Massive liquidity injections from global central banks have sent stocks and bonds to record highs over the past years. The coming financial crisis may have a sharp impact on the crypto space. Investors may fly away from traditional assets and seek safe haven assets such as the US Dollar, precious metals, and top cryptocurrencies. The transition between the traditional financial system and the new one may be nearer than we think.
We always closely follow what important market players communicate at the end of a bull market because they often say out loud what the really “big guns” silently believe.
Although the following list is non-exhaustive, here is what asset managers, analysts, bankers, institutional leaders, or important voices communicated in client notes or in the financial media during the past month.
Charles Gave, Founding Partner & Chairman of Gavekal Research, on May 1 via Bloomberg: “The private sector yield curve (yield of a longer-dated, seasoned industrial bond rated Baa by Moody’s, and the market rate by the prime lending rate charged by US banks) reading stands at zero, or right on the threshold where trouble can be expected to begin. Should this spread move into negative territory, I would expect a financial accident to occur outside of the US, a US recession, or possibly both. We are entering dangerous territory. If the private sector curve inverts, zombie companies will fail and capital spending will be cut, as firms move to service debt and repay principal. Workers will get laid off and the economy will move into recession.”
Billionaire investor Sam Zell to MarketWatch on May 1: “I’m a little bit like that old Wendy’s commercial: ‘Where’s the beef?’ ... I think it’s a very challenging situation, one that requires discipline. It very hard to sit there and not pull the trigger. The stock market, despite all of the gyrations, is still at an all-time high. Real estate is priced to perfection.”
Financial cycle expert Charles Nenner to USAwatchdog on May 2: “The mainstream media talking heads are telling you to buy, but never tell you to sell. It’s just a hopeless situation. I feel sorry for people who invest their money. We have had a nice ride, but soon the whole thing will come tumbling down. this could be the longest expansion ever, what are you playing with? You are gambling with nonsense. So, it’s over. It’s going to be a blood bath, but as I said the last time, in the 1990’s when the Dow was 5,000, the world still looked okay.”
Bill Gross in a Janus Henderson tweet on May 3: “There is a level on US 10yr Treasuries above which stocks and economy are negatively affected because corporations are highly levered. 3.25% is a close estimate. Expect a Hibernating Bond Bear Market for 2018: 2.80-3.25% range.”
Goldman Sachs to the New York Times on May 3: “Goldman has concluded Bitcoin is not a fraud.”
Hedge fund manager at LibreMax Capital and former Deutsche Bank trader Greg Lippmann to Bloomberg on May 5: “The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis, and I think structured products are not going to be the epicenter.”
One River CIO Eric Peters on May 6: “Today’s greatest challenge in asset management is that the biggest pension funds need to generate 7.5% returns in perpetuity or face insolvency. An annual loss would be debilitating, a multi-year loss devastating.”
Goldman’s David Kostin on May 6: “Many investors (clients) fear the current economic expansion will soon end.”
Nomi Prins via USAwatchdog on May 6: “The idea here is you are sinking on the Titanic as opposed to sinking on a canoe somewhere. All of this artificial conjured money is puffing up the system, along with money that is borrowed cheaply is also puffing up the system and creating asset bubbles everywhere. So, when things pop, there is more leakage to happen. The air in all these bubbles has created larger bubbles than we have had before.” “How does the common man protect himself? They have to own things, and by that I mean real assets, hard assets like silver and gold. That’s not as liquid, so taking cash out of banks and sort of keeping it in real things and keeping it on site . . . keeping cash physically. You need to extract it from the system because the reality is when a financial crisis happens, banks close their doors to depositors. Also, basically try to decrease your debt.”
Jeffrey Gundlach in his Asset Allocation Webcast on May 8 via ZeroHedge: “Peak momentum in the economy may be behind us. There has been a sharp decline recently in soft data in addition to a slowdown in the hard data. We've got to start paying close attention to the data.” “Inflation? It's trending higher. if Core CPI goes above 2.25%, the entire inflation narrative is going to change as it will be something of a breakout. “We could very well see a recession in 2019.”
Michael Novogratz, the CEO and Founder of Galaxy Digital Capital Management, to CNBC on May 9: “It's almost essential for every investor to have at least 1% to 2% of their portfolio in crypto. These blockchain technologies in two to four years are going to give every vertical a challenge. In a lot of ways, this is a Millennial-led revolution ... but what I've found is guys with gray hair are much more skeptical.” Then at the at the Fluidity Summit in Williamsburg on May 10: “We have a bet on EOS because I think people like speed and convenience. We also have a bet on Ethereum because it has the most developers. My intuition is: we don’t need 100 blockchains.”
