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How The Fed Just Launched The Next Bear Market: BofA's Unexpected Conclusion In 8 Charts
While the afterglow of exuberance remains in stocks, BofAML's Michael Hartnett is less than impressed by what comes next...
As Fed hikes rates for the first time in 3,460 days, officially ending the era of extreme, abnormal monetary policy in the form of QE and zero rates, what do we see?
Risk assets were very oversold going into the Fed hike...they now bounce.
But the Fed hike follows significant tightening of liquidity; negative blowback is more and more visible, e.g. credit crunch causing less stock buybacks.
And global banks being at all-time relative lows indicate Fed tightening into deflationary expansion, as does the narrow breadth of economic growth, wealth and asset price gains.
Rising rates and falling profits are not a good combination for asset prices, so we will turn sellers of risk in early 2016.
The FOMC In 8 Charts
The Fed hiked 25bps, thus officially ending an unprecedented era of ZIRP and QE. Some quick thoughts:
The BofAML Global Breadth Indicator is on the verge of a tactical "buy" signal (Chart 2). Combined with high cash levels (5.2% in the Dec FMS = "buy signal") and the largest UW of US stocks since Jan'08, this suggests the final "pain trade" of a painful year is a squeeze higher in the most oversold risky assets.
The rate of growth of global liquidity (CB balance sheets + global FX reserves) is now shrinking (Chart 3). In the past 15 months, liquidity has unambiguously tightened as Fed QE3 ended, US real rates rose (see USGGT05Y INDEX), and China/OPEC FX reserves fell. Excess liquidity caused excess returns. But returns have been low and volatile in 2015 (cash is outperforming stocks and bonds for the 1st time since 1990) and we think the Fed hike will simply extend this backdrop...at least until stronger US data signals Quantitative Success.
Credit and commodities were two big "QE winners". The Fed hike coincides with a marked deterioration in the credit cycle, as evidenced by the widening of credit spreads. Rising rates and spreads means lower debt issuance, which in turn means less money for stock buybacks. Last week's S&P downgrade of Yum was driven by its announcement of a stock buyback program likely to be funded by even more debt. If companies cannot now issue debt to fund buybacks, this marks an important turning point for the stock market. Note wider credit spreads have gone hand in hand with underperformance of the stock buyback theme in recent months (Chart 4). We would thus take profits in any short-term bounce in stocks.
In every cycle, higher rates punish financial excess. The commodity crash of 2015 was driven by the combo of tighter liquidity (thus strong $) and excess supply (driven by tech disruption and the zero rate policies of recent years). The widening of Saudi Arabia's CDS (Chart 5) indicates the crash and its secondary impact are still being felt.
The end of QE3 in the autumn of 2014 sparked a bull market in QE "losers" such as the US dollar, volatility and cash, and a bear markets in QE "winners", such as EM, commodities & credit. The bear market in EM, commodities, credit would be irrelevant were the Fed hiking into a strong economy and a strong EPS trend. But the Fed is hiking at the same time as global bank stocks are at all-time relative lows versus global stocks (Chart 6). The absence of a bull market in bank stocks and a bear market in government bonds indicates the Fed is hiking into a very "deflationary expansion", hints at Quantitative Failure, and puts great onus on corporate earnings to support asset prices in 2016.
Unfortunately US corporate profits are currently falling 4.7% YoY and this has historically been associated with negative US payroll growth (Chart 7).
And while the overall stock market looks healthy, it betrays a fragile, deflationary bull market with increasingly narrow leadership (Chart 8).
The Fed's hike still leaves US and global interest rates close to "depression era" levels (Chart 9) and history is littered with examples of central banks struggling to escape from zero rates (Fed 1937, BoJ 1994 & 2000). We will turn sellers of risk in early '16 because rising rates and falling profits are ultimately not a good combination for asset prices.
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Gold takes its beating, just on a 24 hour delay. All is well.
7 years after the financial crisis and a gazillion amount of printing money, gold is rougly at the same level as back then while stocks are up and Fed are raising the interest rate. Mission accomplished, for their part....
