Listen, the thing you have to understand is that there is no way anything could possibly go wrong with risk assets, ok?
You know that’s true because popular pundits have told you as much. They’ve also trotted out a bunch of statistics about how markets usually rise over time and how crashes are rare events, because those are things that no one understands and that you definitely couldn’t have gotten from a beginners book on stocks on sale for $9.99 in the Barnes & Noble checkout line.
See that’s how this works. People who are “smart” know that the best thing to do at the tail end of a rally is pile in and hope you’re not the last fool in the chain. I mean, do you want to participate in the “blowoff top” and the inevitable “melt-up” or don’t you?
Sure that amounts to falling hook, line, and sinker for the greater fool theory of investing, and yes, there’s absolutely no reason to stay long at this point after you’ve already racked up hundreds of percentage points worth of gains since 2009, but fuck it, right? Go “bigly” or go home!
I’m just kidding. None of those people know what the fuck they’re talking about. They’re just rolling out the most evergreen market factoids imaginable that, again, you could read in the first chapter of “Investing For Dummies” and pretending like they’ve said something meaningful. Meanwhile, they’re advocating that you participate in the last leg of one of the longest-running rallies in market history not by selectively choosing stocks, or by replacing equity exposure with cheap calls, but rather by blindly funneling money into ETFs. It’s literally the worst advice imaginable and it is so wildly irresponsible that it boggles the mind.
The reputational damage one would incur from telling investors to be long at this point and then being wrong is immeasurably greater than whatever embarrassment might come from advising caution and missing out on the next 5%. But that common sense assessment seems to elude a lot of folks handing out advice these days.
Well, on the off chance you’re interested in hearing from actual, real analysts as opposed to people who have decided that they are now asset managers when really all they’re doing is riding the active-to-passive shift and piggybacking on Jeff Bezos’ ongoing quest for world domination, here’s BofAML with a nice reality check…
Via BofAML
Starting thinking about 2018: Something’s gotta give
We believe that the market is priced to perfection, assuming good times will continue and nothing will happen. Equities are at all-time highs, volatility is at all-time lows, and our Global Fund Manager Survey shows a very strong consensus that strong growth and low inflation will continue, keeping central bank policies supportive. EM positioning is stretched, but demand remains strong. Flows reflect a market belief of forever flowing bubbles. Staying away from the party would have lost you money this year.
However, as we start working on our year ahead reports, we see the end of this Icarus trade; 2018 will be a very different year from 2017. Stretched labor markets could lead to slower growth and higher inflation, exactly the opposite of what markets expect. The world economy could look very different depending on whether US tax reform takes place or not. One way or another, the rates market and the Fed’s Dot Plot will have to converge. The ECB could be tested, in either direction, if growth remains strong, or inflation disappoints. The UK is well overdue for a reality check, as negotiations for a new trade deal with the EU will take much longer than the UK government expects, in our view. Italy could have a political paralysis following the elections. North Korea could test the West’s patience to new limits. And this list includes only known unknowns.
Just because concerns about market complacency this year proved to be wrong, it does not mean that they are not justified today, particularly as markets are even more bullish. We believe the scenario we have seen this year, of fast growth, slow inflation and booming risk assets is not sustainable. Even if fast growth and low inflation continue, unlikely in our view, we would expect central banks to take advantage and continue normalizing policies, which is what they have been doing this year. This is not what markets are pricing. If growth slows, or if we get inflation, risk assets will correct lower. In either scenario, we will get market adjustments, possibly sharp given positioning.
