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Investors Are Trapped In A "Twilight Zone", BofAML Warns Of Looming C.R.A.S.H. Risks
Episodes of “corrections” are apparently happening more frequently according to BofAML's credit strategist Barnaby Martin...
... and given the extremities of liquidity, profits, technological disruption, regulation, and income inequality, BofAML warns 'gently' that the potential for a cleansing drop in asset prices cannot be dismissed.
Most likely catalysts: Consumer, Rates, A-shares, Speculation, High Yield
Consumer
Investors are unambiguously positioned for the US consumer to once again lead the global recovery. Should US consumption, profits & payrolls (Chart 13) continue to disappoint, equity valuations will be forced to cheapen. Few are positioned for a contagious sell-off in US dollar, bonds & stocks if US GDP growth were to stumble once again in Q2 & Q3.
Rates
Investors are positioned for low and stable rates, anchored by central banks. Yet rate volatility (see MOVE index) is on the rise, expectations for a Fed hike in Sept have dropped sharply (3m Eurodollar rates have dropped from 0.865% to 0.540% in the last 3 months), and should growth or inflation surprise to the upside in the summer, rates (e.g. front-end in US, long-end in Europe) are mispriced.
A-shares
Investors are not positioned for full-blown policy failure in China. Chinese growth expectations may be weak, but the A-share market hardly portends a collapse in Chinese activity. Should Chinese PMI or FAI data indicate a lurch lower in activity at a time of policy easing, the ripple effect via Chinese stocks, rates & FX into global markets is likely to be significant. David Woo argues investors are underestimating the cross-market implications of US-China policy divergence.
Speculation
Investors are not positioned for cash to offer competitive returns. Yet cash has outperformed global fixed income in 2015. There is a risk that investors, in particular systematic macro funds, have crowded and levered positions that do not assume a rise in cash rates. In addition, the correlation coefficient of CTA returns and the DXY dollar index is currently 0.51, its highest level in the past 13 years, and CTA performance has also recently become correlated with German bunds (Chart 14), the Euro, and oil.
High Yield
Investors are positioned heavily in high yield, high dividend yield and high PE strategies (Chart 15). The quest for high yield (relentless multi-year inflows to dividend funds, MLPs, REITS & HY bonds - $415bn inflows since Mar’09) remains the biggest Achilles’ Heel for positioning, in our view.
* * *
These treacherous times continue to make us feel that reducing risk rather than maximizing return is the smarter mid-2015 strategy. We are cognizant of high cash levels and sentiment measures (e.g. BofAML’s Bull & Bear Index currently at 4.4) which do not signal “sell risk”.
Nonetheless the summer months offer a lose-lose proposition for risk assets: either the macro improves and the Fed gets to hike, which will at least temporarily cause volatility; or more ominously for consensus positioning, the macro does not recover, in which case EPS downgrades drag risk-assets lower. We advise selling risk into strength, buying volatility into weakness, advocate higher than normal levels of cash and would add some gold.
We continue to expect risk-off moves in the direction of 0.2% for 5-year German bunds, 2% for the Italian 10-year yield, 20 on VIX and 2000 for the S&P500 in Q2.
Source: BofAML
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The U.S. will never go into another recession. What we have waiting for us is a depression that will make the Great Depression look like a minor correction.
My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... www.jobs-review.com
What do I have to buy to get in on this extraordinary opportunity. Just tell me. I'll pay anything.
Go away, bot! Or go to hell.
What is happening is a falling core set of consumers in the US and most advanced economies...
US 25-54yr/old annual population growth went negative in...you guessed it... '08
US 25-64yr/old annual population growth will go negative in '16 or '17 and maintain negative numbers til maybe '23 or '24...all the while 65+ annual population growth is responsible for nearly all net US population gains.
Why the Fed would choose to treat a population bust like it was a temporary and "emergency" liquidity crisis by conintinully colluding and advocating the printing of massive debt for a 15yr population slump is not idiotic...it is criminal
http://econimica.blogspot.com/2015/05/the-truth-of-great-financial-crisisand.html
There economic theories don't take population demographics into account, hence the endless QE in Japan with no benefit to the economy.
that was a great article, thanks. great charts.
Seriously? I look at the DJIA over the course of the past 2 years, and it's a borderline continuous upwards incline. I don't spot a single correction of note whatsoever.
They might be counting all the times central banks stepped in and applied heroin for the sucking chest wound.
BOA warning to hoard gold?
This week's sign of the apocalypse.
It isnt the only one this week either...Billionaire Hugo Salinas Price warned this weekend that Apocalypse & Enourmous Social Disorder Are Coming...He says "We are heading over Niagra Falls..."
Is there ever a correction in Art?
http://www.bloomberg.com/news/articles/2015-05-18/there-s-a-big-debate-about-whether-booming-art-auctions-are-a-warning-to-investors
Bubbles, bubbles everywhere.
the potential for a cleansing drop in asset prices cannot be dismissed.
Kind of like an enema with a fire hose to clean out your account thoroughly.....
Make that a turpentine enema.
This time it really is different since the central banks are all in.
Right? haha
Whoever at Bank of Amigos is making this prediction ought to talk to Rosie about how to limit the personal damage. After all, that is how ML got bolted onto the side of the Amigos back in '08 and '09. Then years later, they paid a couple of BB of chump change.
But these things do not entail survival of the messengers.
- Ned
"...and would add some gold. "
Hmm. Bank advising to buy gold.
Equities are about to crash and gold will only be a short-term hedge against the deflationary vortex that will swallow up everything in its way... investors are truly trapped.
http://www.globaldeflationnews.com/dow-jones-industrial-averageelliott-w...
http://www.globaldeflationnews.com/gold-elliott-wave-update-for-week-end...
Just buy the ATFH and shut it!!
There is a fifth dimension beyond that which is known to man. It is a dimension as vast as space and as timeless as infinity. It is the middle ground between light and shadow, between science and superstition, and it lies between the pit of man's fears and the summit of his knowledge. This is the dimension of imagination. It is an area which we call the Twilight Zone.
Crash and burn already.
Don't worry BoA as soon as you guys go the way of Lehman we can see 800 on the S&P again
Cleansing.
This is crap for the muppet trade.
Cleansing.
Nearly half the Dow is due to the Fed's actions directly or indirectly.
Cleansing
But BAML is still in denial.
Cleansing.
So build an Aswan High Dam(n) on it and hold back the cleansing water and silt.
Cleansing.
Did this REALLY come from BoA? And Merrill Lynch is telling this to their Zombies?