One week after BofA CIO Michael Hartnett issued a "code red" for stocks after publishing a report in which he showed that while current market euphoria has surpassed dot com levels, what was going now is absolutely staggering and it's only getting crazier with each passing day and new all time high, he has tripled down on his calls for a near-term correction (recall his first reco to "sell the vaccine" hit about a month ago), he is out with a new report warning that the current "froth, greed, vaccine, inflation, renminbi the new Deutschmark" all portend a "toxic brew for uber-Goldilocks 2021 consensus", and is why he has called the current market with what may be the best sellside definition we have heard to date: the Frankenbull.
How did we get here? Here is the full breakdown courtesy of Hartnett:
- $1.3bn: asset purchases by central banks every 60 minutes since March
- 190: central bank rate cuts in 2020, 4 rate cuts every 5 trading days
- 37: US Treasury MOVE index of volatility at all-time low this quarter
- 9.2%: lowest global CCC HY bond yield since Sep'14
- $2.5tn: issuance of US IG, HY bonds, leveraged loans in 2020, all-time record
- $3.4tn: issuance of US Treasuries in 2020, all-time record
- $39tn: rise in global equity market cap from lows (to >$100tn)
- 25.3x: MSCI ACWI equity 12-month forward PE, highest since Mar'00
- $139bn: record inflows into global equity funds past 6 weeks (prior peak Jan'18)
- 9730: global equity offerings (IPOs etc) in 2020…$1.1tn annualized, best year ever
- 2009: 1st time since Q4 '09 (Chart 13) US IPO/secondary issuance higher than S&P 500 buybacks
So before we look at the coming year, first a quick summary of what happened in 2020, as summarized by the year's top winners and losers: flow winners as % AUM: gold (23.7% - Chart 10), cash (18.3%), tech (19.6%).
Corporate bonds ($340bn annualized - Chart 11) and tech ($55bn - Chart 13) attracted most money.
The losers were: Europe (-$43bn), US value (-$35bn), bank loans (-$24bn); winning themes were "safe havens", "yield" & "growth", losing themes "cyclicals" & "value".
And while we are confident regular readers are familiar with the reasons behind Hartnett's skepticism about the coming year, in his latest Flow Show he reminds his clients about the key catalysts traders should focus on as we enter 2021:
2021…Vaccine>Virus: according to BofA, 2021 will be a year of vaccine not virus, reopening not lockdown, recovery not recession; we hope 1.1bn people will be vaccinated by end-'21 (that's roughly 2000 people every minute) vs COVID case count of 69mn in 2020.
2021…Wall Street nationalized: as even Hartnett now admits, "central banks have never been this dovish at this level of asset prices and valuation before" (negatively yielding debt at all-time high as shown in Chart 4). And in yet another stunning admission, the strategist adds that "the new policy establishment is inciting deeper nationalization of bond markets in US, EU and Japan (also equity markets) via YCC so as to facilitate MMT, i.e. inflationary fiscal spending & unlimited deficits"; In other words, authorities are now "openly tolerating asset price bubbles (and extreme wealth inequality) so as to "bridge" to stronger growth and lower employment." Said even simpler: the "authorities" know they are pushing markets to a crash of unprecedented proportions... and they don't care because they have nothing else left!
2021…Renminbi is the new Deutschemark: According to BofA, China's PBoC is positioning the renminbi as new "hard currency": Why? Because China's central bank is the only central bank tightening financial conditions, unwilling to sacrifice balance sheet to finance government spending & debt; it's also why BofA says the CNY to appreciate to 6.30 in '21.
2021…Peak Consumer: None of this is good news for the economy, however, as the "stubbornly high unemployment claims and fading gasoline demand signaling best may be behind us"; too early to implement given Q4 fiscal and Q1 vaccine but Hartnett thinks peak consumer will be a key 2021 theme "as wealth/balance sheet/fiscal positives fade and corporations reluctant to expand workforce."
2021 ≠ uber-Goldilocks: Putting the above together - the frothy prices, the greedy positioning, the vaccine, inflationary & desperate policy makers, China, peaking consumer, represents a "toxic brew for a 2021 consensus of uber-Goldilocks" on the back of a surge in economic growth, low and stable rates & inflation; To find out when it all comes crashing down, MOVE, DXY, CRB RIND, LQD, SOX, XHB will be lead indicators of regime shift to stagflation (growth disappointing, inflation surprising to upside).
Another word for what Hartnett thinks is coming is "stagflation", which is never pretty. To help the bank's clients navigate what is coming he presents the following roadmap:
- Expect low, volatile, clustered, 3-5% long-run returns, like 1970s;
- Optimal AA is 25/25/25/25 in bond/stock/cash/gold;
- Barbell within asset classes during Big Change;
- Raise inflation hedges as US dollar weakens (real assets, gold, TIPS, small cap value, EM assets). Deflation utterly dominant in 2020, but long run contrarian entry point into inflation theme attractive;
In other words, as we enter 2021, it is similar to the transition from the 60s to the 70s (when we saw stagflation, monetary & fiscal instability, breakdown in global cooperation, civil disobedience)and which coincided with 3 big simple trends:
- rising bond yields,
- falling US dollar,
- volatile, sideways stock markets
As such, Hartnett's favorite big trades for 2021 remain a weaker US dollar, higher gold, and higher volatility.