Brace For A Year Of "Peak Everything, Big Rotations" - Here Is BofA's Guide How To Trade It

Tyler Durden's picture

Over the past year, Bank of America's chief investment strategist Michael Hartnett has often repeated that when looking at the "transforming word", one core theme that emerges is the rotation away from monetary to fiscal policy, and from "Wall Street"-focused strategies to "Main Street." Now, under the Trump presidency, his vision may be validated. On a report "peak returns, big rotations" he shares BofA's asset allocation under the new regime for 2017 as follows: long stocks (except in North America where he is bearish), real
estate, commodities, and the U.S. dollar, while shorting bonds.

Among his suggested trades are long inflation, short deflation; long Main St., short Wall St.; long fiscal winners, short “ZIRP” winners; long real assets, short financial assets. Hartnett also lays out the expected returns these various trades: low/negative for bonds, with single-digits for U.S. stocks, commodities, U.S. dollar, EM; sees double- digits for Japan, Europe, U.K. stocks, oil.

Hartnett says. "we believe that for first time since 2006, there will be no big easing of monetary policy in the G7, and that interest rates & inflation will surprise to the upside."

A summary of the bank's 7 key themes and trade is shown in the table below:

When looking at 2017, Hartnett says that he expects a year of "peak returns and big rotations" and break out the divergence from 2016 as follows:

In 2016

  • Global interest rates fell to 5,000-year lows; central bank purchases of financial assets topped $25tn (i.e. >GDP of US & Japan); the stock of negatively-yielding global bonds surged to $13.3tn.
  • Quantitative Failure, BREXIT, US election caused policy leadership flip from monetary to fiscal stimulus.
  • A flash EPS recession in H1 was followed by acceleration in wage inflation in H2 (to 7-year highs in US).
  • The greatest bull market in bonds ever likely ended on July 11, 2016 with a 30-year Treasury yield of 2.088%.

In 2017

  • We believe that for first time since 2006, there will be no big easing of monetary policy in the G7, and that interest rates & inflation will surprise to the upside.
  • We forecast acceleration in nominal global growth: BofAML Economics forecast US nominal GDP up from 3% to 4%, non-US up from 6% to 7%.
  • We believe fiscal stimulus accelerates, trade and immigration policies tighten, and wage growth picks up, boosting domestic demand across the G7, and hardening our “buy Main Street, sell Wall Street” theme.
  • Bond losses likely will constrain gains in commodity and stock markets unless Japan, Europe, China GDP/EPS surprises meaningfully to the upside or US productivity surges.
  • We nonetheless expect strong returns from assets tied to inflation, Main Street, fiscal and real assets, despite losses from assets tied to deflation, Wall Street, “ZIRP” winners, financial assets (Table 4).
  • Finally, disruptive technology and aging demographics remain powerful secular forces; they won’t likely prevent a cyclical pick-up in inflation; but they are likely to constrain the magnitude of the rise in rates and inflation.

Which brings us to the seven top investment themes of 2017 according to BofA,virtually all of which seem to have a "Peak" preface - perhaps we have finally reached "Peak" peak.

  1. Peak Liquidity…era of excess liquidity is over
  2. Peak Inequality…more global fiscal stimulus to address inequality
  3. Peak Globalization…free movement of trade, labor, capital ending; FX wars starting
  4. Peak Deflation…secular low point in bond yields now behind us
  5. Trough Volatility…era of “flash volatility” and “pain trades” continues
  6. Peak Passive…active investors to outperform passive investors
  7. Transforming World…CRISPR, robotics, eCommerce constrain inflation upside

And the details:

* * *

Peak Liquidity:

- Long banks (GBKX), short bonds (W0G1)

We believe the era of excess central bank liquidity is ending (Chart 1): Fed will hike, BoJ/ECB “walking back” negative rate policies, central banks feeling political backlash for fueling inequality. In 2017 markets likely will not benefit from a big monetary easing for the first time since 2006. Assets that “lost” under the QE/ZIRP/NIRP regime, e.g. bank stocks, should benefit as central banks retreat and rates rise. Global banks trade on 1X book value versus 4X book for a “bond proxy” sector such as consumer staples.

* * *

Peak Inequality:  

- Long Main St e.g. US homebuilders (S5HOME), short Wall St e.g. REITs (BBREIT);
- Long small cap value (RUJ), short small cap growth (RUO)

Electorates are demanding a new “War on Inequality” by policy makers, which means less taxpayer money being spent on bonds and more money on people via fiscal spending or tax cuts to boost wage growth. We estimate that fiscal easing in Japan, Canada, Korea, Europe, and the US could total more than $1tn of stimulus in 2016/17. And note G6 public investment as a share of GDP is currently at its lowest level since 1948 (Chart 2). As fiscal stimulus accelerates, trade and immigration policies tighten, and wage growth picks up, domestic demand is likely to surprise on the upside. This supports our “buy Main Street, sell Wall Street” theme. A broader recovery in global residential real estate would allow a “good” rise in rates to occur and cause a big rotation to homebuilders from REITs, a huge beneficiary under the QE regime. “Secular stagnation” was similarly highly beneficial for “growth” stocks versus “value” stocks: small cap growth has massively outperformed small cap value since 2006; we expect reversion in 2017.

