vrijdag 26 mei 2017

BofA Finally Asks "Is The Tech Bubble Happening Again?"

While not nearly in the same ballpark as what is taking place right now with bitcoin, and its various alt-coin peers, the ~30% YTD move higher in tech stocks has been just as impressive, and is beginning to result in warnings of "deja vu" among at least among some bank analysts. One such growing skeptic, is BofA's Michael Hartnett who writes that US growth stocks have just surpassed the 2000 “bubble” highs vs global value stocks and wonders if "the [next] tech bubble has started." Asking rhetorically “Alexa, how high can markets fly?” Hartnett writes that 2017 has seen big global stock (10%) and bond gains (4%), as well as the dramatic resumption of a bullish “deflation” trade. Leadership in stock markets has reverted to the “growth” theme, while leadership in bonds has reverted to the “yield” theme. For example:
# Nasdaq Internet index annualizing a 80% total return; CCC rated junk bonds annualizing an 18% gain, while EM sovereign bonds (EMGB) annualizing a 17% gain. Pointing out something we showed one month ago, namely that in a world awash with central bank liquidity "nothing matters", Hartnett laments that "the lack of tax reform, lack of strong economic growth, no oil recovery, more geopolitical tension, China credit fears, none of it has mattered thanks to the ongoing central bank “Liquidity Supernova”: central banks have purchased a whopping $1.1tn of asset YTD."
- The provision of maximum liquidity has been validated by weaker-than-expected global core inflation. Given buoyant global PMIs and closing output gaps this is perhaps best explained by the “Amazonification” of Main Street (e.g. since 2010 US retail floor space is down 10%, while US department store sales are down 18%), as well as other structural deflation drivers such as aging demographics. The renewed combo of low growth, inflation & yields have propelled US growth stocks above their 2000 “tech bubble” highs versus global value stocks (Chart 1)...


Or, to summarize, "US growth stocks just surpassed 2000 “bubble” highs vs global value stocks; data on valuation (Table 1), flows, and the relationship between equities and bond yields are all good clues that a speculative overshoot has begun; there are nascent signs we are in the very early stages of an overshoot"...


To this the traditional fall back response has been that unlike during the bubbles of 2000 and 2005-6 there has been far less investor euphoria and animal spiris. Well, there is a reason for that. According to Hartnett, tech disruption is as rampant on Wall Street as it is on Main Street, as the diverging trends in flows to passive and active managers in the past 10 years illustrates. He believes that this structural shift is "suppressing the typical euphoria normally tangible at great market tops." And yet, since active managers are unhappy because they need the market to go down to show they can outperform passive strategies; and private clients are unhappy as they want the market to go down so they can participate more aggressively in the bull market, so the “pain trade” in risk assets (equities & credit) remains up...


Here, Hartnett goes back to his long-running investment thesis, but admits that "our bullish Icarus melt-up view is working, but more because of a reversion to the max liquidity, minimal growth, minimal volatility backdrop of yesteryear, rather than the successful implementation of inflationary economic policies." Furthermore, one can make a case for a global asset bubble: Either way, the BofAML Bull & Bear index is creeping up toward a “sell signal” of 8 (it is currently 7.3 - see page 8). But the summer risk is an equity overshoot. Note that at 2630 on the S&P500 index (or 510 on ACWI) the ratio of global market cap to global GDP will exceed all-time highs set in 1999 & 2007. These are plausible targets: the longer it takes central banks to tighten, the greater the risk of tech & “growth” stocks entering a speculative frenzy. Which brings us to BofA's question which few if any other market participants have dared to ask, at least officially: “Alexa, will the tech bubble happen again?”
* Here is Hartnett's answer: Data on valuation, flows, and the relationship between equities and bond yields are all good clues that a speculative overshoot has begun. There are nascent signs we are in the very early stages of an overshoot.
# Excess valuation;
- The market cap of many of new tech giants is already greater than the GDP of large US cities: Google is bigger than Chicago, Amazon is bigger than Washington DC (see table front page)
- Another breathtaking valuation stat: at $1,450bn the combined market cap of Google & Apple is larger than the combined market cap of Eurozone & Japanese financials ($1,310bn)
- The following table shows that the “belly of the beast” of the current equity bull market, the Nasdaq Internet index, is approaching PE levels (61X) that are as spicy as they were in prior “big tops” in stock markets, and at a time where policy is turning less favorable...


- The PE on the global MSCI tech sector is currently 18X, far below the level reached in March 2000 (peak PE was 50X)
- And in 2017 tech EPS numbers are strengthening, currently forecast to grow 16% (Chart 3), thus undermining the case for excess valuation...


# Irrational Exuberance; Inflows to tech funds are rising at their fastest annualized rate (25% of AUM) in 15 years, a sign of renewed exuberance (Chart 4)...


In the 1999-2000 tech “bubble” irrational exuberance was much more visible than today: FMS cash “irrationally” declined sharply in 1999 despite widespread views of excessive valuations (Chart 5); in contrast the recent May FMS shows investors’ view of “excess valuation” in stocks is the highest since Jan'2000 but cash levels are not (yet) collapsing...


Finally, to cool off speculation that we are approaching the top of the second tech bubble, Hartnett points out that the classic sign of a speculative overshoot in equities is a period of rising stock prices that elicits a rise in bond yields, as fixed income markets start to anticipate central bank action to “cool” the fever on Wall Street. He goes on to say that "this occurred in Japan in 1989, in the US in 1999, and at the short-end in the Eurozone in 2007-2008. It is not yet happening." This is true, but it begs the question: with the fixed income market just as corrupted by central planning. After all central banks own over $13 trillion in mostly fixed income assets - one wonders if this is even a relevant metric any more....