The housing market crash started in late 2005
Avg Gold price by qtr
2005 Q1 $427
2005 Q2 $427
2005 Q3 $439
2005 Q4 $485
Could it be they simply have the situation well in hand?
The down arrows on your truthyness is typical of the brain dead that still cant come to terms that the market does what the ppt and the money changers says it does.
IF this market tanks, they wanted it to tank. IF golds up.down sideways they wanted it to.
IF oil goes under 30 bucks they wanted it too.
WTF do you dumbfvks here at 0hedge not understand about what we have been telling you for FVKIN YEARS?
Quit lying to yourselves, it is unhealthy.
"We will turn sellers of risk in early '16".
Yeah right. It's already been done and priced in, with some scapegoat holding all the bad assets.
Yes this time is different. Right. Every govt and currency and system follows the same path, is ultimately governed by the same market forces, and this one will be no different. Just because you seem to have given up intellectually doesn't mean others should. They control the sytem until they can't. Which is approaching as surely as any other time in history.
And btw, if you are despondent about the system, have you bought any bitcoin yet? Even with TPTB's ability to rig gold and silver and all other legacy markets, bitcoin is international and uncensorable by it nature.
Eat shit BofA, criminal losers. Let's hope the next 2 days are bloosbaths or I fear this will never end.
We will look back at Dec 16 as the day we started on the journey in earnest to recession, depression, WAR...it is as choreographed as was the farce of pumping up the market with money "out of thin air" and enriching a select few. Our masters have now decided that the flush shall begin...financial and human. Protect yourselves.
Sooner or later they are going to implement the Georgia Guide Stones and try to push the population world wide to their desired 500 million.
Too bad for them the earth is already pretty much destroyed for the long term future, unless they can eat radiated food via Fukushima- the gift that will keep on giving for centuries.
Is this what the Fed meant by "take off"?
Don't worry BofA, we will be seeing NIRP before you know it. Especially when you consider the way the fuckers in Washington like to spend.
SPEAKER FAIL: PAUL RYAN STACKS BUDGET FULL OF LIBERAL GOODIES – WILL PASS WITH DEM MAJORITYhttp://www.infowars.com/speaker-fail-paul-ryan-stacks-budget-full-of-lib...
I thought that fucker had been voted out of office?!?! WTF?!?!?
Boehner Light
krispkritter...
he's boehner extra stupid.
Paul Ryan is a pathetic, corrupt disgrace. I look forward to sending money to whomever runs against this sellout idiot in the next primary.
Great idea, keep voting. It has worked out so well so far..
*sigh*
And why the hell did Paul Ryan grow a beard?
Ryan = Twerp, rollover patsy, Rhino Rumpelstiltskin!
BofA - nice charts, when the hell am I getting my $4 million dollar tax-free bailout check?
So he could be on a watch list?
What's my Delta Tau Chi name?
Dorfman, l've given this a lot of thought.
From now on... your name is Flounder.
[/animal house]
I was there
shyster bank. they should be closed, like all too big too fail banks.
Rail traffic going down.
Demographics in play now.
Not looking very good for trucks, either, and the BDI is unchanged at 471 today.
You guys are looking at it all wrong. As long as the fed has a voice and a printing press, fundamentals mean absolutely ZERO. Sell PMs, buy stawks and treasuries, and read ZH for the entertainment factor only. The fed has your back - you can't lose!
Said like a proud card-carrying member of th PFC. Be sure to dust off your knees and wipe your lips when you're done worshipping your master....One more reason I just shrug my shoulders when I think about all those souls who have no clue and no inclination to 'Know'...
Didn't BofA also shift their derivative balance onto the "taxpayer-backed" side of the ledger as well?
Fuck this criminal bank! Kill every last one of these fuckers!
Yes they did. About 75 trillions worth to be exact.
