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16 Charts Showing Just How Confused "The Smartest Guys In The Room" Are Right Now

Tyler Durden's picture




 

There is just one word to describe the thought process of the "smartest guys in the room", those who manage trillions in assets and respond to BofA's monthly Fund Manager Survey: confused.

As BofA's Michael Hartnett summarizes the confusion, while on one hand only 7% expect a "recession" in the coming year...

... expectations for flatter yield curve - that surest leading indicator of a recession - just hit the highest since June of 2011:

... while respondents who believe that the US economy is in a late cycle just hit the highest since September 2008!

 

Furthermore, while most expect a rate hike to be announced tomorrow, a majority of respondents, or 58%, believe there will be at least 3 rate hikes in the coming 12 months.

 

... rate hikes which respondents believe will hit government bonds the most, stocks modestly, but the notable jump has been in corporate bonds which 24% now believe will be most vulnerable to Fed tightening, up from 13% a month ago, and surely the result of the recent volatility in the junk bond market.

Further compounding the confusion is that while only a sliver expect a recession, the outlook on corporate profitability and growth continue to decline. In fact, the percentage of investors expecting +10% earnings growth over the next 12 months is now the lowest since July 12 (net -66%).

Few expect help from China: there has been a renewed slump in Chinese growth expectations which means the projection for China’s GDP growth in 3 years’ time has fallen to 5.5% from 5.9% last month.

At the same time, there is also a revulsion to the single biggest drive of equity upside, stock buybacks. As BofA observes, "credit crunch fears inducing a sudden, remarkable investor repudiation of stock buybacks/dividends in favour of balance sheet improvement...

... FMS demand for "improved balance sheets" jumps to highest since Jul’10; investors saying payout ratios “too high” biggest since Mar’09.

 

So how are these "smartest guys" positioned? Simple: the biggest consensus trade, perhaps in history, is the one we showed earlier. This is how BofA frames it: "Bulls are long the dollar, bears are long the dollar" with the "long USD" trade 3x more crowded than any other trade.

 

What do they think will end the USD bull market? Nothing less than the end of the Fed rate hike, with ongoing negative EPS growth in second place (although note this has been the case for 2 quarter already and the USD has continued to rise):

 

When it comes to equities, at least according to their responses, managers are the most underweight to US stocks they have been in 8 years.

As a result of this, FMS report that their average cash balance has risen from 4.9% in November to 5.2% in December.As BofA comically notes, "As a reminder, the FMS Cash Rule works as follows: when average cash balance rises above 4.5% a contrarian buy signal is generated for equities. When the cash balance falls below 3.5% a contrarian sell signal is generated." And yet, as the chart below shows, never in the history of the FMS have cash levels actually dropped below 3.5%, so... never sell?

Looking at the future, an increasing number of respondents bet on high quality, large cap and low volatility, but the survey also shows first sign of shift from “growth” stocks to “value” - a move which would be a seachange over the past 7 years when growth stocks have dramatically outperformed value.  Net 65% expect high-quality stocks to outperform low-quality stocks, 36% expect large-cap to beat small-cap, while 30% expect low-volatility to outperform high-volatility. If correct, say goodbye to high beta, momo, "dash for trash" stocks.

 

Looking at the shorter term, how are the smartest guys positioned headed into the Fed meeting? The survey shows the biggest MoM drop in Tech since Jan’08 with respondents most bearish on Industrials since Sep’12. BofA's take: "So high quality and large cap = consensus favourites." In other words, while the majority expectation is for a rate hike, while many also hope for "dovish language", few are willing to put their money where their hopes are.

 

Finally, for those who wish to fade the consensus, BofA has the following reco: "Contrarians would go long EUR, EM, commodities, resources & bonds; and would short banks, real estate, discretionary, Eurozone & Japan."

 

In short: nobody really has much grasp how to trade an economy that will see ongoing substantial profit contraction, finds itself in a late cycle, suffer more curve inversion, and yet where everybody is long the dollar - the biggest catalyst for slowing profits - on expectations of Fed rate hikes which, by tightening financial conditions, will unleash the next recession.

The hope of course, being that while everyone realizes the next recession is just around the corner, and the Fed's rate hike will bring it even closer, nobody dares to stand apart from the herd and to put on any contrarian trades, especially when it comes to the biggest consensus trade of all, the USD.

After all, the same Fed which may well be the catalyst for the recession, has also been the primary driver for stock levitation over the years.

No surprise then that nobody has any clear idea how to be positioned for 2016 when the link between rising markets and the deteriorating economy may finally hit its breaking point.

 

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Tue, 12/15/2015 - 15:09 | 6926887 buzzsaw99
buzzsaw99's picture

that settles it. fund managers are retards. you have to be a retard to be successful in this market so it all makes sense. ;/

Tue, 12/15/2015 - 15:13 | 6926902 freewolf7
freewolf7's picture

It's like they're just gambling.

Tue, 12/15/2015 - 15:17 | 6926921 buzzsaw99
buzzsaw99's picture

if there were a free unrigged fully functioning market those maggots and their clients would be wiped out in no time flat. no danger of that so they're okay for now.

