Mauldin: "Investors Ignore What May Be The Biggest Policy Error In History"

Submitted by John Mauldin

My good friend Peter Boockvar recently shared a chart with me. The University of Michigan’s Surveys of Consumers have been tracking consumers and their expectations about the direction of the stock market over the next year. We are now at an all-time high in the expectation that the stock market will go up.

The Market Ignores Monetary Uncertainty

It is simply mind-boggling to couple that chart with the chart of the VIX shorts (I wrote about the VIX craze in this this issue of Thoughts from the Frontline).

Peter writes:

Bullish stock market sentiment has gotten extreme again, according to Investors Intelligence. Bulls rose 2.9 pts to 60.4 after being below 50 one month ago. Bears sunk to just 15.1 from 17 last week. That’s the least amount since May 2015. The spread between the two is the most since March, and II said, “The bull count reenters the ‘danger zone’ at 60% and higher. That calls for defensive measures.” What we’ve seen this year the last few times bulls got to 60+ was a period of stall and consolidation. When the bull/bear spread last peaked in March, stocks chopped around for 2 months. Stocks then resumed its rally when bulls got back around 50. Expect another repeat.

Only a few weeks ago the CNN Fear & Greed Index topped out at 98. It has since retreated from such extreme greed levels to merely high measures of greed. Understand, the CNN index is not a sentiment index; it uses seven market indicators that show how investors are actually investing. I actually find it quite useful to look at every now and then.

The chart below, which Doug Kass found on Zero Hedge, pretty much says it all. Economic policy uncertainty is at an all-time high, yet uncertainty about the future of the markets is at an all-time low.

Why This Is Happening Now

At the end of his email blitz, which had loaded me up on data, Dougie sent me this summary:

• At the root of my concern is that the Bull Market in Complacency has been stimulated by:


• the excess liquidity provided by the world’s central bankers,


• serving up a virtuous cycle of fund inflows into ever more popular ETFs (passive investors) that buy not when stocks are cheap but when inflows are readily flowing,


• the dominance of risk parity and volatility trending, who worship at the altar of price momentum brought on by those ETFs (and are also agnostic to “value,” balance sheets,” income statements),


• the reduced role of active investors like hedge funds – the slack is picked up by ETFs and Quant strategies,


• creating an almost systemic "buy the dip" mentality and conditioning.


• when coupled with precarious positioning by speculators and market participants:


• who have profited from shorting volatility and have gotten so one-sided (by shorting VIX and VXX futures) that any quick market sell off will likely be exacerbated, much like portfolio insurance’s role in a previous large drawdown,


• which in turn will force leveraged risk parity portfolios to de-risk (and reducing the chance of fast turn back up in the markets),


• and could lead to an end of the virtuous cycle – if ETFs start to sell, who is left to buy?

On the Brink of the Largest Policy Error

The chart above, which shows the growing uncertainty over the future direction of monetary policy, is both terrifying and enlightening. The Federal Reserve, and indeed the ECB and the Bank of Japan, went to great lengths to assure us that the massive amounts of QE that they pushed into the market would help turn the markets and the economy around.

Now they are telling us that as they take that money back off the table, they will have no effect on the markets. And all the data that I just presented above tells us that investors are simply shrugging their shoulders at what is roughly called “quantitative tightening,” or QT.

I simply don"t buy the notion that QE could have had such an effect on the markets and housing prices while QT will have no impact at all.

In the 1930s, the Federal Reserve grew its balance sheet significantly. Then they simply left it alone, the economy grew, and the balance sheet became a nonfactor in the following decades. I don’t know why today’s Fed couldn’t do the same thing.

There really is no inflation to speak of, except asset price inflation, and nobody really worries about that. We all want our stocks and home prices to go up, so there’s no real reason for the central bank to lean against inflationary fears; and raising rates and doing QT at the same time seems to me to be taking a little more risk than necessary.

And they’re doing it in the midst of the greatest bull market in complacency to emerge in my lifetime.

Do they think that taking literally trillions of dollars off their balance sheet over the next few years is not going to have a reverse effect on asset prices? Or at least some effect? Is it really worth the risk? Remember the TV show Hill Street Blues? Sergeant Phil Esterhaus would end his daily briefing, as he sent the policemen out on their patrols, with the words, “Let’s be careful out there.”

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Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

Institutions Are Selling To Retail Investors At An Unprecedented Pace

According to the latest EPFR fund flow data compiled by BofA"s Michael Hartnett, the great "institutional to equity" stockholding rotation is accelerating, with another $8.8bn allocated to equities, more than all of it from retail investors, and another $5.8bn going into bonds, offset by a $0.4bn outflows from gold.

Ironically, the one place where active investors are still putting back at least a token fight against the robots is in bonds, where $3.6bn went into active bond funds this week vs "only" $2.2bn into passive bond ETFs. And, as Hartnett writes, active AUM is fighting back, if only in bondland, where there have been $1.04tn in active bond inflows past 10 yrs vs. $0.93tn into passives...

.... a very different trend from what has taken place in stocks in the past decade (Chart 2) where institutions are delighted to dump to "low-cost" passive alternatives.

Of course, this particular "great rotation" is no surprise: earlier this week we were surprised to report that on its conference call, Morgan Stanley reported that the cash levels in its clients (retail) accounts, is the lowest it has ever been:

... we"ve been talking about our deposit deployment strategy for quite sometime, and we"ve been investing excess liquidity into our loan product over the last several years. In the beginning of the year, we told you that, that trend would come to an end. We did see that this year. It happened a bit sooner than we anticipated as we saw more cash go into the markets, particularly the equity markets, as those markets rose around the world. And we"ve seen cash in our clients" accounts at its lowest level.

Meanwhile we also showed that institutions continue to sell at a torrid pace, and as BofA reported, in the last week when the S&P hit new all time highs, its clients were net sellers of US equities for the fourth consecutive week. Large net sales of single stocks offset small net buys of ETFs, leading to overall net sales of $1.7bn. Net sales were led by institutional clients, who have sold US equities for the last eight weeks; hedge funds were also (small) net sellers for the sixth straight week.

