Bank of America: "The Last Time We Saw This In The Market Was 2007"

Yesterday, we presented readers with a troubling note from Morgan Stanley which attempted to answer arguably the only question that matters for the future of risk assets: "is the late stage credit cycle about to crack?"

And with just under $1 trillion in anticipated stock buybacks in 2018  - which would be almost entirely funded through new debt issuance - whether or not credit remains a viable, and cheap, funding pathway has become the single most important question in the financial world.

For those who missed the note, Morgan Stanley - which has been turning increasingly pessimistic in recent months largely as a result of the ongoing tightening in global liquidity and central bank financial conditions - warned that the credit cycle is on its last legs, noting that "in our view, a key driver is simply that global liquidity conditions are tightening, and markets are coming to the realisation that the process will be rocky. Rising funding stresses, weaker flows, weaker trading liquidity, higher volatility – this is arguably what quantitative tightening feels like and, in our view, these dynamics will continue to pressure credit spreads over the course of the year."

Morgan Stanley's credit team made the following ominous observations:

  • We continue to see evidence that argues in favour of a very late-cycle environment. When we think about a turn in the credit cycles, we tend to break it up into two phases. First, in a bull market,  leverage rises, credit quality deteriorates and ‘excesses’ build. These factors provide the ‘ingredients’ for a default/downgrade cycle. But they don’t tell you much about the precise timing of a turn. Leverage can remain high for years before it becomes a problem. In the second phase, these excesses come to a head, often triggered by tighter Fed policy, tightening credit conditions and weakening economic growth.

The bank also made a rare timing forecast of when it expects it to crack: 

In terms of timing, we think that enough signals are flashing yellow and cracks are forming to indicate a credit cycle on its last legs: For example, looking at credit markets more broadly than just corporates, we have seen signs of weakness and tighter credit conditions in places like commercial real estate. Additionally, consumer delinquencies have risen in various places (i.e., autos, credit cards and student loans). And in corporate credit, one sector after the next has exhibited ‘idiosyncratic’ problems (e.g., retail, telecom and healthcare to name a few). All this is consistent with other signals we watch, some which have been discussed above (i.e., a flattening yield curve, falling correlations in markets, rising volatility, a trough in financial conditions, narrowing equity breadth, rising stress in front-end IG and much weaker credit flows).

Morgan Stanley concluded that "evidence is mounting that spreads have hit cycle tights – in other words, that bigger fundamental challenges in credit are 6-12 months away, not 2-3 years down the road."

* * *

Fast forward to today when it is the turn of Bank of America's Chief Investment Strategist Michael Hartnett to also point out that the market is late (very late) cycle. Not only that, but based on annualized asset returns, the market now is most similar to what happened, you guessed it, just before the great financial crisis in 2008; to wit:

Late-cycle returns: asset returns YTD (annualized): commodities 23%, equities 5%, bonds 4%, cash 1%, US dollar -9%...“late-cycle” price action...last time asset performance ranked this way was 2007.

Since a late cycle economy (and market) always leads to a recession (the only question is when), it is therefore hardly a surprise that traders are extremely confused and acting - in BofA's words - as "schizophrenics": according to the bank, YTD fund flows are risk-off in bonds (inflows to govt bonds, outflows from High Yield), and risk-on in equities (into Japan, EM, financials, out of utilities, telcos). One of the two will be painfully, dramatically wrong.

Meanwhile, as Morgan Stanley showed yesterday, increasingly more signs point to a recession, starting with the "recessionary yield curve" which bofa describes as follows:  "flattest US yield curve (48bps 2s10s) since global synchronized recovery, despite record EPS, US tax cuts, record low unemployment US/UK/Japan/Germany, Fed selling, surging commodity prices"

This is notable because an inverted US yield curve has preceded ISM index dropping below 50 (i.e. economic contraction) 7 out of 7 times since 1977 with 12-month lag.

Finally, the most glaring confirmation of the slowdown comes not from the US or Europe, but China, where Beijing just cut RRR for the 1st time since Feb’16, i.e. the time of the "famous" Shanghai Accord which sent global stocks soaring for 2 straight years.

According to BofA, the strong CNY and slowing China/regional export growth trigger for easing, note 10yr Chinese yields have rallied 50bps in the past 6 months; as macro data reflect global slowdown and central banks blink; expect the rotation to defensives to accelerate.

Finally, here again is Morgan Stanley's checklist of "late credit cycle" indicators, confirming we are "almost there."


Cash Is King TheWholeYearInn Fri, 04/20/2018 - 12:09 Permalink

I hear ya and usually these clowns only talk their books. Last time (2007/9) they were all trying to convince us to stay in and buy more cause the underlying fundamentals were rock solid! This time I think they’re trying to scare some people out to load up on the cheap knowing the Feds got their backs again. After all, technically they are all still playing with the houses money from the 1st time!