Tue, 12/15/2015 - 15:18 | 6926932 walküre
walküre's picture

the USD long side is very crowded and could easily sink the boat

Tue, 12/15/2015 - 15:22 | 6926948 Amish Hacker
Amish Hacker's picture

Of course. With other people's money.

Tue, 12/15/2015 - 16:16 | 6927170 KnuckleDragger-X
KnuckleDragger-X's picture

They are gambling, but in a rigged casino......

Tue, 12/15/2015 - 15:13 | 6926904 Hitlery_4_Dictator
Hitlery_4_Dictator's picture

Be the optimist. Put your retirement savings in a casino account. Spend your regular savings on NFL jerseys and $6 cups of coffee. And don't forget to buy some of the latest Star Wars crap, that was made for gays.

Tue, 12/15/2015 - 15:09 | 6926888 nuubee
nuubee's picture

Expect: Something like Japan, only with far more volatility and social strife.

Tue, 12/15/2015 - 15:32 | 6926990 lincolnsteffens
lincolnsteffens's picture

Japanese are a polite people that restrain outward emotions. The rest of the world, not so much.

Tue, 12/15/2015 - 15:37 | 6927007 LawsofPhysics
LawsofPhysics's picture

Correct.  Culturally speaking, they are on the same page.  This is not the case in 'merica...

We are considerbly better armed as well.

should be fun.

Tue, 12/15/2015 - 15:15 | 6926917 Mr. Schmilkies
Mr. Schmilkies's picture

I'm going blind with all this chart porn.

Tue, 12/15/2015 - 15:50 | 6927060 Exalt
Exalt's picture

survey is by far my favourite chart porn genre. kappa

Tue, 12/15/2015 - 15:21 | 6926923 Dr. Engali
Dr. Engali's picture

The only data point we need to know in order to be successful is what Gartman thinks. 

Tue, 12/15/2015 - 15:19 | 6926933 White Knight
White Knight's picture

Ths smartest guy in the room knows that he doesn't know anything, and keeps his mouth shut accordingly.

Tue, 12/15/2015 - 15:21 | 6926943 LawsofPhysics
LawsofPhysics's picture

Please, they know exactly what they are doing.

The only "concern" they might have is precisely how they are all going to fit in that rocket ship to mars with all the loot once the guillotines roll.

Look, when you commit fraud on a global scale you most definitely will need to leave the planet...

Tue, 12/15/2015 - 15:22 | 6926953 Bill of Rights
Bill of Rights's picture

The coming price inflation that no one is paying attention to is gonna be epic.

 

Goldman Sach senior rates strategist Silvia Ardagna told clients last week the market is mispricing the potential of rising inflation:

 

As unemployment continues to fall and excess slack gets absorbed, we expect that US core and services inflation, which are already contributing about 2 percent to headline inflation, will continue to accelerate gradually but faster than the market expects.

Tue, 12/15/2015 - 15:35 | 6927000 LawsofPhysics
LawsofPhysics's picture

Let me I see if I understand this correctly; Goldman thinks that as more and more waiters and Bartenders become more and more dependent on SNAP in order to simply survive, all these new part-timers are going to have even more money to spend on other stuff in the real economy?

That's some funny shit right there.

Tue, 12/15/2015 - 15:35 | 6927001 lincolnsteffens
lincolnsteffens's picture

Oh, right, everybody knows unemployment is falling. Biggest jump in inflation due to rentals. Hows that going to work out soon??

Tue, 12/15/2015 - 15:25 | 6926964 SillySalesmanQu...
SillySalesmanQuestion's picture

The markets are acting like there will be no rate hike and moar, double-plus gooder, QE foevah...

Tue, 12/15/2015 - 15:25 | 6926966 somebody poison...
somebody poisoned the water hole's picture

The only charts that really matter today are all green... except the gold one. 

 

http://www.marketwatch.com/

Tue, 12/15/2015 - 15:26 | 6926970 Sudden Debt
Sudden Debt's picture

Almost every company has seen it's sales contract.

Nobody wants to blame the economy because the last time it happened, they all had to fire people.

And those same people who make the analyses for the company, don't want to admit it's all happening again.

So they blame other factors like the warm winter and not enough innovation and blablabla.

 

That's the same what happened in 2007. It took about a year of ignoring the facts to go into a full blown crisis mode.

So we can only wonder how long it will take them now.

But even in 2007, markets kept going down with small spikes to keep everybody confused and wondering if it are only dips.

Tue, 12/15/2015 - 15:34 | 6926997 peu peu moxi
peu peu moxi's picture

SO YESTERDAY "The Smartest Guys In The (®)AUM "

Tue, 12/15/2015 - 15:46 | 6927044 adr
adr's picture

Jarden Corporation is merging with Newell Rubermaid to create a conglomerate of unprecedented bullshit. Putting sporting goods, elmers glue, camping gear, and overpriced crap scented candles under the same umbrella.

Tue, 12/15/2015 - 18:23 | 6927748 moneylover3
moneylover3's picture

Meanwhile $1 Billion is missing from FED's Balance Sheet and Aunt Yellen in untraceable...!:D

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