The best way to visualize the institutional selling? This chart from BofA:

 

Who bought? Why retail"s favorite investment product of course, ETFs: "Private clients were net buyers, which has been the case in four of the last five weeks, but with buying almost entirely via ETFs. Clients sold stocks across all three size segments last week."

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Going back to the latest fund flows report, BofA reports that for all the talk about an imminent surge in interest rates, yields are still winning: $6.3bn inflows to IG+HY+EM bonds this week; investors continue to discount low-rate environment. This happens as the 5s30s yield curve (88bps) is the flattest since GFC, a fact Mike Hartnett finds "remarkable given the Philly Fed Employment outlook hit a 50-year high today." Just as surprisng: bond funds have now seen 31 straight weeks of inflows, as investors continue to overwhelmingly pick yield over capital appreciation.

Across the globe, Japan is losing (for a change), with a record $4.4bn outflows from Japan equities (86% ETF redemptions, possibly via BoJ); which is odd considering the Nikkei hasn"t had a down day in the past 14 days: the longest stretch of gains on record! It likely won"t last however, with BofA predicting that after Sunday"s election "we expect Japan TOPIX to revert to tracking US bond yields (Chart 4)."

In the US, where the S&P just hit all time highs, there was a solid week of $7.5bn US in equity inflows.

Some more bad news for professional investors:  while there have been inflows in 17 of past 19 weeks, all of this continues to go into passive funds, with $11.1bn flowing into ETFs offset by another $2.2bn outflow from mutual funds.

As a result, Hartnett concludes that robots continue to win, especially since this week"s launch of the 1st ETF in which stocks will be selected by robots (AIEQ) comes as tech funds see biggest inflows in 38 weeks; AIEQ outperforming SPX thus far.

As for the retail equity euphoria, nowehere is it more obvious than in BofA"s high net worth client tracking where YTD flows show a decisive cyclical shift by private clients, who are buying bank loans, financials, EAFE ETFs, while shunning quality, utilities, large caps & dividends (Chart 6). And as the next chart shows, equity allocations among BofA private clients are just shy of all time highs, and well above where they were during the last market peak.

BofA"s takeaways:

• Alpha in bonds; inflows to active funds continue to outstrip passive


• AIpha in stocks: first ETF where stocks selected by robots launches amidst biggest Tech inflows in 38 weeks
   


• Tick-tock: risk-on equity & bond flows push B&B indicator up to 7.6

To which we can only add: the rush by institutions to dump their equity holdings to retail investors - courtesy of "low-cost" ETFs - has never been greater. The only question now is when does the Fed pull the trapdoor, as it always does just when the market peaks...

Robert Shiller: 1987 Could Happen Again

By Robert Shiller, first published in the NYT

Oct. 19, 1987, was one of the worst days in stock market history. Thirty years later, it would be comforting to believe it couldn’t happen again.

Yet that’s true only in the narrowest sense: Regulatory and technological change has made an exact repeat of that terrible day impossible. We are still at risk, however, because fundamentally, that market crash was a mass stampede set off through viral contagion.

That kind of panic can certainly happen again.

I base this sobering conclusion on my own research. (I won a Nobel Memorial Prize in Economic Sciences in 2013, partly for my work on the market impact of social psychology.) I sent out thousands of questionnaires to investors within four days of the 1987 crash, motivated by the belief that we will never understand such events unless we ask people for the reasons for their actions, and for the thoughts and emotions associated with them.

From this perspective, I believe a rough analogy for that 1987 market collapse can be found in another event — the panic of Aug. 28, 2016, at Los Angeles International Airport, when people believed erroneously that they were in grave danger. False reports of gunfire at the airport — in an era in which shootings in large crowds had already occurred — set some people running for the exits. Once the panic began, others ran, too.

That is essentially what I found to have happened 30 years ago in the stock market. By late in the afternoon of Oct. 19, the momentous nature of that day was already clear: The stock market had fallen more than 20 percent. It was the biggest one-day drop, in percentage terms, in the annals of the modern American market.

I realized at once that this was a once-in-a lifetime research opportunity. So I worked late that night and the next, designing a questionnaire that would reveal investors’ true thinking.

Those were the days before widespread use of the internet, so I relied on paper and ink and old-fashioned snail mail. Within four days, I had mailed out 3,250 questionnaires to a broad range of individual and institutional investors. The response rate was 33 percent, and the survey provided a wealth of information.

My findings focused on psychological data and differed sharply from those of the official explanations embodied in the report of the Brady Commission — the task force set up by President Ronald Reagan and chaired by Nicholas F. Brady, who would go on to become Treasury secretary.

The commission pinned the crash on causes like the high merchandise trade deficit of that era, and on a tax proposal that might have made some corporate takeovers less likely.

The report went on to say that the “initial decline ignited mechanical, price-insensitive selling by a number of institutions employing portfolio insurance strategies and a small number of mutual fund groups reacting to redemptions.”

An avalanche of sell orders exhausted traders in New York. Credit Maria Bastone/Agence France-Presse

The panic in New York spread to the Sydney Stock Exchange in Australia. Credit Fairfax Media

Portfolio insurance, invented in the 1970s by Hayne Leland and Mark Rubinstein, two economists from the University of California, Berkeley, is a phrase we don’t hear much anymore, but it received a lot of the blame for Oct. 19, 1987.

Portfolio insurance was often described as a form of program trading: It would cause the automatic selling of stock futures when prices fell and, indirectly, set off the selling of stocks themselves. That would protect the seller but exacerbate the price decline.

A car for sale after its owner lost money in the 1929 stock market crash.

The Brady Commission found that portfolio insurance accounted for substantial selling on Oct. 19, but the commission could not know how much of this selling would have happened in a different form if portfolio insurance had never been invented.

In fact, portfolio insurance was just a repackaged version of the age-old practice of selling when the market started to fall. With hindsight, it’s clear that it was neither a breakthrough discovery nor the main cause of the decline.

Ultimately, I believe we need to focus on the people who adopted the technology and who really drove prices down, not on the computers.

