Bank of America: "If You Are Going To Panic, Panic Early"

Who could have possibly predicted years and years of central bank policies aimed at making the rich richer while crushing the middle class, would ultimately result in the kind of "shocking" outcome as that observed last week when in an unexpected outcome, a majority of Brits gave their collective middle finger to an establishment that had only given lip service to fixing their plight when in reality it was simply backstopping banks, propping up stock markets and generally making billionaires out of millionaires (aside for tinfoil blogs who warned from the very beginning that the outcome of one after another failed central bank policy will be precisely income inequality, eventually culminating in war).

Apparently not Bank of America, which in a note by Alay Kapur, titled "The Tide is Turning - Populism and Panic", suggests that "If you are going to panic, panic early."

Here is why, as excerpted from: "Brexit: If you are going to panic, panic early"
by BofA's Ajay Kapur

If you are going to panic, panic early – Brexit is here. And so is risk-off sentiment. Our US economists now call for the US Fed funds rate to be lower for longer with the next forecast rate hike pushed out to December this year rather than in September. We suspect that overall global policy is now likely to be easier for longer, with even more unconventional policy possibly more palatable (helicopter money, anyone?). Our views continue to be the same as they were last week.

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We also think that Brexit has now possibly opened up more uncertainty about the European Union project and that the already beaten down Asian and EM equity markets could receive asset allocation flows from Europe.

As the move for Britain to leave the EU was largely unexpected (Oddschecker average probability of BREXIT implied from betting odds was only 23% before the referendum day), a majority of investors were caught off-guard. Some of the high frequency sentiment indicators like VIX Index, put/call volume ratio, trading in the S&P500 Index versus its components, etc., are in panic now.

We reiterate our views on the potential deeper message from Brexit. As Figure 4 shows, the past 30 years have seen a silent collaboration between the EM middle classes and global plutonomists, at the expense of the bottom 50% of developed market citizens.

While globalization, immigration and the free market have strong support from the winners of these themes – the plutonomists and the highly educated, in our view they seem to have underestimated the frustration of developed market middle and working classes. We think Brexit could just be the first surprise in a re-calibration of the world away from globalization towards more inward looking policymaking. Away from Wall Street and more towards Main Street. Away from financial asset reflation to more income support and wage inflation. We suspect that few will pay attention to these tectonic shifts – it will require more Brexit-type surprises for the message to sink in.

Bottom-line: It is a bit too late to panic.