Rampant Complacency

You just have to laugh.

Stocks closed green across the board and the Nasdaq hit an all-time intraday high as investors cheered upbeat housing data and a big beat from Best Buy which, along with Wal-Mart’s decent quarter, goes some ways towards allaying fears about the American consumer.

Frankly though everyone is just shaking their heads at this point. If central banks’ goal was to herd investors into risk then by God they’ve achieved it as the S&P is now trading near 18X, a level that’s almost certainly not sustainable:


(Charts: Goldman)


Oil lent a helping hand on Tuesday, rallying on (probably false) rumors that Iran is ready to agree to some kind of production freeze. We can’t count the number of times we’ve heard someone use the phrase “eerily calm” lately and true to the narrative, the VIX plunged to an 11-handle at one point:

Incidentally, we just got this from API:



That wasn’t even close to consensus which was betting on an 850,000 bbl draw. Here’s the reaction in crude:


It’s incredible to see the extent to which market participants are figuring on hockey stick earnings growth and not factoring in any risk whatsoever with regard to the US election.  Here’s a look at the results of a Morgan Stanley poll:

And here’s an example of how incredulous the market is becoming via SocGen:

“In a world of low interest rates, negative bond yields, high equity valuations and lacklustre profits growth, it is easy to build the bearish case. Yet much to the amazement of many, ourselves included, equities continue to grind higher. This upward pressure and willingness to put all these concerns to one side we assume is driven by investors need to find a positive return, i.e. it is central banks, not fundamentals, driving the markets higher. To that extent the bears are simply waiting for the inevitable.”

“With the notable exception of the UK, which is seeing positive translation from the collapse in sterling, net income growth continues to weaken, and in China, Japan and Germany forward EPS growth, based on this measure is now negative. In the US it is as weak as it has been at any time over the last five years. This is hardly a collapse, but neither is it resurgent.”

(Chart: SocGen)

No, it is certainly not “resurgent,” but that’s not stopping anyone from breaking out the hockey sticks:

(Chart: BofAML)

Have a look at an updated version of one of our favorite charts which shows defaults rising and CCC issuers losing access:

(Chart: BofAML)

And yet have a look at spreads:

It’s complacency to the point of absolute absurdity. It’s not that people aren’t paying attention, it’s that they just don’t care. They’ve been conditioned to expect nothing but upside for equities and nothing but “tighter” when it comes to credit.

As we put in on Monday, you can expect this market to sleepwalk higher into Yellen’s speech at Jackson Hole. Buy the dip, man. Just hold your nose and buy the dip.

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