times, as evidenced by the dotcom bubble some 20 years ago.
Central bank money without end
And the moral of the story for Bank of America: “central banks have never been this dovish at this level of asset prices and valuation before”. And further: the masters of money “openly tolerating asset price bubbles (and extreme wealth inequality) so as to ‘bridge’ to stronger growth and lower employment.” In other words: the central banks accept bubbles – and they have no other choice and no other means. All in all, Hartnett does not expect a boom, unlike the rest of the market, but rather an era of “stagflation”, in which the dollar, among other things, will weaken.
Sell signal from asset managers
Bank of America followed up with another, concrete correction warning: The latest Fund Manager Survey for December said that the cash level of investors had fallen below 4 percent – and that this had triggered a sell signal. We ask: Who should still buy when all the cash is gone? 217 money managers with a combined $576 billion AUM (assets under management) were surveyed. The last time this sell signal was triggered was in February 2020 – shortly followed by the crash. And on net, investors are actually underweight in cash this time – the last time this happened was in May 2013.
According to the survey, the most crowded trade is long tech with 52 percent – for the eighth month in a row. The second most popular trade among financial managers is Short US Dollar with 17 percent. And 15 percent of investors surveyed indicated Long Bitcoin. So in the event of a correction, these would be the first three candidates for a reversal.
The biggest stock market of all time
Fittingly, the financial blog ZeroHedge recently put a house number on the euphoria: the global stock market reached the size of 100 trillion dollars for the first time ever last week – 100,000,000,000,000. The whole thing is more dangerous than one thinks – because risks build up slowly, but unfold their danger quickly.
Overall, there are currently three major risks: 1) a debt and banking crisis. If interest rates remain low, the volume of unserviced loans will increase and insolvencies are inevitable. 2) Overlooked inflation: According to Bloomberg Economics, inflation is hitting the poor and middle class harder than the official inflation index indicates. These higher costs of living are hitting housing, insurance, food, education and healthcare in particular – and are socially explosive. The blog stated 3) that there is currently a perverse incentive for investors to pump up bubbles that, when they burst, send shock waves into the real economy. This through higher taxes and weaker purchasing power, as central banks use monetary policy to denuclearise the currency.
We think: Every bubble bursts at some point. And then the monster bull dies raging. Even those who see the trend as their friend should not ignore the warnings of the experts. The Bernstein Bank wishes you successful trades and investments!
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