In reply to by TheWholeYearInn

Endgame Napoleon dark pools of soros Sat, 04/21/2018 - 10:41 Permalink

They no longer have to ask Congress, which was set up by the Founders to wield the power of the purse, just like they no longer have to ask Congress for permission to start a war. Maybe, that is because when you ask permission of the US Congress, you are really asking for permission from their employers: corporate donors and lobbyists. This is why Deplorables cannot get anything done about mass-scale, welfare-aided legal / illegal immigration, and counting the part-time jobs held by welfare recipients that keep them below the earned-income limits for welfare that covers rent / groceries and refundable child tax credits up to $6,431 as legit “employment,” by voting against it.

In reply to by dark pools of soros

Frilton Miedman dark pools of soros Fri, 04/20/2018 - 11:22 Permalink

Side by side with 2007, Consumer debt is up 10%, wages up 20%, mortgage payments down 30%.

If the TBTF's are going to stage another 2008, it might not work with wages up & debt payments down, but keep an eye on anomalous bubbles in staples, commodities or energy....the banks pumped oil to $145/barrel to pinch disposable income & stir the onslaught of sub-prime defaults in 2008, then collected big on futures/derivatives shorts, hidden from public scrutiny thanks to the CFMA.

This tells us we're nowhere near that -

It all hinges on the Fed.



In reply to by dark pools of soros

Endgame Napoleon Frilton Miedman Sat, 04/21/2018 - 10:52 Permalink

Wages are up by 2.7%, but the minor upswing in wages is offset by the Consumer Price Index. These are also mostly part-time/temp/high-turnover and 1099-gig jobs.

The violet bar graph on this article shows the growth is the same from 2007 — 2016. The wage growth has barely budged over the last year, and the CPI nullifies it for Deplorables, anyway.

In reply to by Frilton Miedman

BandGap NoDebt Fri, 04/20/2018 - 11:21 Permalink

In a lot of ways this time around might not be as bad for my tribe, at least from the "preparation in expectation" category. That being said I could be carrying a surf board to meet a tsunami.

2007.....if there was no bailout we would be getting over the last vestiges of that clean out right about now. As it is we are going to see an even bigger mess.

In reply to by NoDebt

Alexander De Large NoDebt Fri, 04/20/2018 - 11:26 Permalink

The Bush years were magical.  I could drink a half gallon of vodka in 2 hrs and not feel a fucking thing in the morning.  Wouldn't even get the shakes.

Now it's a goddamned fucking race against time to be able to hold my hand steady enough to get my wallet out to buy chaser before the liquor store opens.

Feel like Rocky in the locker room after fighting the Russian.  It is an outrage.

In reply to by NoDebt

HRClinton NoDebt Sat, 04/21/2018 - 09:33 Permalink

As a BTC millionaire (now living in Switzerland, where I can lawfully thumb my nose at the IRS goons), I can rightfully say that this asset class quilt is crap, if it does not include the asset that's "off the charts": BITCOIN, MFers!


BTC and Altcoins. It's the only asset class that made smart Main St people rich.  Everything else was just incremental wealth of single or double-digit percentages. Big fvcking whoop!

Can your fragile and immature emotions handle the Truth, bankster shills and Crypto haters?

In reply to by NoDebt

BlueStreet Fri, 04/20/2018 - 10:55 Permalink

Funny to see the parade of fools on Bloomberg like the arrogant Krishna Memani from Oppenheimer say yield curves don't matter and aren't a prelude to a recession. OPM Holdings. 

Money_for_Nothing BlueStreet Fri, 04/20/2018 - 11:56 Permalink

Yield curve matters. In this special case it is saying that the Federal Reserve is raising short term interest rates. If that brings USD home then the US booms and the World recesses. Wages rise if illegal immigration is stopped. Ask the people of the nineteen fifties what happened when Eisenhower stopped illegal immigration (wages rose, an uneducated lugger could make enough to feed, clothe, and shelter a family of seven)

In reply to by BlueStreet

Endgame Napoleon Money_for_Nothing Sat, 04/21/2018 - 11:47 Permalink

If Trump emulates IKE in that way, I will be a Trump cheerleader again. Right now, other than this Fed move, which you have connected to the immigration issue, I see few signs of ending illegal immigration. To end illegal immigration, and to open up the job market for underemployed citizens, Trump would need to take illegal immigrants home, nicely, while restricting new immigration to reasonable numbers.  

Male-dominated work crews are starting to again display boldly discriminatory compositions, like 100% minority crews. I likewise see a lot of ads for female-dominated office jobs, seeking a particular racial group: Spanish speakers. 