Bank Of America Dumps $75 Trillion In Derivatives On U.S. Taxpayers With Federal Approvalhttp://seekingalpha.com/article/301260-bank-of-america-dumps-75-trillion...
trav7777
..............I will tell you that ANYONE should have a problem with a notoriously nepotistic and ethnocentric group having a stranglehold on the financial and media sectors. Do you dispute this?
But, should I attach "jew" to this statement, suddenly, it's a problem, isn't it? You've been conditioned...
http://www.zerohedge.com/article/chris-martenson-and-james-howard-kunstl...
Don't worry, I am standing ready to cut rates to negative infinity if need be to keep this mania alive!!
If there are people and governments stupid enough to buy our wallpaper at 2%, why not -2%?
Keep the fiat dream alive!! Long live the Fraudural Reserve!
How about Fraud-u-all Reserve?
yeah, right .... tell the muppets they should hang around until early '16 to sell off risk while the big boyz are dumping now.
why is it the FED's responsibility to save the economy? Let the business cycle work. Let bad businesses fail.
AND, instead, work to maintain a stable currency.
why is it the FED's responsibility to save the economy?
have you forgotten who these people are? They have to control everything. if your country refuses to let these parasites print the money and loan it back to the people at interest, most likely it is being bombed about now.
Where is Prof. Krugman, I'm sure he can tell us what is going on? kappa
i have the professor right here okay: first let's give Janet Yellen kuhonies for lifting interest rates on the back of Reverse Repo operations. Normally the Fed chief would just say here, it's 1/4 percent, take it or leave it, but there is some doubt that would work, so she dropped HELICOPTER money on the banks, but the medicine has aome sugar, and a half percent, incentive, they get to keep, they don't have to do anything.
The reverse repo gives them authority over all interest rates in all lending institutions. This move is too important to trust to the free market. More importantly junk credit, which is responsible for the collapse in oil prices will be brought down, that brings about the accompanying inflation.They're squezing some of the byproducts of malinvestment, or speculation out of the market. Too much liquidity, and the money they hand over to the banks isn't going anywhere, so that liquidity remains, its just as though the Fed transferred part of its balance sheet to every person in America through the banking system. The Fed took all that bad paper, waved a magic wand, and handed it back to the banks and its was magically made whole again. Now the hope is the banks lend this money to you (suckers) I mean borrowers to promote economic activity
Then President Trump sent all the workers home (to Mexico) so that puts upward pressure on labor costs. The days in which someone might clean your house for $100 are a thing of the past. Fortunately there are technological solutions, robots and such, so that improves productivity, which is the real engine of growth. God Bless Janet Yellen
The only difficulty is what does Wall Street make of all this? Now if those bank reserves find their way into more buybacks and M&A the market can transition nicely. Since there is no impetus, or pretense to actually lend those reserves out, they can exist as shadow collateral for financial engineering, where you don't need a real business model, you just slide the money under the door and watch your balance sheet grow.
Its all pretty smart though it confounds the old principle of innovation and capitalism, its more of a central planners power grab, which endears them mightily to the next president to which the Fed might say, Fuck with me and the whole house of cards goes up in smoke (sorry for the mixed metaphor, I am not a professor of Literature) but this whole Fed rate hike stuff has caused a mild form of schizoid brain patterns.
cheers!
In the spirit of Christmas Janet sends gifts to her member banks, any pagan holiday will do.
The market seems to be telling us everything we need to know. All major indices deep in red at 11:20.
That rally had the half-life of a half-day.
So, for absolutely no fee, Hartnett tells us 'Risk off' in 30 days.
What is wrong with that picture?
You do not need to read the B of A charts, all you need to know is this: The Fed runs on a 7-Year Economic Cycle, based on religious grounds.
Excerpt below, more here: http://stability7.com/2015/12/7-year-economic-cycle/
In both the Quran and the Bible (Genesis) it is known that Pharaoh had a dream of 7 fat cows eaten by 7 thin cows. This was interpreted as 7 good years eaten by 7 bad years. Today’s New York economic cycle follows a similar pattern. You start a bubble, then you intentionally burst it at 7 years. It is like building a beautiful home, then you destroy it in 7 years, it is creative destructionism at its best. A bubble burst in 2001, add 7 years, you get the crash of 2008, add 7 years of Fed’s ZIRP policy, you end up with this month’s crash of 2015. A clear 7-Year period. You can go back to 1994, and 1987 (Period T=7 years, Same pattern).
