BofA: "This Is The Magic Number That Will Burst The Stock Bubble"

As we noted this morning, the one dominant sentiment in the market right now is irrational euphoria, also known as "buying panic", as demonstrated in the following Bank of America chart, which shows that in the past 4 weeks, a record $58 billion has flown into stocks.


But while it is accepted by virtually everyone that markets are now in the irrational, melt-up, "blow off top" phase, and even the WSJ writes "‘Melt-Up’ Rally Propels Dow Above 26000 as Fear Turns to Greed", the truth is that nobody knows how long this phase can last. Earlier this month, Jeremy Grantham - who also warned that a market meltup has arrived - calculated that the average time of the final bubble phase of the "great equity bubbles" shown in Exhibit 1 is just under 3.5 years (with the average upcycle of real acceleration just 21 months; in that time they had gains between 58% and 104%.)



Needless to say, an estimate of "3.5 years" before the market bubble finally bursts is hardly helpful, especially if there are no other markers of indicators to keep an eye for.

So, to help the anti-bubble crusaders, Bank of America's Michael Hartnett has come up with not one, but three distinct indicators to keep an eye on, which - when triggered - would suggest that the days of the market bubble are finally numbered.

  • First - credit, which as the chart below shows is already rolling over:


As Hartnett explains, "credit is "glue" keeping cross-asset bull market together but flows rolling over and price action looking fatigued." This to Bank of America is "the clear bear catalyst for us."


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  • Second, "the wings of Icarus": this is the "sundry" category which dumps all possible fat-tail risks together, including the risk of economic overheating.



Here the euphoria is obvious: Jan/Feb investor conviction in fresh upside to stocks driven by: 1. low interest rates (implied Fed, ECB, BoJ tightening next 3 years 80bps, 73bps, 10bps), & 2. high corporate earnings (US macro surveys consistent with 5-6% US real GDP growth (Chart 4) & 20% US EPS growth); NAFTA, China trade war, US government shutdowns, Nov Democratic sweep, surge in inflation, oil prices… "noise" to worry about, but needs to translate into higher rates & lower EPS to change bull positioning.

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  • Third, and appropriately, "Three Is The Magic Number"

Finallty,for those curious what others on the street believe will finally pop the bubble, BofA's CIO writes that client marketing feedback suggests the correction will occur only once real GDP forecasts >3%, wage inflation >3%, 10-year Treasury yields >3% & SPX >3000.




John Law Lives Fri, 01/19/2018 - 14:05 Permalink

If GDP were running at a sustained level of 3% growth, it would be absurd for the 10-year Treasury to yield 3%.  The 10-year Treasury ought to yield something closer to GDP growth rate + inflation rate.  

gaoptimize Fri, 01/19/2018 - 14:33 Permalink

"Wage Inflation" of 3%?!  M2 has been growing at 7% to 8% since 2009 (see the FRED chart).  The banks and the 1% have figured out a way to capture 90% of that money growth.  The Chapwood  index indicates real inflation is in complete alignment with M2 growth.  At 3% wage growth, people would still be getting poorer at 3% to 4% per year.  Fvck BofA and all the bankers.

surf@jm Fri, 01/19/2018 - 14:53 Permalink

JPMorgan Chase, Bank of America and Citigroup jointly control trillions of dollars in commercial bank deposits with thousands of branch bank buildings stretching across the United States scooping up the life savings of everyday Joes who have no clue these are also the Masters of the Universe on Wall Street.

Goldman Sachs and Morgan Stanley also own FDIC insured banks. Goldman Sachs Bank USA, as of March 31, 2014, has $104.7 billion in assets; Morgan Stanley Bank, N.A., as of the same date, has $108.8 billion in assets.

These institutions have access to the Fed’s discount window, super cheap access to capital from FDIC insured deposits and a massive subsidy of their institutions under the too-big-to-fail doctrine. And, they also own outright or jointly a large swath of anything and everything that passes as a trading venue on Wall Street today.


The market will crash if and when they want it to........

TonTon Fri, 01/19/2018 - 15:12 Permalink

Those charts show a price rise and fall in 3.5 years, not just a rise. If you look at the current S&P chart you could take the start of the rise to be from October 2016, giving another roughly 5 months of rises or maybe even February 2016 giving another....few days/weeks of rises.....

moonmac Fri, 01/19/2018 - 15:52 Permalink

The Fed created about $4 trillion out of thin air to make the stock market grow by almost $20 trillion dollars. Now that’s what I call a “Wealth Effect” of almost godly proportions. I’m sure Jesus is wondering how anyone could accomplish such a great feat of economic brilliance? The Money Changers were only making pennies in profit in comparison while working 80 hours a week shuffling around and hocking livestock all day. All we have to do is manipulate our Digital Currency to become filthy rich.

nuerocaster Fri, 01/19/2018 - 18:36 Permalink

What about more fear?

The phrase "capital flight" has clearly been banned by everyone in the OPM rackets.

It wasn't heard outbound in 08 or inbound today. I doubt there's ever been a capital flight run up of this magnitude. Many many people were caught flat footed pre WWII.

Saudi Arabia was the last straw. Everyone with any money in emerging or third world realizes they can be crushed in a heartbeat.