The FT’s Ethan Wu notes: “Standard p/e’s are slightly above historical averages, the Shiller cyclically adjusted p/e ratio is very high and the equity risk premium is near a decade low. If there is a valuation metric that makes the market look cheap, we haven’t seen it.”

Querying ASR’s Ian Harnett: “Might cheapness lurk below at the sector level?” Ian responded, "Mostly, no…"

In conversation with the FT’s Jennifer Hughes, Ian Harnett noted that “US equities currently make up just under half of global stock market capitalisation, up from about a third in 2010. That’s lower than during boom periods such as the dotcom bubble — but that is hardly much comfort…”

The FT’s Ethan Wu, with ASR chief economist Dominic White,  consider whether First Republic’s problems are a sign of a wider credit crunch. Dominic commented that, “as savers flock to money markets, deposit competition is increasing, which should pressure bank profitability and further tighten lending standards…”

In discussion with Bloomberg’s John Authers, ASR’s David Bowers argues that “a decline in the money supply does matter . . . (he) points to total debt in the US as a proportion of GDP. For the first time since . . . the debts incurred to finance WW II, debt has come down, and sharply” . . .

The PBOC signaled it may start scaling back some of the stimulus measures implemented during the pandemic as the economy begins recovering and credit demand picks up.

Adam Wolfe noted that, “Back in the fourth quarter of 2022, structural tools supported a third of the net increase in total lending….”

Ian considers implications of recent bank failures: “if 2022 was about the repricing of capital, 2023 is … about the reduction in the quantity of capital, as "quantitative destruction" puts alternative assets and non-bank financial institutions to the test" . . .

John notes in his column that the ASR survey of asset allocators for the second quarter (based on interviews that took place during the worst of the banking upheaval) “found the deepest pessimism since the survey started in 2015 . . .

David Bowers and Ian Harnett have been talking to clients for some months about the risks, not of QT , but QD, “quantitative destruction” .

Today’s leader in the Times reiterates our concerns…

Rob Armstrong notes “the types of financial wreckage that have forced rate pivots before have been extremely bloody….” citing the ASR chart which plots major crises next to the fed funds rate.

China’s official statistics are often suspected of flattering the economy. But ASR’s Adam Wolfe considers “the balance-of-payments figures may actually understate the size of the country’s pandemic-era export boom”. 

Simon Nixon was in discussion with David regarding implications of the US Senior Loan Officer Survey, showing demand for credit has collapsed and that lending standards have tightened. David notes, that has “typically foreshadowed a rise in credit risks within a year…”

Noting ASR’s “detailed work on the ERP”, calculating nine different ERP methodologies and taking the median output… Wu and Armstrong would agree with ASR that “a decade-low ERP seems a mighty modest premium for a very precarious investing environment”

With Beijing pivoting on key policies, a cyclical recovery appears to be underway. But structural issues – such as the heavy debt load of local governments — haven’t gone away.

Simon Nixon in the Times notes that “There are no shortages of candidates for future sources of financial instability”.

What we are witnessing is what (ASR) have dubbed “quantitative destruction.”

The FT’s Leo Lewis cites David Bowers, who notes that “Strong wage growth is seen as the ultimate ‘amulet’ against Japan slipping back into disinflation…” 

John Authers cites an ASR chart (with numbers as of Oct. 31 - before the central bank meetings) suggesting that “it’s scarcely tenable to hold stocks rather than bonds…"

Robert Armstrong notes in his column that “banks, for example, look as cheap as anything in the market right now. But consider a rather chilling chart from Ian Harnett of ASR …"

Simon Nixon notes that these risks should “hardly come as a surprise. As Ian Harnett and David Bowers of ASR have long been warning, every US interest rate tightening cycle in the past 50 years has ended in a financial crisis.”  

In conversation with Refinitiv’s Robert Hogg, ASR’s EM and China Economist Adam Wolfe commented, "I think increasingly defaulting is going to look like the least worst option for several EMs”… 

Absolute Strategy Research is pleased to announce the appointment of Nick Nelson as Head of Global Equity Strategy.