Bank Of America: "This Could Send The Nasdaq To 10,000"

Last weekend, One River's CIO Eric Peters explained what he thought would be the nightmare scenario for the next Fed chair, who as we now know will either be Jerome Powell or John Taylor, or both (with an outside chance of Yellen remaining in her post). According to the hedge fund CIO, the "worst case scenario" is one in which despite an improving economy, yields simply refuse to go up, leading to the final asset bubble and Fed intervention that "pops" it:

if we don’t see a sustained cyclical jump in wages, then yields won’t go up. And if yields don’t go up, then the asset price ascent will accelerate,” continued the strategist. “Which will lead us into a 2018 that looks like what we had expected out of 2017; a war against inequality, a battle for Main Street at the expense of Wall Street, an Occupy Silicon Valley movement.” He paused, flipping through his calendar.  "Then you’ll have this nightmare for the next Federal Reserve chief, because they’ll have to pop a bubble.”

While Peters never names names in his pieces, the "strategist" in the weekend letter was BofA's Michael Hartnett, who several days after Peters penned the above, followed up with some thoughts of his own on precisely this topic, and in a note released this week, described what he believes is the "biggest market risk" for the market. Not surprisingly, it is precisely what Peters was referring to in the above excerpt.

Responding to the question of "What is the biggest market risk", Hartnett writes that "in our gut, it’s that the two most important investment trends of the past decade, central bank liquidity & technological disruption, ends in a bubble for tech stocks (Chart 7), & High Yield & EM bonds, the epicenters of the “scarce growth” & “scarce yield” themes.

As with Peters, for Hartnett it all comes down to one thing: inflation and higher yields, specifically among long-dated yields: 

Multi-year lows in unemployment, multi-year highs in consumer confidence, soaring global PMIs, soaring profits, a doubling of the oil price, fiscal stimulus…little wonder the world is short bonds in 2017.


And yet inflation & bond yields refuse to rise.

The reason is simple: in attempting to stimulate wage growth, and thus benign inflation, the Fed continues to target the symptom of a condition which it no longer has any control over. Remember: Deflation = Debt + Demographics + Disruption? Well, they're back. Quote Hartnett:

Aging Demographics and excess Debt remain structural impediments to higher inflation. But the biggest impediment is technology, and the potential for the labor market to be permanently disrupted, as AI and robotics crush wage expectations, particularly in the service sector.

For now the bond market still gives the Fed the benefit of the doubt, with 10Y yields occasionally pushing higher when the nearly extinct bond vigilantes make a surprise appearance, pushing rates up at least until the next deflationary scare emerges. But what happens if the bond vigilantes finally throw in the towel? Well, that's what unleashes the final bubble... and sends 30Y yields toward 2% and the Nasdaq  to 10,000.

Capitulation of bond bears would send 30-year Treasury yields toward 2%, the Nasdaq toward 10,000, and high yield & Emerging Market bond spreads 100bps tighter (all-time lows…241bps in the US, 179bps in Europe, 139bps in EM). The outperformance of “deflation” versus “inflation” could turn exponential (Chart 8).

And while the market may or may not have a major correction in the coming months (Hartnett also predicted last week that the next major market drop will take place between Thanksgiving and Valentine's Day), the longer-term implications as this tension is finally resolved either way, most likely with the intervention of the Fed - whose next chair will have no choice but to burst the bubble - will define the market for the next generation, or as the BofA strategist puts it:

'“Icarus Unleashed” in coming quarters would then set-up 2018/2019 as a period of volatility, aggressive Fed tightening to pop bubbles, and more hostile War on Inequality & Occupy Silicon Valley politics, setting the stage for the end of the bull market as Icarus crashes back to earth.'


Iskiab menchivist Sat, 10/21/2017 - 00:26 Permalink

No sore losers, but you need to be able to adapt to the situation. Someone who’s always bullish or bearish misses out, and you need to be able to change directions quickly, and ahead of the curve.

I’ve done well with some equities, but there comes a time when it’s not about whether something will keep going up, it’s about how much it’ll go up vs the risk of it going down. Except for a couple of fangs I’m out. Upside doesn’t warrant the downside, and I’ve started to drink the cool aid that gold’s a better investment right now.

In reply to by menchivist

D.r. Funk yogibear Fri, 10/20/2017 - 23:59 Permalink many of you are not incorporating the vix hinge binding ....or the circumstance in the power structuresvix was cannibalized, as impenetribly euphoric as it seems its at universal outer limit extremity, and the circle is tightening around the corrupt-protected-power that unexpectedly lost a year ago

In reply to by yogibear

Silver Savior Secret Weapon Sat, 10/21/2017 - 12:10 Permalink

I always get down voted when I talk about this. Glad you bring it up. Yes it does mean the dollar is just worth less. I stay away from all this garbage for a reason. In the end it's all about assets that appreciate in value along with inflation. And boy I have seen lots of inflation. The term for all this is "nominal confusion" a very strange concept for the population as a whole. Lynnette Zang explained it clearly.

In reply to by Secret Weapon

D.r. Funk morethan1 Fri, 10/20/2017 - 23:36 Permalink

That's why the forced-suppression programming of the vix is bigger than any market forces. Just! say! ing! Think about the logic. The squelching of vix is a high contingent of actual control coming from somewhere. That-somewhere is therefore powerful enough to fend off any market forces (sep correction). And we know vix wanted to be higher than 9 or low 10 (lol) many times intraday. so-the-entity-making-sure-vix-stays-absurdly-immobilized-must-have-a-"realreason"-for-doing-so

In reply to by morethan1

FreeShitter Fri, 10/20/2017 - 22:03 Permalink

October 12th 2009 BTC - $.001Dow Jones industrials - 9,985Gold - $1,045October 20th 2017BTC - $6,088 up 6,088,000% Dow Jones Industrials - 23,328 up 233%Gold - $1,280 up 22.5%

The Old Man Fri, 10/20/2017 - 22:32 Permalink

Too much cocaine I believe they may take. Norman Vincent Peale for high hopes and positive thinking may be their answer but I don't believe it is so. This much false rich cannot be positive for the outcome. Once people begin to become afraid of losing the gain, the waterfall from the mountain of dept will burst. And nothing ever gets in the way of the fall. Always fractionally sell. There will more than oportunity to BUY. 

SheHunter Sat, 10/21/2017 - 01:18 Permalink

WTF is so great about (supposed) record unemployment when the majority of recently employed workers are allowed less than 35 hrs a wk and are seeing minimum wage.Am I the only one who has met a Walmart cashier who 7 years ago was an independant precision pipeline welding contractor?Screw this bullshit.  The service sector is a lose lose industry.

farmboy Sat, 10/21/2017 - 01:47 Permalink

Wow since when is the S&P 500 a deflation asset ?BoA has lost its mind. Keep discounting stocks against deflation bond yields makes no sense at all. In deflation there are no profits.