On the heels of some wild crash trading in major markets as well as violent rallies, apparently “sh*t happens.”
By Peter Boockvar, author of the Boock Report
February 6 (King World News) – Here is what Peter Boockvar wrote as the world awaits the next round of monetary madness: Yesterday was the day the short volatility trade died. Bye, bye Miss American pie. I’ve seen estimates that the trade was as big as $1.5 Trillion. Putting aside the major technical reverberations of this unwind, I’ll say this on what has gone on the past week, S**T happens when interest rates rise and monetary policy tightens at the same time equity valuations are extreme…
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Boockvar continues: “For my readers who have heard me say this many times before I’m sorry I’m about to repeat myself AGAIN. We are combining equity valuations as measured by price to sales, EV/EBITDA, market cap to GDP, and the median price to earnings ratio that is at or above where it was in March 2000 with a now changing interest rate regime. The markets got a free pass in 2017 because of tax reform and $2 Trillion of ECB and BoJ money printing that completely offset the impact of 3 rate hikes and the beginning of QT from the Fed.
This year as we know, monetary tightening is intensifying in the US defined as $420b of lost liquidity via QT and the ECB is on a run rate to buy $600b less of assets this year relative to its 2017 run rate. What do you think was going to happen when $1 Trillion of less liquidity was floating around especially considering what has gone on in this bull market. We also have the BoJ that is buying less and more rate hikes from other central banks. Yes, earnings are good and the global economy is growing together, but they are only playing catch up to the huge multiple expansion we’ve seen over the past 5 years due to, you know what.
Lastly, we can all admit that the market went parabolic in the first 4 weeks of 2018 and we’re just back to square one. I believe enough said.
The problem for the Fed if this continues is they unfortunately have tied our economic well being with the price of assets. The US savings rate is at a 10 yr low. Their credibility as perpetual bubble blowers is now about to be tested again.
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