* * *

Peak Globalization

- Long global small cap (MXWOSC), short US tech (IXK)
- Buy 1-year USDCNH vol
- Long basket of UK, Japan, China, Mexico exporters, short US multinationals

The 1981-2015 era of free trade, capital & labor mobility appears to be coming to an end. Electorates are shifting in an anti-immigration direction. Anti-trade populism is on the rise (a recent poll showed 65% of Americans say trade policies have led to a loss of U.S. jobs, versus 13% who believe trade policies created jobs). BREXIT and the US election represent populist repudiations of the globalist status quo.  Anti-globalization means less deflation, a big positive for global small cap stocks versus the “architects of deflation”, US tech. The rise of populism means trade and FX wars are more likely. To hedge against an escalation of trade tension between China and the US own 1-year offshore Chinese renminbi volatility. And own exporters that will or are likely to benefit from currency devaluations (UK, Japan, China, Mexico) versus US multinationals, which are likely to be pressured by dollar appreciation in 2017

* * *

Peak Deflation

- Long real assets, short financial assets
- Long TIPS (G0QI) vs Investment Grade bonds (C0A0)
- Long Japanese banks (TPNBNK) FX-hedged

The trade of the past 35 years has been lower inflation and interest rates (Chart 3). We believe the greatest bull market in bonds ever ended on July 11, 2016 with a 30-year Treasury yield of 2.088% and “peak” expectations of deflation. In 2017 investors likely will experience a backdrop where inflation surprises to the upside leading to further rotation from entrenched long positions in “deflation assets” to assets that benefit from higher rates and inflation. Real assets should outperform financial assets (the price relative of real estate, commodities, collectibles to stocks and bonds is currently at its lowest level since 1926). Investment grade bonds have been big deflation winners and are currently trading close to 2 standard deviations expensive relative to both Treasuries and TIPS. We expect this excess valuation to unwind. Japanese banks (trading at 0.7X book), the world’s deflationary poster child, have the most to gain from “peak deflation.”

* * *

Trough Volatility

- Buy bond volatility via 2yr Treasury Note 1yr straddles
- Long British pound (GBP), short Brazilian real (BRL)

Price action at secular inflection points tends to be big and violent. Between July 1980 and October 1981 US bond yields surged from 10% to 16%. By October 1982 they were back at 10%. The lowest interest rates in 5,000 years in 2016 represented an “undershoot” that can be quickly unwound. Bond volatility is very likely to rise in 2017 (note Treasury market volatility surged from 5% to 31% in 1980).

Volatility means the era of “flash volatility” and “pain trades” continues. 2017 is likely to be another year where being contrarian works at moments of extreme price action and positioning. Heading into 2017, the most contrarian global “long” is the UK equity market and sterling. In contrast, EM debt and EM FX, most particularly the Brazilian real, benefitted greatly in 2016 from lower-than-expected growth and yields in developed markets. Buy GBPBRL. Our EM strategists are cautious EM near-term on higher rates volatility and low liquidity, but expect buying opportunities to emerge as 2017 progresses as EM fundamentals assert themselves and US real rates stabilize

* * *

Peak Passive

- Long dispersion via short SPX vol & long equity sector vol

Based on projection of trailing five-year growth rates, passively managed equity assets could exceed actively managed equity assets by 2023 (Chart 4). The 2017 “inflection point” backdrop of higher rates & EPS is positive for stock pickers and macro managers, while peak returns mean less upside for passive investors and closet indexers. We expect active investors to outperform passive investors. A play on this theme is to own dispersion (the range of expected returns) via buying volatility at the sector level while selling volatility at the index level.

* * *

Transforming World

- Long Robots (ROBO), long Biotech (NBI)

Finally, disruptive technology and aging demographics remain powerful secular forces; they won’t prevent a cyclical pick-up in inflation; but they are likely to constrain the magnitude of the rise in rates & inflation.

The rise of robots will continue. The global robot population is expected to rise from 1 million in 2010 to 2.5 million in 2018…you can’t build a wall to keep robots out (Chart 5). Meanwhile, CRISPR is making enormous leaps in genomic editing and genetic engineering, and has the potential to repair genetic mutations that cause hereditary disease, cure disease, and extend life expectancy. Our analysts are bullish on biotech given reduced regulatory risk post-election and cheaper valuations after the 40% selloff 2015-16. A breakout in NBI index above 3200 would signal the end of the biotech
bear market.