Portfolio insurance had a major role in another sense, though: A narrative spread before Oct. 19 that it was dangerous, and fear of portfolio insurance may have been more important than the program trading itself.

On Oct. 12, for instance, The Wall Street Journal said portfolio insurance could start a “huge slide in stock prices that feeds on itself” and could “put the market into a tailspin.” And on Saturday, Oct. 17, two days before the crash, The New York Times said portfolio insurance could push “slides into scary falls.” Such stories may have inclined many investors to think that other investors would sell if the market started to head down, encouraging a cascade.

Newspapers grappled with the biggest one-day stock market decline, in percentage terms, in Wall Street’s modern history

In reality, my own survey showed, traditional stop-loss orders actually were reported to have been used by twice as many institutional investors as the more trendy portfolio insurance.

In that survey, I asked respondents to evaluate a list of news articles that appeared in the days before the market collapse, and to add articles that were on their minds on that day.

I asked how important these were to “you personally,” as opposed to “how others thought about them.” What is fascinating about their answers is what was missing from them: Nothing about market fundamentals stood out as a justification for widespread selling or for staying out of the market instead of buying on the dip. (Such purchases would have bolstered share prices.)

Furthermore, individual assessments of news articles bore little relation to whether people bought or sold stocks that day.

Instead, it appears that a powerful narrative of impending market decline was already embedded in many minds. Stock prices had dropped in the preceding week. And on the morning of Oct. 19, a graphic in The Wall Street Journal explicitly compared prices from 1922 through 1929 with those from 1980 through 1987.

A graphic in The Wall Street Journal on the morning of Oct. 19, 1987, compared current stock trends with those of the 1920s

The declines that had already occurred in October 1987 looked a lot like those that had occurred just before the October 1929 stock market crash. That graphic in the leading financial paper, along with an article that accompanied it, raised the thought that today, yes, this very day could be the beginning of the end for the stock market. It was one factor that contributed to a shift in mass psychology. As I’ve said in a previous column, markets move when other investors believe they know what other investors are thinking.

In short, my survey indicated that Oct. 19, 1987, was a climax of disturbing narratives. It became a day of fast reactions amid a mood of extreme crisis in which it seemed that no one knew what was going on and that you had to trust your own gut feelings.

The week of Oct. 19, 1987, people around the country kept a close eye on the market

Given the state of communications then, it is amazing how quickly the panic spread. As my respondents told me on their questionnaires, most people learned of the market plunge through direct word of mouth.

I first heard that the market was plummeting while lecturing to my morning class at Yale. A student in the back of the room was listening to a miniature transistor radio with an earphone, and interrupted me to tell us all about the market.

Right after class, I walked to my broker’s office at Merrill Lynch in downtown New Haven, to assess the mood there. My broker appeared harassed and busy, and had time enough only to say, “Don’t worry!”

He was right for long-term investors: The market began rising later that week, and in retrospect, stock charts show that buy-and-hold investors did splendidly if they stuck to their strategies. But that’s easy to say now.

Like the 2016 airport stampede, the 1987 stock market fall was a panic caused by fear and based on rumors, not on real danger. In 1987, a powerful feedback loop from human to human — not computer to computer — set the market spinning.

Such feedback loops have been well documented in birds, mice, cats and rhesus monkeys. And in 2007 the neuroscientists Andreas Olsson, Katherine I. Nearing and Elizabeth A. Phelps described the neural mechanisms at work when fear spreads from human to human.

The Chicago Stock Exchange was drawn into the market fall

We will have panics but not an exact repeat of Oct. 19, 1997. In one way, the situation has probably gotten worse: Technology has made viral rumor transmission much easier. But there are regulations in place that were intended to forestall another one-day market collapse of such severity.

In response to the 1987 crash and the Brady Commission report, the New York Stock Exchange instituted Rule 80B, a “circuit breaker” that, in its current amended form, shuts down trading for the day if the Standard & Poor’s 500-stock index falls 20 percent from the previous close. That 20 percent threshold is interesting: Regulators settled on a percentage decline just a trifle less than the one that occurred in 1987. That choice may have been an unintentional homage to the power of narratives in that episode.

But 20 percent would still be a big drop. Many people believe that stock prices are already very high — the Dow Jones industrial average crossed 23,000 this week — and if the right kinds of human interactions build in a crescendo, we could have another monumental one-day decline. One-day market drops are not the greatest danger, of course. The bear market that started during the financial crisis in 2007 was a far more consequential downturn, and it took months to wend its way toward a market bottom in March 2009.

That should not be understood as a prediction that the market will have another great fall, however. It is simply an acknowledgment that such events involve the human psyche on a mass scale. We should not be surprised if they occur or even if, for a protracted period, the market remains remarkably calm. We are at risk, but with luck, another perfect storm — like the one that struck on Oct. 19, 1987 — might not happen in the next 30 years.

How The Elite Dominate The World – Part 2: 99.9% Of The World Live In A Country With A Central Bank

Authored by Michael Snyder via The Economic Collapse blog,

Even though the nations of the world are very deeply divided on almost everything else, somehow virtually all of them have been convinced that central banking is the way to go. 

Today, less than 0.1% of the population of the world lives in a country that does not have a central bank.  Do you think that there is any possible way that this is a coincidence?  And it is also not a coincidence that we are now facing the greatest debt bubble in the history of the world. 

In Part I of this series, I discussed the fact that total global debt has reached 217 trillion dollars.  Once you understand that central banks are designed to create endless debt, and once you understand that 99.9% of the global population lives in a country that has a central bank, then it finally makes sense why we have accumulated so much debt.  The elite of the world use debt as a tool of enslavement, and central banking has allowed them to literally enslave the entire planet.

Some of you may not be familiar with how a “central bank” differs from a normal bank.  The following definition of a “central bank” comes from Wikipedia…

A central bank, reserve bank, or monetary authority is an institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency,^[1] which usually serves as the state’s legal tender.

Over the past 100 years or so, we have seen central banks steadily be established all over the planet.  At this point, there are just 8 very small nations that still do not have a central bank…

• -Andorra


• -Monaco


• -Nauru


• -Kiribati


• -Tuvalu


• -Palau


• -Marshall Islands


• -Federated States of Micronesia

When you add the populations of those 8 nations together, it comes to much less than 0.1% of the global population.

But even though central banking is nearly universal, only a very small fraction of the global population can tell you how money is created.

Do you know where money comes from?

Here in the United States, most people just assume that the federal government creates money.  But that is not true at all.

Many are absolutely shocked when they discover that U.S. currency is actually borrowed into existence.  The federal government gives U.S. Treasury bonds (debt) to the Federal Reserve in exchange for money that the Federal Reserve creates out of thin air.  The Federal Reserve then auctions off those bonds to the highest bidder.

Since the federal government must pay interest on those bonds, the amount of debt that is created in these transactions is actually greater than the amount of money that is created.  But we are told that if we can just circulate the money throughout our economy fast enough and tax it at a high enough rate, then we can eventually pay off the debt.  Of course that never actually happens, and so the federal government always has to go back and borrow even more money.  This is called a debt spiral, and at this point we will never be able to escape it until we do away with this horrible system.

But why does our government (or any government for that matter) have to borrow money that is created by a central bank in the first place?

Why can’t governments just create money themselves?

Oops.  That is the big secret that nobody is supposed to talk about.

Theoretically, the U.S. government doesn’t actually have to borrow a single penny. Instead of borrowing money the Federal Reserve creates out of thin air, the federal government could just create money directly and spend it into circulation.

Yes, this could actually happen.  Back in 1963, President John F. Kennedy signed Executive Order 11110 which authorized the U.S. Treasury to issue debt-free “United States Notes” which were not created by the Federal Reserve.  These debt-free notes began to be issued, and you can still find them for sale on eBay today.  Unfortunately, President Kennedy was assassinated shortly after this executive order was issued, and the notes were not in production for long.

If we had ultimately fully adopted “United States Notes” and had phased out Federal Reserve notes, we would not be 20 trillion dollars in debt today.

The elite of the world love to get national governments deep into debt, because it enables them to enslave entire populations while making an obscene amount of money in the process.

Back in 1913, an insidious plan was rushed through Congress just before Christmas that was based on a blueprint that had been developed by very powerful Wall Street interests.  Author G. Edward Griffin did an extraordinary job of documenting how all of this happened in his book entitled “The Creature from Jekyll Island: A Second Look at the Federal Reserve”.  A central bank was established, and it was purposely designed to create a government debt spiral, and that is precisely what happened.

Since 1913, the size of the national debt has gotten more than 6,000 times larger, and the value of our dollar has declined by more than 98 percent.  Many conservatives are still under the illusion that we could get out of debt someday if we just grow the economy fast enough, but I have shown in another article that we have gotten to the point where this is mathematically impossible.

And most people are also operating under the false assumption that the Federal Reserve is part of the federal government.  But that is not accurate either.  The following comes from one of my previous articles…

There is often a lot of confusion about the Federal Reserve, because a lot of people think that it is simply an agency of the federal government. But of course that is not true at all. In fact, as Ron Paul likes to say, the Federal Reserve is about as “federal” as Federal Express is.

The Fed is an independent central bank that has even argued in court that it is not an agency of the federal government. Yes, the president appoints the leadership of the Fed, but the Fed and other central banks around the world have always fiercely guarded their “independence”. On the official Fed website, it is admitted that the 12 regional Federal Reserve banks are organized “much like private corporations”, and they very much operate like private entities. They even issue shares of stock to the private banks that own them.

In case you were wondering, the federal government has zero shares.

According to the U.S. Constitution, a private central banking cartel should not be issuing our currency.  In Article I, Section 8 of our Constitution, Congress is solely given the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.

So why in the world has this authority been given to a central bank?

The truth is that we do not need a central bank.

From 1872 to 1913, there was no central bank and no income tax, and it turned out to be the greatest period of economic growth in all of U.S. history.

But since the Fed was established, there have been 18 different recessions or depressions: 1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.

Abolishing the Federal Reserve is one of the core issues of my platform, and I have been writing about these things for the last seven years.

As I discussed yesterday, the elite use debt to enslave all of the rest of us, and central banking allows them to literally dominate the entire planet.

Until we abolish this debt-based system and go to a currency that is debt-free, we are never going to permanently solve our very deep long-term economic and financial problems.

But because they are so immensely wealthy, the elite are able to wield extraordinary influence in our society.  They control the mainstream media, our politicians and even global institutions such as the United Nations.  Anyone that would dare to question the validity of the current system is marginalized, and for a long time very few politicians around the world were even willing to speak out against central banking.

However, that is starting to change.  A new generation of leaders is rising up, and they are absolutely determined to break the stranglehold that the elite have on our society.  It won’t be easy, but if we are able to wake enough people up, I believe that we will eventually be able to free ourselves from this insidious system.

Morgan Stanley: "Client Cash Is At Its Lowest Level" As Institutions Dump Stocks To Retail

The "cash on the sidelines" myth is officially dead.

Recall that at the end of July, we reported that in its Q2 earnings results, Schwab announced that after years of avoiding equities, clients of the retail brokerage opened the highest number of brokerage accounts in the first half of 2017 since 2000. This is what Schwab said on its Q2 conference call:

New accounts are at levels we have not seen since the Internet boom of the late 1990s, up 34% over the first half of last year. But maybe more important for the long-term growth of the organization is not so much new accounts, but new-to-firm households, and our new-to-firm retail households were up 50% over that same period from 2016.

In total, Schwab clients opened over 350,000 new brokerage accounts during the quarter, with the year-to-date total reaching 719,000, marking the biggest first-half increase in 17 years. Total client assets rose 16% to $3.04 trillion. Perhaps more ominously to the sustainability of the market"s melt up, Schwab also adds that the net cash level among its clients has only been lower once since the depths of the financial crisis in Q1 2009:

Now, it"s clear that clients are highly engaged in the markets, we have cash being aggressively invested into the equity market, as the market has climbed. By the end of the second quarter, cash levels for our clients had fallen to about 11.5% of assets overall, now, that"s a level that we"ve only seen one time since the market began its recovery in the spring of 2009.

