Tuesday, October 27, 2009
Bill Gross says assets are overvalued and the rally is over.
Nouriel Roubini - who called last year's crash - said last week that "a big crash is coming":
There’s a huge bubble, because we have zero rates in the
, zero rates around the world and a huge carry trade. Everyone is borrowing at zero interest rates in dollars and getting a capital gain because the dollar is weakening, so they are borrowing at negative rates. And then they invest in risky assets:commodities, equities, credit. We’re creating a bigger bubble than before. U.S.
It’s going to go crashing down, in an ugly way. That’s the basics of the argument...
There is a wall of liquidity chasing assets. That liquidity can chase those assets higher for the time being until the huge carry trade—the asset bubble and the wall of liquidity—comes crashing down. You can still have all the risky assets going higher. Of course, the higher they go, the more they diverge from fundamentals, and the riskier the situation becomes. But eventually, if the recovery of the economy is going to be anemic, sub-par, below-trend and U-shaped, there is going to be a correction. And therefore my view is to stay away from risky assets. Stay in liquid assets. I don’t know when the correction is going to occur, it could be a while longer, but eventually it will be a pretty ugly correction, across many different asset classes.
Barry Ritholtz, who has been very bullish for some time, is now looking for a correction:
I see a significant increase in the odds for a fairly substantial correction — in the 5 – 15% range — over the next 60 days.
5 factors are making me more cautious:
1) Over the past 4 days, we have had 3 failed rallies;
2) The number of New Highs on the major indices is contracting;
3) Stocks seem to be reacting far less enthusiastically to earnings beats then they had been;
4) The Transports have been acting squirrelly lately;
5) The S&P is forming an Ascending Wedge (more on this later today).
Here's the Ascending Wedge he's talking about.
And, as Bloomberg writes:
The U.S. Standard & Poor’s 500 Index is about 40 percent overvalued and headed for a drop as central banks pull back on securities purchases that pushed up asset prices, according to economist Andrew Smithers.