These office jobs are doubly discriminatory, in that they staff with near-100% childbearing-aged moms who can accept the low pay and / or part-time hours due to spousal income, child support that covers rent or pay from government for sex and reproduction out of wedlock that covers rent, groceries, electricity and childcare on top of an up-to $$6,431 refundable EITC child tax credit and monthly cash assistance that increases per birth within the time restrictions, as long as moms work part time to stay below the earned-income limits for the welfare programs. 

Regardless of Fed maneuvering, wages for non-welfare-eligible / non-womb-productive citizens will never go up when employers have so much access to moms with “somethin’ comin’ in” from government that makes the low pay and part-time hours palatable and, in fact, advantageous since it keeps them below the earned-income limits for welfare and the cut off for refundable child tax credits. 

Not at all sure that Trump’s removal of regulations on hiring preferences will work in the favor of non-minority citizens, when minorities are allowed to discriminate as openly and boldly as childbearing-aged moms—the group with the most access to unearned income for womb productivity from government—who now dominate the workforce. 

If immigrants in single-earner, welfare-eligible households with US-born kids are going to continue to take most blue-collar, male-dominated jobs, working cheaply due to their access to pay for sex and reproduction from government, there is no reason that half of male citizens — ages 18 to 34 — living in moms’ basements could not flood the mom-dominated office jobs with applications. 

Womb-less men are just as capable as childless women of working in the following mom-dominated fields: credit processing, insurance underwriting, insurance inside claims, customer service, inside sales, etc. 

The moms in these office jobs have it cushy, guys. They can come in 45 minutes late, frequently. They can leave early every day at 2:30. They can take off whole days and whole weeks beyond pregnancy leaves and PTO, regardless of phones ringing off the hook with paying customers. They will not be fired, including those who do not meet the quotas.

Some of you men who have produced kiddos could claim the same above-firing absenteeism privileges due to your role in generating the womb productivity, even retaining your job when not meeting the sales-generation and account-retention numbers. You, like the moms, will be above firing as a working parents unless you push it so far that you are absentee all day / every day in a management job. 

If you get into management in the many “voted-best-for-moms” female-dominated fields with the nearly 100% mom-gang staffs—as some men do—you can just churn the non-culture-fit hard workers, i.e. the people who come to work every day, stay all day and produce high sales-generation and account-retention numbers every month. 

Crony-parent managers use those churn-able, non-culture-fit employees to keep their numbers up for bonus purposes, firing them or, more often, bullying them out for the slightest of infractions, while the crony-parent managers take as many lengthy and frequent babyvacations as their low-wage mom-gang employees. 

It is an above-firing cake walk for working parents. There is no reason why men cannot get in on the action as long as they have reproduced and, thus, fit in the absenteeism gangs in the office jobs. 

When at work, male working parents also need to put their emphasis on the important things, not customers or account generation / account retention, but the Halloween Dress-up Day, the Family Day Picnic, the Tacky Christmas Sweater Contest and the Baby-Mommy-Look-Alike-Bulletin-Board-Decorating Contest. 

Soy fed or not, you can do it men! You can be as “productive” as the absentee mom-gang office workers, if not as womb-productive. Demand your rights in America’s family friendly workplaces for participating in the womb productivity. Remember: Sperm = Skill in the same way that Birth Canal Exits = Skill in the Fake Feminist Era. You Go Boy!

In reply to by Money_for_Nothing

taketheredpill Fri, 04/20/2018 - 11:01 Permalink


"it is therefore hardly a surprise that traders are extremely confused and acting - in BofA's words - as "schizophrenics": according to the bank"


Once you decide to let go of the Fundamentals and stay in, why would you ever get out??  Thanks Central Bankers! Thank You very, very Much!! 

taketheredpill Fri, 04/20/2018 - 11:03 Permalink


My 16 year old son was trying to decide between Economics and History for one of his classes next year.


I felt like History would be better.  Economics just helps you to think like Central Bankers.


Money_for_Nothing Fri, 04/20/2018 - 11:46 Permalink

All the bank-checking-account and 401k account money market funds have been forced into government debt. That means they can't go below their nominal value or lose their liquid nature (eg exchangeable for legal tender). Last time some large money market accounts broke below a dollar and panic had to be quelled.
The Federal Reserve will continue to raise interest rates because interest rates are still too low. The Federal Reserve might force the break-up of a large bank because Trump would let them and a break up would get the attention of some people who think they are above the law and think they have to answer to no one. Federal Reserve might not be as easy with the currency swaps this time. Mexico and Europe might have to quit some of their (you-name-it). Trump has troops on the borders and a deployed military (ask NK). Obama insured US citizens are armed and have more than a two week supply of necessities. As ready as US will ever be. Better now than later.

silverer Fri, 04/20/2018 - 12:58 Permalink

Good old Bank of America. Their public relations people will go down in history as the biggest successful bullshitters ever. They give you information perceived as useful, while behind your back, they drain your wealth. Pretty slick.