While some of this newfound euphoria may have been due to Schwab"s recent aggressive cost-cutting strategy, it is safe to say that the wholesale influx of new clients, coupled with the euphoria-like allocation of cash into stocks, means that between ETFs and other passive forms of investing, as well as on a discretionary basis, US retail investors are now the most excited to own stocks since the financial crisis.  In a confirmation that retail investors had thrown in the towel on prudence, according to a quarterly investment survey from E*Trade, nearly a third of millennial investors were planning to move out of cash and into new positions in the second half of 2017. By comparison, only 19% of Generation X investors (aged 35-54) were planning such a change to their portfolio, while 9% of investors above the age of 55 had plans to buy in.

Furthermore, according to a June survey from Legg Mason, nearly 80% of millennial investors plan to take on more risk this year, with 66% of them expressing an interest in equities. About 45% plan to take on “much more risk” in their portfolios.

In short, retail investors - certainly those on the low end which relies on commodity brokerages to invest - are going "all in."

This was also confirmed by the recent UMichigan Consumer Survey, according to which surveyed households said there has - quite literally - never been a better time to buy stocks.

What about the higher net worth segment? For the answer we go to this morning"s Morgan Stanley earnings call, where this exchange was particularly notable:

Question: Hey good morning. Maybe just on the Wealth Management side, you guys had very good growth, sequential growth in deposits. There"s been some discussion in the industry about kind of a pricing pressure. Can you discuss where you saw the positive rates in Wealth Management business and how you"re able to track, I think, about $10 billion sequentially on deposit franchise?

Answer:  Sure. I think, as you recall, we"ve been talking about our deposit deployment strategy for quite sometime, and we"ve been investing excess liquidity into our loan product over the last several years. In the beginning of the year, we told you that, that trend would come to an end. We did see that this year. It happened a bit sooner than we anticipated as we saw more cash go into the markets, particularly the equity markets, as those markets rose around the world. And we"ve seen cash in our clients" accounts at its lowest level.

In other words, when it comes to retail investors - either on the low, or high net worth side - everyone is now either all in stocks or aggressively trying to get there.

Which reminds us of an article we wrote early this year, in which JPM noted that "both institutions and hedge funds are using the rally to sell to retail." Incidentally, the latest BofA client report confirmed that while retail investors scramble into stocks, institutions continue to sell. To wit:

Equity euphoria continues to remain absent based on BofAML client flows. Last week, during which the S&P 500 climbed 0.2% to yet another new high, BofAML clients were net sellers of US equities for the fourth consecutive week. Large net sales of single stocks offset small net buys of ETFs, leading to overall net sales of $1.7bn. Net sales were led by institutional clients, who have sold US equities for the last eight weeks; hedge funds were also (small) net sellers for the sixth straight week. Private clients were net buyers, which has been the case in four of the last five weeks, but with buying almost entirely via ETFs. Clients sold stocks across all three size segments last week."

The best way to visualize what BofA clients, and especially institutions, have been doing in 2017 is the following chart:

Meanwhile, a familiar buyer has returned: "buybacks by corporate clients picked up as US earnings season kicked off, with Financials buybacks continuing to dominate this flow."

And just like during the peak of the last bubble, retail is once again becoming the last bagholder; now it is only a question of how long before the rug is pulled out. For now, however, enjoy the Dow 23,000.

The ECB Has Bought €1.9 Trillion In Bonds: Here Is Who Sold And What They Did With The Money

Since the ECB launched its sovereign debt QE, initially known as PSPP, in March 2015 and later expanded to include corporate debt, or CSPP, in June 2016, the world"s biggest hedge fund central bank has created enough money out of thin air to purchase bonds with no consideration for price to grow its balance sheet, i.e. investment portfolio, by €1.89 trillion.

Meanwhile, over the entire QE period, net European bond new issuance has only amounted to €394 billion - only one-fifth of what the ECB has bought - and that only after picking up recently.  In fact, through much of 2016, there was hardly any net issuance at all according to Citi data.

Here, as Citi notes, It’s hardly rocket science that for every bond the ECB has bought there must have been a seller – either a new issuer or an existing holder, which means:

    Net € FI issuance = Domestic net buying of € FI + Foreign net buying of € FI + ECB net buying of € FI

Imbalances between desired issuance and desired holdings at the prevailing market price are what drive valuation changes until equilibrium is found. Put differently, if the ECB bought a bond from an investor who wished to remain in the € fixed income market, then that investor would buy from another investor, who could buy from yet another, but unless there was new issuance to invest in eventually prices would reach levels where someone would take the money out and put it somewhere else.

But who has been selling to the ECB? And where have they been putting their money?

That"s the question Citi"s Hans Lorenzen set out to answer, and since per the math above, net of issuance holdings of private investors must have fallen by more than €1.5 trillion, the answer would be rather material. Put that number into context, the €1.5 trillion in debt that someone sold without replacing, is equivalent to more than 9% of €-denominated bonds outstanding at the start of the program. Those are bonds which used to be held by private investors, who have now been given cash and have to park that cash somewhere else.

As Citi notes, "It truly is crowding out on an unprecedented scale."

Going back to Citi"s question, here is the answer in two parts.

First, the "who" sold this €1.5 trillion in private holdings:

Using ECB data, we know that private banks have beem major sellers, to the tune of €645 billion since the start of QE, making up more than 40% of the decline in private holdings. Here the net selling has mostly been of government bonds (€293bn) other MFIs (€273bn), while corporate and other bonds only amount to €70bn. Aside from banks, Citi calculates that while non-resident European investors have sold €400bn since Q1 2015, with non-bank private Euroarea investors filling the gap of €795bn. This calculation challenges the predominant  assumption that the selling to the ECB has mostly been done by foreigners, as much of the non-bank net selling must have come from other domestic investors. When one adds Eurozone banks, it is clear that the majority of private selling in aggregate has been domestic.