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thesonandheir's picture

Please explain to me how inflation helps the 99%?

Joe Davola's picture

Peak listicles of things about to Reach the Tipping Point!

BaBaBouy's picture

They don't mention ART ...
Although the market is on IDLE right now, its holding @ record levels...
Living artists are selling at $30M plus regularly.
Lots of Money chasing contemporary and classic ART.
Im sure the bankers are aware, they keep it on the downlow for ??? reasons...

the grateful unemployed's picture

you know the collectible market really stinks, at least in broadly based consumer items, like hummel figures, but art is another story because there are only so many picassos and the rich can bid them up between themselves to see how many million they want to spend. i think in the end the market for a lot of these impressionist art geniuses will go flat, like high end real estate. in the end the market gets too big, too many choices and pretty soon the rich are just trading their own hummel figures back and forth and the market in those is showing zero inflation for the last fifty years. a lot of people tried to fund a retirement that way. sad

GUS100CORRINA's picture






LawsofPhysics's picture



Tell me asshat, what are your equities priced in?

CPL's picture

You see the problem now eh?  It doesn't matter what you are buying with the currency, it's what the currency is worth by value and what it buys.  The fiat currencies do all head towards consolidation to zero point eventually, mathematically and systemically it can do nothing else but implode.  Without any features in the system to fix the glaring hole in the armour.  Easier to sit and wait.

Why?  Because the currency velocity has accelerated itself the more times the print button has been pushed, in higher and higher volumes of currency.  Like a gambler at casino doubling down without the need to worry about recapitalization since they can magically push the button each time they need a fresh bank roll.  Eventually the currency does implode leaving no options, the proper term most normal people use is 'that be right fucked'. 

At that point it doesn't matter how far you want to dig underground or how deep a mountain a person goes and hides in or even hiding in the bush.  The only thing keeping it running is the  the velocity of capital.  Which is no longer driven or governed by the central banks pushing the print button.  It's all the interest accrued on all that debt, seen and un-seen.  World GDP on a debt to equity ratio metric flew past the point of no return around 2003.  At that point in time, economically, it's means game over for that economic paradigm of fiat currency in general.  At this point everyone is just watching the clock hoping it goes faster.  In the meanwhile though everyone gets eaten ass up from inflation.

That is unless you've got an option to migrate the existing capital from a system that is shitting the bed in inches, to new capital that's transparent.  Nor is it locked into a single country and focuses if a country's ability can use tools and technology well.  Therefore BitCoin.  BitCoin is built, and has been tested in a live financial environment, to be tenacious for exactly the above situation.

Point blank...the longer I wait, the richer I get with a currency I trust using tools I know in an open market that's at least growing 90000% per year considering that the first transaction was a trade for a slice of pizza.  Got something to say to you fiat and metal enthusiasts.  Amateurs, get off the court.  Quit while you able and learn how it gets done at school.  Take I'll take your rock anytime I want.

bonderøven-farm ass's picture


+1...It's not about the stock, it's about the flow. 


-1....Assigning value to imaginary, electronic whiffs of fairie dust

the grateful unemployed's picture

or if you run a business with pricing power.

the grateful unemployed's picture

you buy a home, lock in a 3% mortgage and watch mortgage rates triple. you go to work and the guys and gals are outside holding picket signs, you think oh oh, but before you get into line management agrees to higher wages and benefits. suddenly paying on that 3% mortgage just got a lot sweeter. no mailing in these keys. you put some money in the bank and they actually pay you interest. imagine that? oh sure things cost more, opera tickets, golf at the country club you have to be careful how and where you spend and you are doing something you have never done, saving money. why do you suppose the central banks keep trying for inflation, they arent dumb, they dont want to destroy the world. inflation is the working class panacea

LawsofPhysics's picture

For those actually working...

Even better for those of us who are debt free....

Unfortunately, the takers now far outnumber the makers...

baldknobber's picture

And every public employee and SS recipient gets nice fat COLA raises, paid for by who?  When you are in debt to other people inflation can get you off the hook, when you are in debt to yourself you are screwed

the grateful unemployed's picture

those nice fat COLA raises never keep pace, and you end up eating catfood in your golden years, its been proven time and again. you can work your way through it if youre young enough and you can actually find some work or run a business. its not exactly a good environment for that but then a lot of americans cant handle it anyway. so sign if youre one of those guys who thinks Trump will fix you, better off to sign up now for the free shit army. three hots and a cot.

Grandad Grumps's picture

The only way to win is to not play.

RagaMuffin's picture

Gee, bet with bailout Boa or Martin Armstrong..............\s

bada boom's picture

Peak bullshit too?

BigWillyStyle87's picture
BigWillyStyle87 (not verified) Nov 21, 2016 12:34 PM

Wait so this guy thinks that Janet Yellen finds it more politically expedient let the bond market destroy the global bubble economy on her watch before she initiates QE4?

DetectiveStern's picture

Rising inequality's solution is more stimulus? Srsly why do they pay these people. The inequality is caused by the fact that all money is debt owed to the fucking banks!

Hohum's picture

They pay these people because these people believe debt can grow faster than income forever.

saveUSsavers's picture

How long before B of A SCUMBAGS call "earnings TROUGH behind us " ??


the grateful unemployed's picture

what a list of knee jerk assumptions. read hussman besides the fiscal spending wont kick in for a couple years meanwhile what exactly is the catalyst for rising rates? Japan and Europe? a global recession? where is demand? in the EM? China housing?

LawsofPhysics's picture

Demand for what?  be specific!


Can I interest you in a financial "product"?



trgfunds's picture

So I'm wondering... why suddenly now? What has changed in the last few WEEKS? Debt and prices are only higher. Metrics are only the same or worse. Dollar spiking, rates spiking, mortgages slowing. Where is this inflation gonna come from? ESPECIALLY with no additional QE. With rates on the rise and 20+ trillion it is unlikely Trump or anyone else gets any large spending bill through. It is as if they have waited until this exact moment in history to "trigger" this "inflation" meme and I think I know why. This is the final sweep up for the little guy to get into stocks, etc. and think that everything is fixed because Trump saved the day, etc. but I think the long con is to place an economic depression onto Team B (Trump et al.) so Team A can come back and say they told us so and spoon feed us our medicine.

Ironmaan's picture

Your resoning is spot on. Thats why Obama has been continuously saying "We left the country better than we found it". Theyll wait a few months and then the rug will be pulled out from under the the Trump admin and they will say "i told you so". 

There are many more liberal unelected beurocrats than conservative beurocrats and so the long con WILL be played.

brushhog's picture

When they talk about "bond losses" they are talking about reductions in bond prices and increases in yield. This is bad news for people who buy and sell before maturity, its neutral news for people who buy and hold until maturity, and its great news for people looking to buy in and get a return. I own bonds and I really couldnt give a shit less about the prices tanking. I receive a fixed return, and when the bond matures I get my initial investment back.

I'm actually waiting eagerly for prices to fall so I can lock into some higher yields.

trgfunds's picture

Yeah. But then where do you lock in? Nobody knows the risk free rate anymore. You think 4% is high? Then it goes 6% and takes you years to just break even. Nobody wants that kind of capital loss, regardless of the coupon. You might as well have just had negative rates at that point. Honestly if you're doing anything at this point you should be reducing your duration, and say screw the yield because this whole thing just went batshit crazy after the election and it is anyone's guess where we are going. The least crowded trade is cash/equivalents. This thing is gonna blow up eventually, but early is wrong so you can't be short. These string pullers really have officially made everyone look like an idiot. Now they're shaking down grandma and grandpa and anyone who owns a bond before rates go full retard zero or negative on everything. Rates CANNOT go higher. This is the mother of all head fakes. Position accordingly.

brushhog's picture

Its like saying I got a raise of 4% but then the boss offered a bunch of other people a 6% raise, so now I'm operating at a loss. I cant see it that way. I got a 4% raise, what do I care if they are now offering 6%? NObody has a crystal ball. Somebody sitting on an old 7% bond is doing pretty well by today's standards, it doesnt really matter that at some point they might have got 8. There is no capital loss unless you plan on selling into the low market. My yield is the same, and my coupon at maturity is exactly the same. My situation has not changed.

Now as far as this being a head fake, I kind of agree with you there. Rates wont go up to far for too long. I think we'll see the 10 yr approaching 3% at its peak, and the 30 approaching 5%. We'll see that for a year or two and then they'll start cutting them. When I see rates at those levels I'm buying in. Maybe Im wrong and it goes up another point before coming down, so what? In the long run those will be the highest rates you'll see.

ihatebarkingdogs's picture

Does anyone listen to BofA for anything any longer?

I left BofA in 09 after 39 years of patronage. Screw Ken Lewis, or what ever the F the jack-wad's name is.

I still have a BofA credit card. Pay it off everfy month. While I don't pay any interest they still pick up 3% from me in merchant's fees. I waited 30 minutes in line today to make my CC payment in cash. Two tellers open, and every illegal, misfit, and muslim (which are the demographich BofA caters to now) in South Bay felt the need to tell the teller their life or sob story of the day. 30 minutes with 6 people in front of me; my transaction was completed in 90 seconds.

Gawd, I need to apply for different CC. I really need to cut the leash to BofA. I didn't even read the article. The comments reveal I didn't need to. Same old BofA bullshit.