US stocks are at 'scary high levels' - and 10 other terrifying charts about the global economy
1. US stocks at scary high levels.
"Warren Buffet has often argued that broader US equities should follow US economic growth. The trouble is that US equities, covering a very wide range of US companies from large to small, are trading at multiples to US GDP that previously marked a top," Hafeez said.
He added that "To make matters worse, larger US companies are geared more towards foreign growth, which is looking less appealing than US growth."
2. Huge expectations on private equity.
Hafeez says that this asset is all the rage and even pensions funds are pushing to invest. "Being able to borrow cheap, leverage the target company and value the companies with less public disclosure is a great model for private equity. The question is whether expectations of private equity gains are too elevated? Estimates certainly suggest so."
3. Leverage loan machine is spluttering
" The IMF has also found that new leverage loans are showing worse fundamentals. The loans are associated with higher debt loads and have less cashflow to cover interest payments. This could prove costly for private equity firms that dominate these form of lending."
4. The US budget deficit about to hit $1 trillion.
Hafeez notes that the budget hitting a $1 trillion has only happened once outside of a financial crisis, so to do that outside of a recession he says is "quite an achievement." He adds, "Markets have responded, but more at the very front-end, but surely it will only be a matter of time before investors get nervous. "
5. Negative term premia on long-dated US bonds is something we've never seen before.
"Investors should get paid a bit more for holding longer-dated bonds than simply the expected rate moves. That term premium for the US has been as high as 5% in the late 1970s. Today it has turned negative, which implies you have to pay to be locked into holding a longer-dated asset. Something isn't right about that."
6. FX volatility at all-time lows.
Hafeez says that investors are getting bored of forex markets due to uncertainty with the euro. "Expected volatility has collapsed as a result. But if history is a guide, this is temporary. The question is whether the big move will be a dollar collapse which could be inflationary or a dollar rally which could hurt US exports and anger President Trump."
7. European bank valuations are terrible.
Deutsche Bank's results were published for the third quarter on Thursday and they made for disappointing reading. Hafeez says that as a result, the market has no faith in the book value of the company. "In any other industry, it would be taken over and turned around, but banking is different. It's not just Deutsche, though, other banks in negative-yielding regions are struggling as well. The more interesting question is what happens if US and Canadian rates start to fall? Should US banks like JPMorgan trade at such high valuations?"
8. Chinese banks look vulnerable.
"The IMF recently estimated how exposed banks were to vulnerable segments of the economy They found that by far, Chinese banks had most exposure. This shows an eerie parallel to Japan of the 1990s. It also probably explains why Chinese authorities have been reluctant to ease credit – it won't work. "
9. Index funds are popular
Hafeez says that the shift to passive investing has been "remarkable."
"Who needs active managers, when stocks have gone up year after year. Recently, it looks like there are now more mutual funds and ETFs in passive index trackers than active managers. And when do active managers do best – typically during market corrections. Have they been ditched at the wrong time?," he asks.
10. Youth unemployment will lead to instability.
"A shocking third of young workers in Italy and Spain are unemployed even after the euro crisis of 2012 has passed. Such structural weakness is a problem that any number of creative ECB solutions cannot solve. Instead, politicians need to act, and youngsters will become more activist – not a stable system."
11. China's ageing population is a problem now.
"People have long argued that China could get old before it gets rich – and it has started to happen. Japan had great demographics – that is, a larger working-age share of the population - over the 1970s and 1980s. But it started to turn down in the 1990s and has been trending down ever since. China is now in the trending down zone. Add that to the list of worries around China."
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