Continue here: http://stability7.com/2015/12/7-year-economic-cycle/
Isn't there suppose to be some multi $B, life as we know it ending, trading tsunami happening this week?
So if rates keep going up, who's going to end up with the companies that go bust for having so much debt now?
Sorry, but this article is complete bullshit to the extent that it was written by a banker. And, it should be obvious to everyone, including bankers, investors, regular people, that the last 8 years of ZIRP has failed to achieve any of its expected goals and these charts prove it. That said, the fed must exit ZIRP and normalize policy. It's the painful, but correct move.
Fed Rate Hikes Lead to Higher Gold Price:https://youtu.be/GtIGW3_LnSk
I used to hate doing “busy work” but now that’s the only work left! Please keep sending me fake budgetary bids so I can look busy! It's getting really awkward with everyone sitting around completely quiet doing nothing, including all the bosses.
Here are some signs of a coming recession.
1. Investors in high-yield bonds are expecting to see their first negative return since the start of the credit crisis in 2008.
http://www.marketwatch.com/story/deteriorating-junk-bonds-flash-warning-signs-for-stocks-2015-12-07?dist=afterbell
2. Factory orders continue to drop
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
3. Default risk spikes
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
4. M&A set record
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
5. Iron ore prices tumble
http://www.marketwatch.com/story/iron-ore-prices-keep-crashing-adding-to-global-growth-fears-2015-11-30
6. Baltic dry shipping index tumbles
http://www.marketwatch.com/story/shipping-index-falls-to-all-time-low-stoking-fears-about-global-growth-2015-11-19
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
Out on a limb here on ZH: maybe the Fed is right, time to prick the asset bubble?
Problem: deeper recession in 2016, Trump gets elected.
Trump has experience rescuing bankrupt entities -- don't remember if it was himself, or the Trump Organization, that went bankrupt in the 90s? He restructured loans, trimmed unnecessary spending, and rebuilt.
Of course, things would be better if Obama/Bush/Bernanke hadn't fucked everything up in the first place. But we have to play the hand we dealt ourselves.
Reagan's first couple years included massive interest rate hikes and a serious recession -- but the economy was better off for it. Yellen is no Volcker; Trump would have to tell her to leave (yes, the Fed is supposedly independent. Not really though).
Do you want a serious recession next year and into 2016? Or do you want a hopeless, endless, stagnant debt bubble for decade after decade like Japan?
Either way, the Fed screwed up. They should have normalized interest rates years ago. "normalize" means make monetary conditions "neutral", like 2-3% Fed Funds now.
Is does not mean tight conditions, no matter how many mis-educated MBAs appear on CNBC/Bloomberg.
that is the interesting question, isn't it? the answer is their record. they haver never been right. they always under or overshoot too early or too late.
WTF? The Fed "just" launched the next bear market? Just now? Is everyone at BofA this slow? No wonder they needed a massive bailout.
Bernanke, way back in 2001, grinned like a stupid idiot and announced that he had discovered a thing called a "printing press", and with his PhD training this printing press thing could bring about world peace, housing prices that never go down, mass euphoria.
News flash to all the idiots in academia: Bernanke did not discover the printing press. Banana republics from Zimbabwe to Argentina discovered this "magic" device decades before Bernanke. Japan decided to run 0% and endless deficits way back in 1989.
Bernanke's dumb policies were old news before he got lost and wandered off Princeton's campus. They failed over, and over, and over, and over, and over again. Never worked.
Actually, cheap debt has caused misery and suffering everywhere it was tried -- BEFORE Bernanke made his stupid helicopter speech.
And guess what? This time will not be different. Lots more misery and suffering await.