BofA Lashes Out At The Fed: "Take That Punch Bowl Away" Or Face A Crash

In a dramatic appeal for rationality at the Fed, Bank of America's global FX strategy team today released a note titled "take that punch bowl away", which laments that while central banks backtracked from their hawkish recent rhetoric this week, it warns that "they will be sorry if they allow bubbles" and predicts that vol will increase this fall adding that the bank remains "cautious and selective in EM FX, despite the Fed-triggered rally this week."

The note comes 24 hours after BofA's chief strategist Michael Hartnett warned that "the most dangerous moment for markets" will likely come 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."

Of course, Hartnett's report is based on the assumption that the Fed will do what Yellen has threatened to do and hike at least once more in 2017, i.e. the "right thing."

But what if the Fed once again backs away from its plans to burst the asset bubble as all of the top FOMC members were loudly warning they would do just three weeks ago? Well, things will get much worse, as BofA's unexpectedly objective analysis of the bubble the Fed has blown in recent years, details:

The global crisis shifted debt from the private to the public sector, which now encourages high savings and leads to low interest rates. Population is aging in many countries, also supporting saving. And technology is a positive supply shock, leading to lower prices. High savings and low inflation keep central bank policies loose. Loose monetary policies in turn support risk assets. Equities are at historic highs and vol at historic lows, even more this week following a dovish tone by Yellen in her Congress testimony.

Here Vamvakidis echoes Hartnett and says that in his, and his bank's view, "we do not believe that this is sustainable, and we have been arguing that we will see the beginning of the end of this new not-so-normal market this fall."

For those who have missed our coverage of Hartnett's weekly laments, BofA's FX team recap the bank's thinking of why the Fed and its central bank peers have been so aggressive in following a hawkish tone, despite economic data which continues to disappoint:

Central banks getting more concerned that they are fuelling asset price bubbles. We got a taste of this in recent weeks, with a number of central banks talking about loose financial conditions despite low inflation and the need to normalize monetary policies, but there was some backtracking this week. Our global investment strategists believe that central banks will act to pop the bubble later this year.


The unwinding of central bank balance sheets itself will gradually reduce their role in global markets. This role has been a distortion, as it represents strong demand for assets that is inelastic to fundamentals. The Fed is about to announce plans to start unwinding its balance sheet and the ECB is about to announce plans to first taper and then end its QE program. We believe both will help bring back some normality in fixed income markets.

Amen... only that may not happen if history is any guide. In which case what is an already bad situation will only get much worse. BofA explains:

If we are wrong and central banks do not take away the punch bowl, things will get much messier eventually. “Bubbles” may form that will eventually burst, leading to much higher volatility than necessary. Keeping rates low in response to persistent positive supply shocks that keep inflation low could lead to imbalances, with a painful eventual correction. Central banks did this mistake before the global crisis and kept monetary policies too loose as inflation was low, ignoring very easy financial conditions, excessive and sometimes irresponsible credit expansion and a housing price bubble. We do not believe, or at least we hope, they will not repeat the same mistake twice.

Unfortunately, with $15+ trillion in DM central bank liquidity backstopping the market, the threat of a crash is all too real - just ask Jamie Dimon - once the unwind begins. Which is why Janet Yellen, concerned about her legacy, may get cold feet in the last moment and to precisely that: "repeat the same mistake twice."

That said, all hope is not yet lost: recall that the catalyst the spurred the hawkish Fed was the assumption that monetary policy would be able to hand off risk asset support to fiscal policy. However, with Trump now mired in Russian collusion scandals, the possibility of some fiscal boost deal emerging is virtually nil.

There is still hope for tax reform in the US. Everyone agrees that the US badly needs it. Our corporate survey suggests that US corporates remain hopeful. However, our Global Fund Manager Survey and our Rates and FX Sentiment survey suggest that investors have given up. If it does happen this fall, many of the so-called Trump trades will come back. Our corporate survey also suggests that the share of non-USD assets that US companies keep abroad is much higher than consensus estimates, which could lead to a much stronger USD from repatriation following tax reform.

Finally, there are other risks:

... there are always potential shocks from unknown unknowns. Our survey data suggests that cash balances are not low, but we believe investors are waiting for market dips to buy. We believe that the market is not hedged for unexpected shocks, or implied volatility would not have been so low. The VIX index is reaching levels again from which the risks are mostly to the upside based on its history.

Oh well, at least there is a new generation of traders preparing actively for this worst case scenario, right? Well, not really.

Amid what has emerged as one of the most boring markets in history, Bloomberg reported this week that with nothing to do, traders spend their time on... tinder.

... one bond trader who spoke with Bloomberg said he’s been slipping out early to watch his kids play sports. A fund manager says his office just staged a golf retreat. And a trading supervisor at another bank confided that he’s spending more time swiping through potential romantic partners on the dating app Tinder.

And speaking of tinder, if BofA is correct, that's precisely what "markets" have become, now just lying in wait for the next lit match.


Snaffew CPL Fri, 07/14/2017 - 13:00 Permalink

maybe that mantra should switch to...Kill Janet Brutally!Kill Brainard Brutally!Kill Cohen Brutally!Burn the fucking Fed to the ground!That is just a suggestion to switch the mantra---in no way is this an endorsement to do these things---to each their own!

In reply to by CPL

CPL Snaffew Fri, 07/14/2017 - 13:15 Permalink

If developing a mantra you need something a large group of kids can chant and concentrate on.  Maybe some tweaks though.