The chart below breaks down the transactions in bonds issued by Euro-area residents by investor type. Aside from banks, the main sellers have been households and other financial institutions.

Second, where did the money go?

While the answer will hardly come as a surprise, there are - intuitively - four destinations where a euro pulled out of € fixed income could move into.

1. stay in fixed income, but move into bonds denominated in other currencies;


2. move out of fixed income and into another asset class (domestic or foreign), like equities;


3. move into money markets;


4. leave the securities market altogether, in which case you"d expect it to show up as a deposit (with a domestic or a foreign bank

While there are some potential complications here, mostly because there is no explicit data revealing the "mirror image" for the private selling of €-denominated bonds, if one lines up the transactions against Citi"s proxy, consisting of net purchases of European equities, money market flows, and non-government deposits, and the directional terms of the resulting asset disposition proceeds emerge, or as Citi summarizes, "When investors
have been selling bonds, investments in our proxy have mostly tended to rise."

Furthermore, as shown in the second chart below, splitting up these “proxy investment outlets” into their constituent parts, it becomes clear that the bulk of the “delta” from before QE in 2014 is in an increase the rate of deposit accumulation and an increase in outflows from Eurozone investments. However, since QE began, the deposit accumulation has continued, but the purchases of equities and especially foreign investments have grown, and have accelerated markedly this year.

In short: the ECB purchased €1.5 trillion in bonds, mostly from European banks and domestic investors, with no regard for prices thereby virtually assuring booked profits for the sellers, who then turned around and purchased domestic equities, foreign investments, or converted the money into deposits and money market instruments.

And so, with the ECB set to taper with trial balloons that the ECB could cut its monthly QE by half or more, what happens next now that this swap is about to be throttled by more than 50%? Will households sell more or less bonds, and what will happen to yields? We will present one answer - an answer which the central banks do not want to hear - shortly.

Mapping The World's Trillion-Dollar Asset-Manager Club

In the late 1700s, it was the start of the battle of stock exchanges: in 1773, the London Stock Exchange was formed, and the New York Stock Exchange was formed just 19 years later.

And while London was a preferred destination for international finance at the time, Visual Capitalist"s Jeff Desjardins notes that England also had laws that restricted the formation of new joint-stock companies. The law was repealed in 1825, but by then it was already too late.

In the U.S., exchanges in New York City and Philadelphia took full advantage by dealing in stocks early on. Eventually, for this and a variety of other reasons, the NYSE emerged as the most dominant exchange in the world – helping propel New York and Wall Street to the center of finance.

THE CENTER OF FINANCE

Wall Street, and the U.S. in general, is now synonymous with finance – and most of the world’s largest banks, funds, and investors maintain a presence nearby. The biggest asset management companies, which pool investments into securities such as stocks and bonds on behalf of investors, are no exception to this.

Today’s chart shows all global companies with over $1 trillion in assets under management (AUM).

Not surprisingly, all but 17.1% of assets managed by this $1 Trillion Club are overseen by companies based in the United States.

Even further, outside of Northern Trust (Chicago), Pimco (Newport Beach), and Capital Group (Los Angeles), the remaining U.S. companies are based in the Northeast specifically – either on Wall Street, or just a short drive away.

THE NEWEST ENTRANT

The newest entrant to the $1 trillion club is Norway’s sovereign wealth fund, which is managed by Norges Bank Investment Management. It’s the world’s largest sovereign wealth fund, and it was “never forecast” to get so big.

The Norwegian fund recently joined France’s Amundi ($1.6 trillion), the UK’s Legal & General ($1.3 trillion), and Japan’s Goverment Pension Investment Fund ($1.2 trillion) as non-U.S. members of this exclusive club.

"There Are No Bears Left... None... Not A Soul"

By Kevin Muir via The Macro Tourist blog,

Think back six months. Do you remember all the warnings from the legendary hedge fund managers about the impending stock market doom?

Paul Tudor Jones, Scott Minerd, Larry Fink, Seth Klarman, the list is long but distinguished. At the time I penned It’s too easy to write bearish pieces. Even in late summer, gurus like Gundlach were bragging about the 400% he would make on his S&P 500 put purchases - Billionaire Bears. Given the atmosphere, I knew posts about the coming collapse would be greeted with tons of words of encouragement. Yet if I wrote something about the stock market continuing higher, crickets… Or worse yet, remarks about my cluelessness regarding the problems in the global financial system.

I didn’t think stocks were going higher because everything was roses, no in fact just the opposite. Stocks were being pushed higher because everything was so FUBAR’d. Central Bank balance sheet expansion was pushing risk assets higher, and for the longest time, everyone wanted to fade it.

Fast forward to today. Even the most ardent bears have given up and embraced the idea Central Bank buying will push stocks higher. Investors that were previously doom and gloomers are now speaking of blow off-tops. I can hear the capitulation in their voices. No more brave predictions of the coming collapse. Instead, meeker forecasts of a high volume runaway euphoria. There are no bears left. None. Not a soul.

The bears have been replaced by gloating bulls that are openly bragging about how high the S&P 500 futures will gap up Sunday night. They are mocking the bears with taunts of how much money will they lose fighting the rally. They joke about buying the dip, which increasingly is becoming more and more nothing more than a couple of downticks.

I might not know much, but I know the Market Gods do not take kindly to that sort of behaviour. What was that quote from Bernard Baruch? “The main purpose of the stock market is to make fools of as many men as possible.”

Ask yourself what would embarrass most investors right now? Would it be a continuing rally? Not a chance. Given the white flag waving by the bears, and the over-enthusiasm of the bulls, there is little doubt in my mind that a stock market decline is what would hurt most. That wasn’t the case six months ago. Heck, it wasn’t even the case two months ago. But that’s where we are today.

I could try to dig up some sentiment numbers, but the reality is I don’t need to. The mood is plainly obvious. Investors are as bullish as they have ever been since the Great Financial Crisis. Sure, you might argue that it was much more frothy in 1999. But who cares? Do you really want to be buying based on the greater fool theory? Ask Chuck Prince how that turned out.