Viktor Shvets of Macquarie Research via ZeroHedge on May 12: “Investors reside in a world of no wages (or eroding pricing power of labour & products) and the need to keep ‘zombies’ alive to avoid contraction of demand. These forces are highly deflationary and public sectors would struggle to offset them. In this environment, we should theoretically see that the current anomaly of USD and gold appreciating at the same time turn into a consistent trend while investors also search for more extreme value alternatives, ranging from fine wines, paintings to cryptos. This investor behaviour might become ever more extreme as the public and electorates demand protection and continuity from CBs & fiscal authorities and politics deliver. It would be positive for the USD.”
Eric Peters on May 13: “When strains emerge in the US credit markets, and the Japanese and Germans start to pull capital home to park in their domestic bond markets, lowering those yields, you know the cycle is turning.”
David Rosenberg of Gluskin Sheff and Associates on May 14: “Jerome Powell talked about risk-taking in the past, he’s talked about frothy financial conditions. He was adamantly against the prolonged period of zero percent interest rates. He was profoundly opposed to the repeated rounds of QE, and now he’s in charge. So, for people to think he’s only going to go three times this year [raise official interest rates three times], I think he’ll go four. He may go more, depending on the circumstances.”
Benoît Cœuré, a member of the Executive Board of the ECB since 2011, at the International Center for Monetary and Banking Studies in Geneva on May 14: “Central banks today could make use of new technologies that would enable the introduction of what is widely referred to as a token-based currency – one based on a distributed ledger technology or comparable cryptographic technology.”
Bill Gross in another tweet on May 15: “Will 3.22% be broken to upside? I don't think so. The economy can't support yields higher than 3.25% for 30s and 10s, nor 3% for 5s. Continuing hibernating bond bear market is best forecast.”
Goldman in a market note on May 20, via ZeroHedge: “We project that, if Congress continues to extend existing policies, including the recently enacted tax and spending legislation, federal debt will slightly exceed 100% of GDP and interest expense will rise to around 3.5% of GDP, putting the US in a worse fiscal position than the experience of the 1940s or 1990s.”
Bill Blain of Mint Partners on May 22: “Some analysts are suggesting the Draghi put may longer exist. They say 2.4% Italian yields will confirm the ECB has washed its hands… That is Heresy! Of course, the Draghi Put lives. The threat of Italian instability contaging other states, and the maintenance of the European dream at any cost, mean Italian bonds look cheap because the ECB has to act.”
Goldman regarding high frequency trading (HFT) in a note via ZeroHedge on May 22: “One conspicuous consequence of post-crisis evolution is that trading volumes in many markets are now dominated by high-frequency traders. While bid-ask spreads and other indicators of trading liquidity appear to indicate liquidity has improved in markets where HFT has grown, the quality of this liquidity has not yet been stress-tested by recession. The recent experience of the “VIX spike” suggests there is good reason to worry about how well liquidity will be provided during episodes of market distress, and this is only the latest example of a “flash crash”. Regulators and researchers increasingly warn that HFT strategies can contribute to breakdowns in market quality during periods of distress.”
Deutsche Bank's chief macro strategist Alan Ruskin in a note via ZeroHedge on May 24: “Every Fed tightening cycle creates a meaningful crisis somewhere, often external but usually with some domestic (US) fall out. Going back in history, the 2004-6 Fed tightening looked benign but the US housing collapse set off contagion and a near collapse of the global financial system dwarfing all post-war crises. The late 1990s Fed stop start tightening included the Asia crisis, LTCM (Long Term Capital Management) and Russia collapse, and when tightening resumed, the pop of the equity bubble. The early 1993-4 tightening phase included bond market turmoil and the Mexican crisis. The late 1980s tightening ushered along the S&L (Savings & Loans) crisis. Greenspan’s first fumbled tightening in 1987 helped trigger Black Monday, before the Fed eased and ‘the Greenspan put’ took off in earnest. The 1970s stagflation tightening was when the Fed was behind ‘the curve’ and where inflation masked a prolonged decline in real asset prices.”
Rating agency Moody’s on May 25: “Low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors.”
George Soros via Project Syndicate on May 29: “The EU is in an existential crisis. Everything that could go wrong has gone wrong. To escape the crisis, it needs to reinvent itself.” “The United States, for its part, has exacerbated the EU’s problems. By unilaterally withdrawing from the 2015 Iran nuclear deal, President Donald Trump has effectively destroyed the transatlantic alliance. This has put additional pressure on an already beleaguered Europe. It is no longer a figure of speech to say that Europe is in existential danger; it is the harsh reality.” “The strength of the dollar is already precipitating a flight from emerging-market currencies. We may be heading for another major financial crisis.”