JPMorgan: “Central Banks Have Created A Collective Hallucination Where Valuations Are Entirely Fabricated”
The comments below are an edited and abridged synopsis of an article by Tyler Durden
In a recent interview, Oksana Aronov, head of alternative fixed-income strategy at JPMorgan Asset Management, said that central-bank buying has forced rising credit valuations out of line with deteriorating fundamentals, resulting in a market where everything is broken.
Investors are “locked in this collective hallucination with the central banks around valuations and what they mean and that there is a lack of desire to acknowledge the fact that market valuations are entirely fabricated—or synthetically generated—by all the central bank liquidity and do not reflect fundamentals of the securities that they represent,” Aronov said. “Central banks continue to run the show, and investors need to be really cautious here.”
Aronov has some recommendations: raising liquidity; staying in high-quality credit; and not extending duration profile, because “we’re going into a much more difficult second half” with the fiscal cliff coming in just two weeks, where a trapdoor may open below the economy and lead to another crash.
Aronov said that, even when a vaccine becomes available, the damage has been done. Small businesses that have been without revenue for months will not be able to reopen simply because a vaccine exists, so the news on the ground will continue to be dire.
Meanwhile, downgrades and defaults are piling up, there’s a record level of fallen angels that isn’t reflected in credit valuations, and the fundamentals are getting worse by the day.
Aronov’s ominous conclusion: “Ultimately, fundamentals will prevail.” This is frightening when you consider that everything is so overvalued that once fundamentals do indeed prevail, the Great Depression will seem like a walk in the park.
Her advice to those who still want to put their money into something: “Investors should look to the things that make sense fundamentally before investing.” Things such as gold, because once fundamentals prevail, the current monetary system will no longer exist.