It’s hard standing alone and fighting the crowd. If it was easy, everyone would do it.

I have written about the new reality of how markets are now full of A Series of Rolling Mini-Bubbles, but a sharp Seeking Alpha writer by the name of Ian Bezek has done a better job than me of identifying the latest madness. In his post, An ETF Levitates: This is Not Normal, Alex points out that the IWC nano-cap ETF has been up 26 of the past 28 days.

This is the new reality. A series of rolling mini-bubbles. But you want to know the hardest part? Just when it looks best, is the time to fade it.

I can already hear you saying to yourself, that’s a big leap. Selling it because it looks good? Well, in case you don’t believe me about the series of rolling mini-bubbles (remember, the keyword is mini), how about this for a reason?

Almost everyone has now embraced the idea that Central Banks will push asset prices to the moon. It’s like they just realized that with the balance sheet expansion of the ECB, BoJ and the SNB (Swiss National Bank), the monetary stimulus has been higher than any time except for the initial days of the crisis.

One thing before I continue. For these Central Bank balance sheet charts, I have frozen the currency adjustments in time. If I let them float, then the balance sheet size will move around as the US dollar rises or falls. Since we are interested in how much the Central Banks are expanding or shrinking their balance sheets, this would lead to a distorted monthly change.

Let’s zoom in and have a look at this a little bit more closely.

It’s a little bit amusing that market pundits are now shouting about the inevitability of Central Bank buying. The reality is that from mid-2013 to 2017, the pace at which their balance sheets have been expanding has been ferocious.

The ironic part? All these pundits have figured it out just as the pace has started to slow. Look at the last six months. Slowest six month period in the last few years. And guess what? It will be negative soon enough. The ECB will taper, the Fed will shrink, and if financial assets keep screaming at this pace, even the BoJ and the SNB might be forced to slow down their purchases.

So yeah, knock yourself out buying stocks because Central Banks are printing like mad. Instead of examining what they did, I am more interested in what they will do. And to me, it looks like this game is nearly over.

Nothing sums up better the crazy rush into stocks than the recent headlines.

Remember the last time the Economist came out with a bold cover like that?

So let’s sum it up.

We have the bears capitulating and accepting the inevitability of the Central Bank buying pushing up asset prices, at the very moment magazine covers are shouting about the “bull market in everything.”

We have nano-cap ETF’s rising more in a period of a month than they have ever done before.

I have former bears telling me how we need to have a blow-off top before the true bear market can start.

As far as I can tell, there is absolutely no one who thinks this market will head lower over the next month or two. Well, sold to them.

Given the dirt cheap options they are all selling to gather extra premium (it’s free money after all - stocks never go down), I think taking the other side of their trade via long put positions is a great risk reward. I know this trade is lonely. Jeez, as I write this, a little bit of me wonders if I have gone insane.

But I take comfort in the words of a famous speculator, Jesse Livermore - “The obvious rarely happens, the unexpected constantly occurs.”

Then again, Livermore killed himself in the cloakroom of the Sherry Netherland Hotel. He left a note that he was tired of fighting. Good thing Jesse isn’t around to see this bull market.

God is Dead

From the Slope of Hope blog:

That"s something I"ve got in common with Private Pyle: he wants to be different. For whatever reason, I"m a contrarian to the core. Indeed, one of the appeals of messing around with personal computers back in 1980 was that practically nobody else was doing it (in case you hadn"t noticed, the unusualness of microcomputers vanishes decades ago, so that aspect of the appeal is likewise gone).

This contrarian view of the world extends to the "cover curse", a theory to which I strongly subscribe. Any bold declaration made by a prominent publication seems to invariably mark an inflection point. There"s this cover, for instance, which came out immediately before the demise and near-bankruptcy of Apple:

This cover from The Economist (itself quite famous for its covers being so often dead wrong) when oil was $10 per barrel and was about to explode hundreds of percent higher.

This homoerotic image of the strength of the US dollar, just before it commenced its very steady slide promptly at the start of 2017:

Barron"s decided Facebook was a lousy stock, just before it started a gargantuan run up to "blue chip" stock status, almost exactly to the day......

And, perhaps the most famous of all, Business Week decided just before 1980 began that stocks were doomed, after which time literally trillions of dollars of new wealth were created.

So, time and again, newspapers and magazines get it wrong - - but plenty of other media does too. This book, for instance, was all about the coast-to-coast millionaires in the United States, and it came out June 2007, precisely at the apex of the housing bubble.

So with mountains of other anecdotal evidence, it would seem that only a fool would declare loudly, on a public stage, anything definitive, since major announcements from prominent publications or thought leaders so often represent the collective consciousness at the point that it"s utterly saturated with some particular notion. Even though they say that no one rings a bell at the top, if you look historically at major turning points, there were always bells ringing - - just in a contrarian, hidden form.

Thus, when Trump was elected, inaugurated, and soon thereafter started bragging about the stock market, it seemed like a major reversal signal. After all, this is the President of the United States, and he"s crowing to the world about a stock market for which he gives himself full credit. So that"s bound to be some kind of peak, right? Surely after a tweet like that, the gods above will shame the man, just like they"ve embarrassed anyone showing hubris since the times of the ancient Greeks. Right?

.......Right?........

And yet there they are. Tweet after tweet, month after month, about high after high. And yet the market just keeps going higher..........which, let"s face it, is just going to egg the man on even more. It"s one thing for an old biddy like Yellen to yammer on about no more crises in her lifetime. But the POTUS is another matter altogether.

It really wasn"t that long ago that acts of hubris, either in the form of cover stories or political braggadocio, were met with swift reprisal from the universe. The biggest question facing us today - - far greater than where interest rates are going, or what the dollar is going to do, or even whether Kim is ever going to launch any of those missiles he"s so proud of - - is whether market forces...........normal market forces..............are gone for good. They might just be, and if so, hubris is not only back in style, but it"s going to be here to stay for a long, long time.

