Remember the other day, when Citi tried to catalogue all of the risks facing markets?
Well, in case you missed that post, here’s a refresher:
The Street has been worried about politics (Trump, Merkel, Le Pen, Wilders, Grillo, Hard Brexit), geopolitics (North Korea, Syria, Iran, Libya, Venezuela, Brazil) and central bank policy (Fed, ECB, BoE and BOJ) as well as economic growth (US, China and Europe) plus valuation, profit margins, money flows, inflation expectations, fiscal initiatives, automation replacing workers and retailers closing shops leading to layoffs, not to mention auto sales sustainability given signs of subprime pressures. Investors also bemoan sluggish business loan growth, an alleged lack of capex, weak M&A trends and low volatility.
That is a laughably long list.
And yet despite that, everything only seems to go up. Citi noted that in a kind of ad hoc survey they conducted with clients, analysts, sales people, and traders, the mood was cautious, with “President Trump leading the pack” in terms of concerns. Also evident was trepidation on China (slowdown fears). Finally, respondents were jittery about Fed policy (balance sheet rolloff and the recent flattening of the yield curve).
And so, as Bloomberg’s Richard Breslow wrote on Wednesday morning, “we function in a world where risk assets keep going up while we couch everything in risk-off terms.”
“It’s not enough,” he continued, “that our central bankers think they can play with our heads under the fiction that they are masters of nuance, we do it to ourselves.”
Well, Pimco thinks maybe it’s time to consider raising cash – if only because you could deploy it more efficiently after a pullback.
Consider what the firm’s Andrew Balls and friends had to say in their most recent “Secular Outlook”:
We believe that many market participants today are too relaxed, that medium-term risks are building and that investors should consider using cyclical rallies to build cash to deploy when markets eventually correct — and possibly overshoot — as risks are repriced.
As one of Balls’ associates told told Bloomberg in a phone interview, “one thing that’s happened is all asset classes are 10 or 15 percent more expensive than they were a year ago.”
Here’s what that looks like:
Balls and friends also note the following:
Policymakers are driving without a spare tire because of limited tools — caused by big balance sheets and low- or negative-interest rates — to deal with a recession.
[Additionally] policy measures may not be sufficient to counter the next downturn, whenever it materializes.
Right. Ultimately, this probably sums things up best:
A lot of good news is already priced in.