Die Janet Yellen, die.Die Lael Brainard, die.Die Gary Cohen, die.Hitler did nothing wrong.

Keep the mantra easy to remember and tight.  Eventually we'll just change it into a nusery rhyme so all children remember what happens to failures and offers a thumbs up to a great man that did nothing wrong.

In reply to by Snaffew

CPL enfield0916 Fri, 07/14/2017 - 13:10 Permalink

Exactly none of them are allowed to bitch, they took the 'free money!'.  They took the OFFER and didn't read the fine print.  That means they gave their legal agreements and oaths for an eternity.  That also means no one gives a fuck about their crybaby bullshit.  They all have FAITH IN FIAT.  Now it's time for them to decide if their faith is unwaivering by giving the lives for the FAITH.Open season is declared on all bank employees.  From the janitor, the tellers, the branch manager, the district managers.  They will all be considered the martyr's for their Church of Fiat Faith.  Just keep hacking down their Priests and followers of Fiat currency to help send them on their way to the fiat afterlife with their fiat god.  If the employee quits, that's fine, leave them alone.  Any still working for a bank, offer no mercy.Then the insurance industry will be taken care of after the example is set with any and all bank employees.

In reply to by enfield0916

yogibear Fri, 07/14/2017 - 12:40 Permalink

Yeah, just like Goldman selling toxic CDSs and then betting against it to make a boatload of money.Then Goldman gets bailed out by the taxpayer  on it's bad bets.Banksters never lose. Socialize loses (taxpayer) and privatize profits. 

Too-Big-to-Bail (not verified) Fri, 07/14/2017 - 13:00 Permalink

Can't you just use new debt to pay for old debt? It has so far worked all along pretty good.

VWAndy Fri, 07/14/2017 - 13:01 Permalink

 Of course it will be crashing. Whenever they want it to crash.  Whoever they want to crash it into. Anybody they miss they have civil asset forfiture all ready to go.

jmack Fri, 07/14/2017 - 13:06 Permalink

The trap is complete.   They cannot tighten or they crash the system.  they cannot continue easy money policy, or they crash the system.  They are trapped, waiting for that next shoe to drop, spouting happy talk about how our controls wont let another crash happen like 1929.  Its amazing to behold.

OCnStiggs GOSPLAN HERO Fri, 07/14/2017 - 18:26 Permalink

No kidding!Many folks are saying, after a big crash, we may lose access to our trading accounts for awhile. Or net access may be down. How is digi-cash supposed to work when all the computers are asleep. Will crypyo currency crash to nothing if access becomes difficult? Seems logical!When and if the system reconstitutes itself, if they try any funny business with my account, I have paper records going back 15 years. Try that with BooFoo-thereum. LOL!!!Wonder if BofA's concern stems from their derivatives exposure? I am transfeerring all my cash out of BofA to my credit union because they have no derivatives exposure... 

In reply to by GOSPLAN HERO

TrainReck Fri, 07/14/2017 - 13:22 Permalink

Gee I wonder when that Bubble is really going to form. I've been watching the S&P explode since 3/31/09 when it was at 461.20, and watching the FED pump trillions of liquidity into the system. But I just can't grasp that this is a Bubble about to crash when Janet says" we"ll never see another financial crisis in our lifetimes". Thank God, I was starting to worry that what appears to be the biggest assest bubble in history is just an anomaly and were jus going to continue to make new ATH's - just like today. Gotta love the euphoria. It's been playing in a theatre near you for a long, long time.

khakuda Fri, 07/14/2017 - 13:35 Permalink

S&P from 1800 to 2500 in 16 months.  No, not a bubble, just keep rates below inflation forever and let valuations go to 70x earnings.Janet Yellen loves her free money tree.

khakuda rusty55 Fri, 07/14/2017 - 15:33 Permalink

Nope.  You can't short.  The Fed is owned by the markets now.  Even a 10% market and they would talk about lowering rates.The funny thing is what the Fed has done is ultimately deflationary.  Too much oil gets produced because money is free, too many cars get bought and encourage more to be produced which is deflationary when demand gets satieted (now).  When you encourage too much supply you get deflation.Just think, Japan has been monetary crazy for decades, yet no inflation in consumer goods.  Inflation is runaway in asset prices because cash yields are still very negative and even more negative after taxes.  Overstimulative monetary policy creates asset bubbles, it doesn't create consumer price inflation - which is fine because who other than the Fed wants that anyway.As long as these policies continue and they keep short rates negative and long rates at probably half of where they should be, assets will inflate like crazy.  Government bureaucrats have no interest in having bubbles pop on their watch and the only lesson the Fed seems to have learned from the last 2 bubbles is not to raise rates and pop them.  They haven't even demonstrated a willingness to lean into them to arrest the speculative excesses.  They should have their PhD's taken away because they continue to commit malpractice.

In reply to by rusty55

Blankfuck Fri, 07/14/2017 - 13:52 Permalink


rusty55 Fri, 07/14/2017 - 13:56 Permalink

This rally now on it's ninth year has managed to wipe out most perma bears on Zero hedge. Only a few left. Then market crashes. Shep wave been calling market moves like science. Thanks ZH

Blankfuck Fri, 07/14/2017 - 14:12 Permalink

Pure Ponzi! corruption collusion you name it! The banksters want million$ and billions for their own self. Holding the little hardworking people of the usa by the sword. We need to take down these banksters once and for all! Run BANK OF CORRUPTION OUT OF BUSINESS, RUN JPM MORGAN OUT AND WELLS FUCKO BANK AS WELL