Bill Fleckenstein thinks equities are expensive and is keen to short, but only when the bond vigilantes are unhappy with accommodative monetary policy (indicated by rates consistently above 3%).
Both
Felix Zulauf and
Hugh Hendry think the current market resembles 1997.
Hugh looks through 113 of DJIA price data. The current period most closely resembles 1928, 1982 and 1998 (looking at last 500 trading days)
The 1998 EM crisis led to easy monetary policy, providing the last euphoric leg to the rally.
Hugh thinks EM will suffer a crisis again, due to neo-mercantilist policies in EM, procyclical as the policy works when DM imports, but suffers problems when DM don't want to buy from EM anymore.
Hugh says that Japan boomed from 1970 to late 1980s due to authorities wishing for a weaker FX rate, so that imports remained competitive. FX being weakened by too much money, combined with strong economic growth, led to the massive bubble in Japan in the 1980s.
"In 2004, China's cheap land, cheap labour, cheap money, cheap everything, produced high returns on capital and trade surpluses with the rest of the world which encouraged investment inflows into the country. That, as Charles Kindleberger noted, is the kind of combination that "almost always" leads to an increase in the country's currency and domestic asset prices." This is usually normalized through rising consumption and stronger FX, which leads to less exports. But China artificially suppressed the FX rate. The US countered the Chinese policy through QE, which has led to a stronger yuan and more Chinese consumption.
Hugh proposes a rule - go long SPX when 10yr TIPS breakevens are higher than 200dma
The more QE there is, the less China grows, so they invest more in GFCF, which leads to more capacity, which leads to more deflation. QE cycle is repeated!
Hugh then goes on to talk about long periods of underperformance. US stocks up until 1941, Japan in the 1980s, gold in 1980. Silver took 31 years to take out prior high. Oil took 24 years to take out high. Hugh seems to feel that Japan has paid its penance and is due for a boom.
His trades are:
Long DM stocks, Short EM stocks
Long Nikkei, Short JPY
His essential thesis is 'bad is good, don't fight loose monetary policy'.
Lastly, this anecdote:
"Back in 2008, with world equity markets in turmoil, I purchased a one-touch 40k Nikkei call option for which we paid $300k. I could envisage the yen strengthening substantially and triggering a corporate shock as Japanese household names buckled under the duress of currency appreciation. I also bought a lot of credit protection. And sure enough, in 2011 and for the majority of 2012 the yen strengthened. Japan recorded its largest manufacturing bankruptcy and a number of prominent household names, the giant electronic businesses, saw the cost of insuring their debt sky-rocket. For instance, Sharp rose from a spread of around 100 in January 2012 to over 5,900 in October of the same year. The Japan iTraxx Index for five-year protection, however, only flared to 220 (from around 100 in 2010) and so our hypothesis that much of corporate Japan would buckle under the weight of yen strength proved unfounded. That was a shame but nevertheless, this "crisis-lite" was sufficient to produce the political intervention that we had envisaged. The most senior policy makers at the Bank of Japan were unceremoniously removed from office and monetary policy was set, instead, very loosely, propelling yen asset prices higher. The stock market leapt by 60% on the news and the currency weakened by 20%. And, as the chart below of the Japanese five-year break-even inflation expectation reveals, one should be long their stock market. We still value the one-touch at our purchase price today, and with the market approaching 16k and trending higher, who is to say where it will trade in April 2018? If it touches 40k, get $5m."
Felix is short China stocks, long USTs, long gold.
He likes USTs and gold due to extreme bearish positioning.
USTs bot at 3%, to be sold at 2%.
He recommends going long gold through call options on gold miners.
He thinks everyone is long Nikkei and long USDJPY, so if you want to short the yen, do it against another FX.
"China can technically kick the can down the road again and stimulate the economy once again. But something would have to give. You cannot try to reflate a bursting credit bubble AND keep your currency stable. Either you keep the currency stable but then interest rates will rise dramatically as it happens in good old fashion credit crunches. Or you inject enough liquidity into the system to prevent the credit crunch and rising interest rates but then you have to sacrifice your currency. It's hard to get data but we believe that China relies on substantial foreign funding flows. If this dries up, we believe FX will be protected first, so we foresee a credit crunch. We'd play the credit crunch through the HK banking sector. "
on late 1990s comparison:
"If we are right with our view, then we could see a similar situation as in the late 90s. Back then, the US imported disinflation or even some mild deflation because of the events in Asia and Russia. This led to a decline in Treasury yields and after a short but sharp correction in US equities, the bull market entered its final phase. Hence, it would make sense to expect a big correction sometimes this year, probably starting in winter/spring, not the least due to concerns about earnings. 50% of the S&P500 earnings come from overseas and as other currencies weaken against the Dollar and some economies slow more than expected, estimates have to be cut and the market could sell off."
