Goldman: Markets in Unsustainable Goldilocks Mode; The Bear Will Catch Her and Bite Her Head Off

In a joyous, albeit somewhat cantankerous note today, Goldman says the current rally and situation with low yields and stretched valuations is unfucking-sustainable. More than that, they likened the market to Goldilocks and said the bear will catch up to eat her.

It’s very simple, according to Peter Oppeheimer (unsure as to his relation to the father of the atomic bomb), either yields go higher and stocks get to enjoy unchecked hedonism, or this fucker is going down in flames–like the fucking Hindenburg.

“Like Goldilocks herself, the market might get away with it for a while but it will eventually get caught by a bear,” said Chief Global Equity Strategist Peter Oppenheimer.

“Either bond yields and interest rates stay at record lows and economic and profit growth disappoints once again (capping valuations), or growth and inflation surprise to the upside (perhaps on the back of more fiscal easing) but bond yields adjust higher (also capping valuations).”

Oppenheimer sees three ways forward for markets:

Reflation — growth picks up, but bond yields do too;

Stagflation — inflation propels bond yields higher, but without a commensurate acceleration in growth; and

Fat and Flat — the most likely scenario, a continuation of the current trend of sluggish growth and low bond yields.

Notably, the potential for multiple expansion in light of ultra-low bond yields – a key component of the Fed Model that’s pointed to attractiveness of equities over sovereign debt – isn’t likely to come to fruition even under the “fat and flat” scenario, the strategist argues.

“There are limits to how much yields alone can drive equity valuations, in our view,” he writes. “Eventually, they have to reflect a realistic assumption about long-term nominal growth.”

Globally, Oppenheimer estimates that measures of the equity risk premium are near levels reached during the European sovereign debt crisis and amid the market turmoil following the Chinese devaluation.

But if one assumes that slow-growth environment that’s prevailed since the financial crisis is a “new normal,” rather than a series of stiff headwinds that will fade over time, equities don’t look like as much of a screaming buy.

“Here lies the great dilemma for investors: on the one hand, current bond yields imply that valuations can continue to rise for financial assets (as they have already done over recent years), but, on the other hand, to justify current risk free rates into the future, we should assume lower long-term growth (consistent with ‘secular stagnation’),” concludes Oppenheimer.

While scribbling random notes on random pieces of loose leaf paper, Oppenheimer was heard saying ‘you can’t have it both ways, motherfuckers.’