The year 2015 was extraordinary. Incredibly, despite powerful confirmation of the bursting global Bubble thesis, market optimism remained deeply entrenched. All leading strategists surveyed in December by Barron’s remained bullish – some were borderline crazy optimistic.
Optimism withstood a commodity price collapse. Crude, the world’s most important commodity, crashed almost 35% to an eleven-year low, much to the peril of scores of highly leveraged companies and countries. The Bloomberg Commodities Index dropped 25%, its fifth straight year of declines. Copper fell 24%, with platinum and palladium down about 30%. In agriculture commodities, wheat fell 20%, with soybeans and corn down about 10%. Coffee sank 25%. Debacle.
Bullishness persevered through deepening EM turmoil and a crisis of confidence. The Brazilian real dropped about a third (worst year since 2002), and Brazil’s sovereign debt suffered major losses. Brazil’s corporate debt market was pummeled (Petrobras, Vale, BTG, Samarco, etc.) while confidence in the nation’s major banks and government waned. Russia and Turkey showed further deterioration. Fragility surfaced in EM linchpin Mexico. Currencies suffered generally throughout EM – Latin America, Asia, the Middle East, Eastern Europe, etc. Collapsing currency peg regimes saw almost 50% devaluations for the Azerbaijani manat and Kazakh tenge. Argentina devalued the peso 30% versus the dollar. Throughout EM, dollar-denominated debt became a market concern.
Optimism survived the major financial tumult that unfolded in China. Early 2015 stimulus efforts stoked “Terminal Phase” excess in Chinese equities, a Bubble that came crashing down in a 40% summer drubbing. An August yuan devaluation destabilized markets across the globe. Aggressive (invasive) monetary, fiscal and regulatory measures somewhat stabilized equities and the yuan, at the heavy cost of extending “Terminal Phase” excess throughout the Credit system (i.e. corporate debt and “shadow banking”). The yuan posted a 4.5% 2015 decline against the dollar, the worst performance since 1994. The “offshore yuan” trading in Hong Kong dropped 5.3%.
Bullishness endured despite the August global market “flash crash.” While the summer market dislocation provided important confirmation of mounting fragilities throughout the markets on a global basis, the bulls interpreted the event as further validating their view of unwavering central bank support and liquidity backstops. The Fed’s September flip-flop emboldened speculative excess, with U.S. equities back within striking distance of record highs by early-November. Continue reading
If you have forgotten your Gulliver’s Travels, recall that Jonathan Swift described the people of Brobdingnag as being as tall as church steeples and having a ten foot stride. Everything else was in proportion——with rats the size of mastiffs and the latter the size of four elephants, while flies were “as big as a Dunstable lark” and wasps were the size of partridges.
Hence the word for this fictional land has come to mean colossal, enormous, gigantic, huge, immense or, as the urban dictionary puts it, “really f*cking big”.
That would also describe the $325 billion bubble which comprises Amazon’s market cap. It is at once brobdingnagian and preposterous——a trick on the casino signifying that the crowd has once again gone stark raving mad.
When you have arrived at a condition of extreme “irrational exuberance” there is probably no insult to ordinary valuation metrics that can shock. But for want of doubt consider that AMZN earned the grand sum of $79 million last quarter and $328 million for the LTM period ending in September.
That’s right. Its conventional PE multiple is 985X!
And, no, its not a biotech start-up in phase 3 FDA trials with a sure fire cancer cure set to be approved any day; its actually been around more than a quarter century, putting it in the oldest quartile of businesses in the US. Continue reading
The most important outbreak or story of 2015 had to have been the junk bond reversal. It combined all the major elements of what investors and economic agents are both fearing and, at one point in the past anyway, hoping. It is the confluence of finance, “dollars”, liquidity and economics with or without recovery and the best scenario. The FOMC raising rates is supposed to confirm the brightest outlook, which would only lead to more extension in the credit cycle, and yet junk bonds traded as if the worst were only just around the corner. It isn’t so much the selloff, though that is obviously important, but rather how increasingly the selloff is being treated as permanent.
It is the expression of an obvious and apparently durable shift in risk perceptions, and I think it the most significant development. You can see it clearly in the changes this year to last. After the selloffs in October and December 2014, junk was bid in clear bargain hunting patterns of behavior. The rebound after last December lasted months and was quite significant even if it didn’t quite bring prices and yields quite back to the full comfort of prior complacency.
This year, each discrete selloff was met instead by listlessness and palpable uninterest, including the past week or so after what was undoubtedly the most intense selloff yet. That leaves the waves of selling only pushing the idea of the continuation in the credit cycle further and further remote; bringing instead the sense of doom closer and closer. This alteration in outlook and perception really could not be more unmistakable: