Bank of America: "The Most Dangerous Moment For Markets Will Come In 3 Or 4 Months"

Tyler Durden's picture

Two weeks after BofA's Michael Hartnett previewed (and timed) not only the "Great Fall" of stocks, but also explained that the Fed and global central banks are now in the business of making the "rich poorer", he is out with a new note which looks at the Fed's latest U-turn, which has unleashed the latest market buying spree, warning that "further upside in risk assets will create problems later in the year" (for three reasons he lists out), and concludes that "ultimately, we believe the extremely strong performance by equities and bonds in H1 is very unlikely to be repeated in H2." Hartnett then goes back to his original thesis that the Fed will no longer pursue its primary mandate of pushing stocks (i.e. wealth effect and confidence) higher because it is "now politically unacceptable for the Fed and any other central bank to stoke a bubble on Wall St."

As a result, "monetary policy will have to tighten to raise volatility, reduce Wall St inflation, and reduce inequality. There are two ways to cure inequality: you can make the poor richer, or you can make the rich poorer. The Fed will reduce its balance sheet in the hope of making Wall St poorer."

Hartnett may be right, but for now Wall St. has obviously decided that when push comes to shove - or market goes to crash to be more specific - the Fed will not destroy its legacy from the past 9 years overnight (and perhaps even end the institution of the Fed if the coming crash is similar to 2008) and will simply do what it has done so many times before: fold and inject even more liquidity to stabilize assets.

Of course, "Wall St." has been wrong before, and if the BofA strategist is right, pain is coming. He even says when:

The most dangerous moment for markets will be when rising rates combine in three or four months’ time with an inflection point in corporate profits. In anticipation of this, we would use the next couple of months to buy volatility, and within fixed income slowly reduce exposure to IG, HY, and EM bonds.

Key excerpts from his note below:

Icarus and inequality

Further upside in risk assets will create problems later in the year.

First, central banks will simply exacerbate inequality. Note how the total amount of hours worked necessary to buy a unit of the S&P 500 has risen to an all-time high (Chart 1).

Second, the combination of rising equity prices and balance sheet reduction starting in September will cause bond yields to rise. Central bank assets, most of which are held in fixed income assets, are now equivalent to 31% of the $49tn fixed income universe tracked by the BofA Merrill Lynch Global Fixed Income Markets Index (GFIM); and the percentage of global bond market monthly returns explained by the monthly change in central bank balance sheets has dramatically increased in recent years (Chart 5).

Note how in the past year, the months in which central bank asset purchases have either declined or been very small have coincided with months of weak performance from global bonds (Table 2). This was particularly the case in the fourth quarter of last year and a similar pattern is emerging this summer.

And finally, as bond yields rise, financial conditions will tighten. Financial conditions are a leading indicator of corporate earnings and they are already warning that US EPS will very soon hit a peak in YoY terms (Chart 6).

A simple indicator of financial conditions using Treasury yields, corporate bond returns, and the US dollar does a very good job of leading US profit growth by 6 months. The indicator of financial  conditions is currently “easy” but less easy than it was 3-6 months ago.

Ultimately, we believe the extremely strong performance by equities and bonds in H1 is very unlikely to be repeated in H2. It is now politically unacceptable for the Fed and any other central bank to stoke a bubble on Wall St. Monetary policy will have to tighten to raise volatility, reduce Wall St inflation, and reduce inequality. There are two ways to cure inequality: you can make the poor richer, or you can make the rich poorer. The Fed will reduce its balance sheet in the hope of making Wall St poorer.

The most dangerous moment for markets will be when rising rates combine in three or four months’ time with an inflection point in corporate profits. In anticipation of this, we would use the next couple of months to buy volatility, and within fixed income slowly reduce exposure to IG, HY, and EM bonds.

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robertsgt40's picture

Which translates to the collapse will happen sooner 

Sliced into ribbons's picture

Or later. Or not at all. Plan accordingly.

Captain Chlamydia's picture

Whatever. Can not happen soon enough. Been living in this matrix for far too long. 

ZeroPoint's picture

I was hoping to have the collapse happen back 08 when I was in my 30's. It will be wonderful fighting through arthritis and the worthless neighbors when it does happen.

 

 

peopledontwanttruth's picture

Some of the biggest events in history has happened in that same time around September to October. Hmmm maybe they're on to something

coast1's picture

thata what I was thinking....3 or 4 months?  puts us in November...I thought Mr. Yellen was going to raise rates in September, and dont forget the debt ceiling coming soon...

RSDallas's picture

it tells me that thus market is about to explode!  These crooks continue to work the system.  

G-R-U-N-T's picture

Yeah, worldwide government bonds collapse and the Dow launches to 30 - 40k.

Two Theives and a Liar's picture

No one knows when the REAL "dangerous moment" will come. My guess is us Lumpen will be the last to "know"...

Whatever...I keep stacking. 

Arnold's picture

You'll know by letter.
All your equity suddenly becomes governance bonds.

how_this_stuff_works's picture

Just in time for Merry Christmas!

Sliced into ribbons's picture

I'm guessing if the market crashes Trump will find a way to blame Hillary.

Cordeezy's picture

Septermber  and October are usually dangerous months for the market.  Most crashes happen in those months.

 

 

www.escapeamazon.com

 

 

PUNCHY's picture

See: Mark Twain's view on matters market's and dangerous. ..... "September and October are dangerous months for the market, as are January, February, March, April and so on and on"

Mark Twain had a really great way to solve the poblems of the modern capitalist system, I think he termed it:- Taking-in-each-other's- laundry. The man was an absolute common sense genius and he would have cut these 21st century finance smart asses down to size in about one sentence!

Arnold's picture

Break some windows.

--Krugger

JohnGaltUk's picture

I have read a lot of Mark Twain and he had an intellect that cut straight though, sharp as a pin.

Robert Paulson's picture

Hold, Muppets, Hold!

SunRise's picture

" There are two ways to cure inequality: you can make the poor richer, or you can make the rich poorer. ".  

Now there's an assumption!

lester1's picture

The Fed's PPT will just buy more stocks and keep everything propped up. Watch.

LawsofPhysics's picture

Well, BofA is indeed one of the tentacles of the Fed, so they might know...  ..."markets", LMFAO!!!

Fuck em, jump you fuckers!

"Full Faith and Credit"

Hemiskull's picture

St. Valentine's Day Ma$$acre

kavabanga's picture

Just a humble view S&?!

https://www.tradingview.com/chart/SPX/jGDwq0vi-Gravity/

Continuing analysis of trends, I looked at each blow off top, or move to highs, and calculated it's percentage in market tops from back to 1987. The luxury is I know where the top is. Current price is definitely in that range of past market tops. No matter where the price of where the top gets put in, losing the 2090 area will signal a market crash, no doubt in my mind.

Guyzz239's picture

Bank of america is to no trusted. The only analsyt in america who is giving accurate market calls is Shepwave.  but even they need to be watch because of their connections.  they have been calling the dips and the rallies in stocks so for now that is what is working. ZH would do well to stick with those articles.

RoBERTAZ's picture

Yes but most on here are not really traders. Any real investors already know them. I have a feeling a lot of perma bears on ZH have gone bellyup by now. 

Dr.Carl's picture

SW  is good but they are private.  Their readers make money.  BAC is good for their preferred clients only. Reviews like this are meant to instill confidence but not any clear direction.  There is a difference. 

Consuelo's picture

 

 

The 'most dangerous moments' are playing out nearly on a weekly basis, hidden in plain view.   But because the 'market' still believes the universe revolves around the U.S. economy, it remains invisible.   Every antagonization towards China and Russia equates to a firmer resolve and/or acceleration of moving out/away from dollar-based trade.   Nothing complicated about it.    It simply chips away little by little, until one day the average American wakes up to a different economy.

Lost in translation's picture

Didn't they say the same thing 3 or 4 months ago?

XBroker1's picture

I have zero risk tolerance, so I've been collecting my 1% religiously. lol

Akzed's picture
"The Most Dangerous Moment For Markets Will Come In 3 Or 4 Months"

And they'll let us know all about it a few weeks after it happens.

Last of the Middle Class's picture
The Most Dangerous Moment For Markets Will Come In 3 Or 4 Months"

 

Can kickers unite!!!! She's saying the next rate increase will be a "bitch" 

TrainReck's picture

A Banker saying the Central Bank is in the business of making the rich poorer? They're hoping to make Wall Street poorer. Are you kidding me jerkoff? Who in their right mind believes that pscho-babble? All of a sudden the Tin Man has grown a concious? Frickin comical