The Dangers Of Performance-Chasing

Authored by Lance Roberts via RealInvestmentAdvice.com,

In this past weekend’s newsletter, I addressed three of my concerns for the markets going forward.

“Chart 2) One of the hallmarks of a late-stage bull market cycle is the acceleration in price as investors capitulate by “jumping in” as prices accelerate. While the long-term moving averages currently suggest the bull cycle is intact, we will watch for the crossover to give us an indication of when to leave.”

The acceleration in the increase of prices is a hallmark of “exuberance” in the markets. Not surprisingly, the sharp increase in asset prices, as the markets broke through successive barriers of 2200, 2300, 2400 and 2500, has spurred investor optimism to the highest levels in 17-years as noted last week:

“The latest boost in optimism pushes the index almost 100 points higher than the +40 score measured in February 2016. The 98-point hike over the past 18 months is the largest increase in the 20-year history of the index that is not a rebound immediately after a major drop in optimism.

After more than 8-years of a surging bull market, often declared the ‘most hated in history,’

• Sixty-eight percent now say they are optimistic about the stock market’s performance during the next year, matching the record high for the question from December 1999 and January 2000.


• At least 61% have expressed optimism about the stock market in each of the three surveys this year, a percentage matched or exceeded only four other times in the 132 times the question has been asked since April 2000.


• Twenty-five percent say they are ‘very optimistic,’ topping the previous record high of 24% from the first quarter of this year. Only 11% were very optimistic a year ago.


• Sixty-one percent of investors now say it is a good time to invest in the stock market, up from 53% two years ago. Among those saying it’s a good time to invest, the main reason is their belief that the market will continue to increase, mentioned by 47%.”

As Robert Shiller penned for the NYT, that surge in optimism is symptomatic of a bigger issue:

“Canny stock investors are like judges in a quirky beauty contest. They aren’t looking for real beauty but for qualities that other people believe still other people will find beautiful.

 

That was the observation of John Maynard Keynes, who suggested that investors do not actually make money by picking the best companies, but by picking stocks that waves of other traders will want to buy.

 

Investing, in other words, is an exercise in mass psychology.”

The belief that Central Banks have the markets under control is a dangerous one. While many believe that just a few Central Bankers have the foresight and capability to control a market driven by human emotion and frailties, such is unlikely to be the case. This was a point John Mauldin clearly made this past weekend:

“This time is different are the four most dangerous words any economist or money manager can utter. We learn new things and invent new technologies. Players come and go. But in the big picture, this time is usually not fundamentally different, because fallible humans are still in charge. (Ken Rogoff and Carmen Reinhart wrote an important book called This Time Is Different on the 260-odd times that governments have defaulted on their debts; and on each occasion, up until the moment of collapse, investors kept telling themselves ‘This time is different.’ It never was.)”

As shown in the chart below, which is monthly price data, the market is trading 3-standard deviations and nearly 17% above its 3-YEAR moving average. Such extensions and deviations have generally not lasted long, but are evidence of the bullish psychology driving the market.

I agree with Dr. Shiller that such does NOT mean there is a crash coming tomorrow:

“But the result is that while valuations remain very high there just doesn’t seem to be much evidence that many investors in the United States stock market are actively worrying today that other investors are on the verge of selling. Mass opinions may well change, but for now, in the critical psychological dimension, the stock market does not closely resemble the market in the dangerous years of 1929 or 2000.

 

That doesn’t mean that there is no danger of a crash. But at the moment, the psychological preconditions for a spiraling downturn don’t appear to be in place.”

As is always the case in late-stage bull market advances, the need to chase performance overrides the logic of investing for the long-term. More importantly, mass opinions can change extremely quickly. Like a slow leak in the hull of a ship, it will begin slowly, but the eventual rupture will send participants scrambling for the lifeboats.

You can’t blame individuals really. They are inundated daily by media-driven commentary that pushes them to “jump in because they are missing out.” This sense of urgency to be invested leads to performance chasing of things that have already done well. As I have shown previously, there is substantial evidence that buying last year’s “winners,” more often than not, turn out to be this year’s “losers.”

Rob Arnott, Vitali Kalesnik and Lillian Wu of Research Affiliates made a brilliant point about the danger of performance chasing:

“Joe Kennedy famously said on the eve of the 1929 stock market crash: ‘When shoeshine boys have tips, the stock market is too popular for its own good.‘

The negative relationship between a manager’s past and future simple returns means that when your cab driver or bartender (shoeshine boys are less common these days) tells you about an investment with recent double- or triple-digit returns—beware! That may just be the signal to stay away from the market, and most particularly, from the winningest funds. Reciprocally (from repeated personal experience in 1974, 1982, 1987, 2002, and 2009), when you hear reasonably savvy people saying they’ll never invest in stocks again, chances are stocks are at extremely low valuations and are a bargain.“

In other words, investing successfully is, in part, learning to do what is uncomfortable in the short-term.

As Research Affiliates concludes:

“Because it’s impossible to know where the top is, and we don’t want to sell too soon, ‘selling high’ is not easy. When we sell high, and the asset moves higher, we feel foolish. ‘Buying low’ is even harder. Anything that’s newly cheap has inflicted pain and losses in its path to low prices. It’s impossible to know where the bottom is, so buying low inevitably leaves us looking and feeling foolish until the turn. ‘Buy low, sell high’ is therefore a painful path to success.

Nevertheless, we hope our findings encourage investors to consider joining us in moving out of our respective comfort zones. The capital markets do not reward comfort. In investing, we generally find our best rewards in our discomfort zone.”

Holding higher levels of cash than normal, trimming back winning positions, and selling losing ones are all steps which “go against the grain” in the current market. As noted, it’s hard to think you are “missing out” as others may be getting ahead of you.

But, investing isn’t a competition. There are no winners, just losers when you get it wrong.

Just remember the one final chart below.

From the current levels of over valuation, excess extension and extreme bullishness which currently exists, the coming reversion “beyond” the mean will wipe out the majority of any gains made over the last several years. Such is the case with all reversions throughout history.

Worrying about “missing out” on the current bull market should probably not be at the top of your list.