‘They Called Me Mad!’ Bears And ‘Lunatic Ideas’

Lately, it feels like someone utters a variation of the following phrase nearly every single day: “Like everyone else, we hope for the best, but…”

That’s always a preamble to cautionary remarks, usually about equities.

And nobody will blame you for being cautious. Or, actually, they might. It depends on who you are. If you’re a pundit of some sort, you’re free to be as circumspect as you like. If you’re managing money (yours or anyone else’s) watching stocks run away from you is perilous. That’s presumably why there’s renewed interest in crash-up scenarios.

“The market zeitgeist shift from the prior ‘crash-down’ obsession [during] the first three months of the year pivoted hard to ‘fear of the RIGHT-tail’ by late March,” Nomura’s Charlie McElligott wrote last week.

“There may be no greater risk for investors right now than underestimating just how powerful the trio of economic reopening, deficit spending and committed Fed policy are,” Macro Risk Advisors’ Dean Curnutt remarked, in a note.

This is always the dilemma. To chase or not to chase. Never short a bubble. And so on, and so forth.

“Elevated discretionary positioning has been underpinned by strong equity fund flows, both into the US and into international funds, and put/call volume ratios that have hovered persistently near 20-year lows on elevated call volumes,” Deutsche Bank said, in the course of flagging an all-time record high reading on their discretionary investor positioning measure.

It’s hard to overstate the magnitude of the flows situation. I realize I’ve been over this and over it lately, but do note that inflows to global equity funds in 2021 total $413 billion (figure below). If this week sees another hefty inflow, it would bring the YTD total nearly in line with the net inflow over the previous dozen years.

Commenting Monday, in a characteristically colorful note, SocGen’s Andrew Lapthorne wrote that “given this almost euphoric market backdrop, anything bearish is met with groans.”

But that hasn’t stopped his colleague, legendary bear Albert Edwards, from delivering plenty of good-natured financial humor. “In 2003 they called me mad!,” he exclaimed, in a social media message tagging Lapthorne, who had just reminded him of a presentation they delivered in June of 2003. In it, they outlined their thoughts on “what policymakers would be forced to do when they ran out of interest rate road.” Apparently, the pages shown below are from that presentation (and you have to love the spiral binding).

“Gradually, 18 years later, all of our lunatic ideas have been ticked off the list,” Edwards went on to muse.

In his Monday note, Lapthorne cited what he called “an increasingly large number of weird and wonderful signs of market excess,” including Dogecoin which I generally refuse to cover out of respect for readers’ sanity (and out of fear that I might inadvertently prompt someone to put money into it).

On a more serious note, Lapthorne reminded market participants that even after this year’s expected recovery in profits, global equities (you know, those things that investors have poured nearly a half-trillion dollars into over the past four months) will still trade “at over 21x earnings, which is expensive on most historical measures.”

Perhaps more poignantly, Lapthorne gently pointed out that “the amount of global market capitalization that has reported a negative profit number in the last year and in each of the last three years is higher than at any point during the past 22 years.”

How, he wondered, will “the history books describe 2021”?

Maybe market historians will say we were all “mad” — a multitudinous collection of lunatics.