‘Acceptance Of The Unthinkable’

It’s almost always possible to suggest that some asset, somewhere is a bubble.

That simple observation gets lost in the daily deluge of financial commentary. We often chastise a handful of people for being “doomsayers” or “Chicken Littles,” but they’re just scapegoats — the “usual suspects” we castigate as “permabears” to deflect from the fact that nearly all of us have (incorrectly) predicted a financial or economic calamity at some point.

If we’re honest, the list of folks who’ve warned of a major correction or some manner of “event” over the past dozen years is so long and includes so many “respectable” market participants, that it would probably be easier to make a list of recognizable names who haven’t trafficked in hyperbole or otherwise suggested the “end is nigh.”

That’s not to say everyone has predicted an asteroid strike or a replay of the financial crisis. It’s just to state the obvious, which is that in a world where asset prices are increasingly administered by policymakers to the detriment of price discovery, the attendant distortions are so glaring that anyone old enough to remember a time before 2008 can’t help but suggest that “something has to give.”

In that respect, the post-pandemic rally isn’t much different from the post-GFC bull market. Mispricings are everywhere, equity valuations are extreme, especially in the US, bonds and credit are still expensive by any historical standard despite a lackluster year, and so on and so forth. What else is new?

Still, when you observe some of the more glaring manifestations of what many believe will one day be characterized as wild speculative excess, it’s difficult to avoid coming to the conclusion that it “just can’t go on like this,” to employ another nebulous protestation.

Crypto is perhaps the most obvious example, but the SPAC mania and the meme stock craze are arguably more egregious. Why do I say that? Simple. I think crypto is worthless. But I know shares of XYZ 90s nostalgia company have no value, and I know the SPAC fever is just an old-fashioned hustle.

It’s with all of that in mind that BofA asked, in their year-ahead outlook, “What will we say when we look back at today?” In a section called “Hindsight: 2000 versus 2022,” the bank’s equity strategists, led by Savita Subramanian, wrote the following,

What will we say when we look back at today? The shift from 2021 to 2022 can be characterized by a growing acceptance of the unthinkable: negative real rates, 6ppt inflation prints, liquidity risks in the world’s largest asset classes like US Treasurys and China real estate; the ‘Metaverse’. We began our career in the late 1990s, which felt similar — Fed hike, valuations, IPOs, negative equity risk premia — and was also characterized by an acceptance of the outrageous.

You could scarcely conjure a more damning indictment of the current market conjuncture than “acceptance of the unthinkable.”

But note the subtle difference between that characterization and Subramanian’s description of the ill-fated dot-com bubble (i.e., “acceptance of the outrageous”). Perhaps she was looking for a synonym to avoid using the same word twice, but it’s easier to call something “outrageous” when you already know it ended poorly. “Unthinkable” doesn’t necessarily carry such a negative connotation.

The figures (below), are meant to underscore the veracity of the analogue.

I should note that BofA’s full 2022 equity outlook is long even as year-ahead outlook pieces go. At 116 pages, it’s an impressive tome.

The short excerpt above isn’t necessarily indicative of the overall thrust of the piece. It’s merely a tiny quotable pulled from a voluminous survey which, in its entirety, simply isn’t amenable to any kind of summary treatment.

Ultimately, BofA sees the S&P ending next year at 4,600, down 2% from current levels. In the opening line, Subramanian suggests that 20 years hence, when analysts look back at 2021, their comments will probably be “similar” to what we say now when reminiscing about the year 2000.

Subramanian added a few caveats. “The last sign of a bubble – excessive corporate and consumer leverage – has been transferred to the government,” she said. “And bubbles can produce great stocks: 1 of 4 IPOs in 1999 are blue chips today.”