In ‘Dreamland,’ Nobody Knows Anything

To the extent they’ve succumbed to avarice, market participants could use “a little bit more perspective.”

That’s according to David Solomon who, during an interview with Bloomberg on the sidelines of a forum in Singapore, suggested traders and investors may be too enamored with risk-taking in the wake of a historic rally that saw the S&P double from the pandemic lows hit in March of 2020.

“I step back and think about my 40-year career, there have been periods of time when greed has far outpaced fear,” he said. “We are in one of those periods.”

He should know. Goldman, along with its “peers” (always a misnomer), has benefited from various manifestations of “greed.” If that’s not quite right, let’s just say Wall Street enjoyed windfall trading gains at various intervals post-COVID and in the third quarter, IB took the baton.

Solomon’s remarks echoed a cacophony of similarly cautious rhetoric emanating from virtually every corner. “It’s all dreamland that’s been supported by interest rates that aren’t where they should be,” Bill Gross complained, to an attentive FT this week.

To call equities “defiant” in the face of such naysaying wouldn’t be quite right. After all, Gross (and others) argue that artificially suppressed risk-free rates (and monetary accommodation in general) are the proximate cause of myriad distortions and oxymoronic outcomes, including the notion that stocks are actually “cheap” despite being among the most expensive in history (figure below).

It’s all relative. There’s a very real sense in which equities are just doing what they “should” be doing considering the circumstances.

The longer the situation persists, the larger the addiction liability for policymakers. Some of the stocks which trade at the loftiest multiples are also those which dominate benchmark equity indices. Kneecap them by raising rates and you kneecap the market.

As BofA’s Michael Hartnett is fond of pointing out, interest rates are actually the lowest they’ve been in 5,000 years (figure below).

Gross expressed doubt that central banks will be able to normalize policy, let alone raise rates aggressively. Jerome Powell, he said, “is captive to the financial markets.”

That’s probably true. But note that markets are captivated by Powell. And both (markets and the Fed) are at a loss when it comes to macro forecasting.

“Inflation continues to rise at an unprecedented rate, and yet, the most urgent concerns of the market seem to revolve around the front end of the curve,” Deutsche Bank’s Aleksandar Kocic wrote Tuesday, attributing the relative liveliness of the upper-left corner to the notion that, lacking visibility on inflation and thereby bereft when it comes to longer-term macro forecasting, “the market is focusing on the Fed and short-term monetary policy as if it were the only thing that matters.”

“It would be difficult to find a more convincing confirmation that we are deep in administered markets territory,” Kocic went on to say.

For many, the disparity between long-end yields and surging inflation is a manifestation of “broken” markets, but it could also be due to a lack of context and/or a dearth of historical precedent on which to rely when it comes to inflation forecasting. Absent some cognitive scaffolding, markets revert to focusing on policymakers and, by extension, the front-end.

“[Gross] is worried about investors sleepwalking into a ‘dangerous dreamland’ [and] stresses that the Fed needs to raise rates but can’t do so aggressively ‘because markets,'” Rabobank’s Michael Every wrote Wednesday.

Generally speaking, bearish prognostications for equities center on the notion that the Fed will be “forced” (by inflation) to hike rates rapidly — markets or no markets. Bill Dudley suggested as much this week.

But, as Neel Kashkari put it while responding to Dudley, “I can’t predict the future any better than Bill Dudley can.”

“Is the federal funds rate going to end up at 2% or 3%?”, Kashkari asked Kathleen Hays, before answering his own question. “I don’t know. And neither does Bill Dudley.”

As ever, nobody knows anything. Or at least not about what’s supposed to matter — namely, the economy.

So, we end up resorting to increasingly nebulous pseudo-warnings and dour predictions with no sell-by date.

For example, Goldman’s Solomon said Wednesday that “something” will come along soon to “rebalance” greed and fear.

For his part, Gross told FT that “one of these days, one of these years, or one of these decades, the system will collapse.”

As Rabo’s Every quipped, “Even as a big-picture/longer-term practitioner, I think that’s a pretty loose market call for a portfolio manager to have to trade.”