Earlier this month, SocGen warned that U.S. equity investors are a bunch of “boiling frogs.” And no, that is not a distortion of the bank’s message. Here’s the actual quote:
The parable of the boiling frog refers to how a frog in a pot can get slowly boiled alive without even realising it. The frog is so comfortable as the water gradually warms up that it is unaware of the danger it faces and ends up cooked. Today’s current dynamics put the US equity market at a similar risk as the frog.
“Come on in, the water’s warm – and seemingly getting warmer.”
Well on Tuesday, the bank is out with their latest Multi-Asset Portfolio piece called “Be ready for the end of Goldilocks”, and in the editorial portion they’re reiterating their contention that you are slowly being cooked alive. They were nice enough to substitute “we” for “you” although you’ve got to think they’ve taken measures to ensure they do not suffer the same fate. So it’s more of a “what do you mean, ‘we,’ Kemo Sabe?” type of deal.
“With asset prices reaching record high levels, and pushing volatility down, we as investors run the risk of reliving the parable of the boiling frog: the gradual heating is so comfortable that the frog does not perceive the danger and ends up cooked,” SocGen writes, before noting (again) that “it seems that markets for now are unwilling or unable to perceive the gathering threats.”
In case you were wondering what it means when cross-asset vol. is suppressed across the board, they’ve added a Trump-ish exclamation point to the chart in the lower pane:
Yes, “too much complacency!” and that, the bank writes, is simply “not sustainable.”
Or, in other words, “someone DO SOMETHING!”
"SOMEONE DO SOMETHING!" pic.twitter.com/GGHI8XdabJ
— Walter White (@heisenbergrpt) November 3, 2017
Next, SocGen flags the self-evident: liquidity withdrawal is a certainty going forward unless central banks simply reverse course and plunge headlong back into QE. Here’s a fun chart which plots relative equity performance versus the combined balance sheet of the big three plus the BoE:
The implication there is clear: the secular downtrend in DM yields which has been supercharged by $15 trillion in QE is set to reverse and when it does, the dynamic which drove investors out the risk curve and down the quality ladder will reverse too, imperling equities.
But here’s the kicker. SocGen calculates hedge fund positioning across two dozen asset classes in January of each year in order to determine the percentage of assets with “extreme positioning” (basically plus/minus one standard deviation).
As the bank notes, “in January 2017, 54% of hedge funds’ net positioning on the pool of assets under review can be considered extreme [and] the last time positioning was stretched on such a similar share of the assets under review happened to be in January 2007, or a few months before the global financial crisis“: