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A historic global bond-market crash threatens liquidation of the world’s most crowded trades, says BofA

A historic global bond-market crash threatens liquidation of the world’s most crowded trades, says BofA

‘If the bond market does not function, then no other market functions, really,’ say Ben Emons of Medley Global Advisors 

A newspaper headline is shown after the Treaty of Versailles was signed in 1919. Global bonds are in one of their worst bear markets since the treaty went into effect in 1920, establishing the terms for peace at the end of World War I.


Global government-bond markets are stuck in what BofA Securities analysts are calling one of the greatest bear markets ever and this is in turn threatening the ease with which investors will be able to exit from the world’s most-crowded trades, if needed.

Those trades include positions in the dollar, U.S. technology companies and private equity, said BofA strategists Michael Hartnett, Elyas Galou, and Myung-Jee Jung. Bonds are generally regarded as one of the most liquid asset classes available to investors. If liquidity dries up in that market, it’s bad news for just about every other form of investment, other analysts said.

Financial markets have yet to price in the worst-case outcomes for inflation, interest rates, and the economy around the world, despite tumbling global equities along with a selloff of bonds in the U.S. and the U.K. On Friday, the Dow industrials DJIA, -1.62% sank almost 500 points and flirted with a fall into bear-market territory, while the S&P 500 index SPX, -1.72% stopped short of ending the New York session below its June closing low.

U.S. bond yields are at or near multiyear highs. Meanwhile, government-bond yields in the U.K., Germany, and France have risen at the fastest clip since the 1990s, according to BofA Securities.

…click on the above link to read the rest of the article…


BofA: “Transitory Hyperinflation Ahead”

BofA: “Transitory Hyperinflation Ahead”

Last week, when discussing the latest earnings call commentary, Bank of America said “Buckle up! Inflation is here”, and showed a chart of the number of mentions of “inflation” during earnings calls which exploded, more than tripling YoY per company so far, the and the biggest jump in history since BofA started keeping records in 2004.

Who knew that just one week later BofA would need a bigger chart… a much bigger chart.

As BofA’s Savita Subramanian writes, after the third week of earnings. mentions of “inflation” have now quadrupled YoY; and after last week, mentions have jumped nearly 800% YoY!

While the implications are obvious, we leave it to Bank of America to explain what this means:

On an absolute basis, [inflation] mentions skyrocketed to near record highs from 2011, pointing to at the very least, “transitory” hyper-inflation ahead.

Yes… really:

Because if there is one thing hyperinflation is, it’s “transitory.”

BofA: We Are Witnessing The Biggest Asset Bubble Ever Created By A Central Bank

BofA: We Are Witnessing The Biggest Asset Bubble Ever Created By A Central Bank

Back in March 2018, when commenting on what was then the 2nd longest central-bank induced bull market of all time (it is now the longest ever) Bank of America’s CIO Michael Hartnett pointed out that “bull market leadership has been in assets that provide scarce “growth” & scarce “yield”. Specifically, the “deflation” assets, such as bonds, credit, growth stocks (315%), have massively outperformed inflation assets, e.g., commodities, cash, banks, value stocks (249%) since QE1. At the same time, US equities (269%) have massively outperformed non-US equities (106%) since launch of QE1.”

And, as happens every time the Fed tries to manage asset prices, it had blown another bubble: commenting on the hyperinflation in risk assets, Hartnett said that the “lowest interest rates in 5,000 years have guaranteed a melt-up trade in risk assets”, which the strategist had called the Icarus Trade since late 2015, noting that the latest, “e-Commerce” bubble, which consists of AMZN, NFLX, GOOG, TWTR, EBAY, FB, is up 617% since the financial crisis, making it the 3rd largest bubble of the past 40 years.”

Fast forward two years, one failed attempt at normalizing interest rates, one QE4, and one historic P/E multiple expansion meltup later, when the same bull market leadership in “growth” assets has led to the unprecedented result that the top 5 stocks now account for a greater share of S&P500 market cap than ever before

… and when what in 2018 was the third largest bubble of all time only has – thanks to 800 rate cuts by central banks since the Lehman bankruptcy – now been rebranded to “e-Commerce” by BofA’s Hartnett, and which as shown in the chart below has – after rising more than 1,000% from its crisis lows – become the single biggest asset bubble of all time.

…click on the above link to read the rest of the article…

There Has Been Just One Buyer Of Stocks Since The Financial Crisis

There Has Been Just One Buyer Of Stocks Since The Financial Crisis

Over the weekend we showed a chart which demonstrated that the bulk of the 21st century has been characterized by equity retail fund outflows offset by a tsunami of bond inflows, i.e. a reverse “great rotation.” The chart also illustrated that periods of “big bond inflows often preceded big policy changes”, hinting that some major event was coming; meanwhile big bond outflows (e.g. 2008/13/18) tended to coincide with the most bearish returns across asset classes, which may explain why in a time of record bond inflows, i.e., right now, stocks are trading near all time highs…

… even if it did – as we said on Sunday – pose a question: “just who is buying stocks here?”

Now, in his latest Flow Show weekly report, BofA CIO Michael Hartnett confirms that the flows continued for one more week, as another $11.4 billion flowed into bonds, while $8.4 billion was redeemed from stocks (a clear sign investors are not worried about bond bubble for now, with chunky inflows to both IG ($7.9bn) & govt bond ($3.5bn) funds).

More importantly, when looking at the bigger picture and finding $213 billion in redemptions from equity funds stands in stark contrast to $337bn inflows to bond funds; Hartnett answered our pressing question: who is buying stocks here? 

His answer: “the sole buyer of US stocks remain corporate buybacks, not institutions” as shown in the chart below.

This is notable not only because it means that without the buyback bid (made possible by record cheap debt, which is used to fund corporate stock repurchases) stocks would be far, far lower, but because it is a carbon copy of what we observed almost exactly two years ago, suggesting that between the summers of 2017 and 2019 absolutely nothing has changed.

 …click on the above link to read the rest of the article…

BofA: Central Banks Are Creating Bubbles Instead Of Helping The Economy; The Result Will Be A Disaster

BofA: Central Banks Are Creating Bubbles Instead Of Helping The Economy; The Result Will Be A Disaster

In recent weeks we have seen a surprising spike in criticism of central banks by establishment figures, in some cases central bankers themselves, most notably Mark Carney who last Friday remarkably admitted that very low interest rates tend “to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime.” This continued yesterday when 7 months after it praised negative rates, the San Francisco Fed pulled a U-turn and warned that the “Japanese experience”, where negative rates dragged down inflation expectations even more, is ground for NIRP caution.

Then, in an even more bizarre interview with the FT, St Louis Fed president James Bullard made an even more stunning admission – that the Fed no longer has any idea what is going on. To wit:

“Something is going on, and that’s causing I think a total rethink of central banking and all our cherished notions about what we think we’re doing… We just have to stop thinking that next year things are going to be normal.”

There was more. In a series of questions aimed at the Fed in this post-Jackson Hole powerless reality, we brought you some rhetorical fireworks from the head of FX at Deutsche Bank, Alan Ruskin, who lashed out at the central bank with 20 questions, technically statements, that 10 years ago would have branded him a tinfoil-wearing conspiracy theorist (we know, because we asked just these questions back in 2009), among which:

  • “Will the Fed/ECB buy equities/ETFs? How far are central banks willing to distort underlying value, or is distorting value intrinsic to Central Banking as per the Austrian critique?”
  • “How much are Central Banks going to be complicit in a collapse in fiscal standards, by buying public sector assets? Will a passive Central bank simply accommodate and facilitate fiscal actions related to MMT?”

 …click on the above link to read the rest of the article…

Bank of America: Selling Will Continue, “Big Low” For Stocks Is Yet To Come

Bank of America: Selling Will Continue, “Big Low” For Stocks Is Yet To Come

Many economists and financial analysts have said that the economy isn’t doing as well as the talking heads on TV are proclaiming. And now, even the Bank of America says it’s time to prepare for an even lower stock market, as that hasn’t come yet.

The recent stock market slide may look bad, but it wasn’t bad enough to indicate that the damage has been completely done, according to Bank of America Merrill Lynch. That means it will only get worse as we have yet to hit “the big low.”

Even after a day when the Dow industrials lost 602 points and as the Nasdaq tech barometer remains in correction territory, indications of a bottom remain elusive, the bank said in its latest survey of professional investors. “We [Bank of America Merril Lynch] remain bearish, as investor positioning does not yet signal ‘The Big Low’ in asset markets,” Michael Hartnett, BofAML’s chief investment strategist, said in a statement.

The sharp decline that began in mid-October continues to chip away at the stock market and it’s causing some to put out warnings that we should be prepared for a crash. In such cases, Wall Street strategists look for signs that sellers are exhausted and the market has reached sufficiently low levels as to indicate a bottom. And the concerns are global.

According to NBC News, a net 44 percent of respondents see global growth decelerating over the next year, representing the worst outlook since November 2008. As part of that, a net 54 percent see China slowing down, which is the highest level of pessimism in two years. Global earnings growth expectations are at their lowest levels since June 2012.

…click on the above link to read the rest of the article…

Don’t Expect A Fed Bail Out: What Convexity Flows Mean For Repricing Of The “Fed Put”

One of the major topics to emerge among financial professionals over the past week in the aftermath of the latest violent market move lower was whether the “Fed Put” would come into play, and at what level, and just as importantly, what happens to markets – both stocks and bonds – as this new put level is repriced by market participants.

As we discussed last Thursday, in one of its questions in the latest Fund Managers Survey released last week, Bank of America asked “what level on the S&P 500 do you think would cause the Fed to stop hiking rates?” What it found is that according to the respondents, the Fed would stop hiking if the S&P 500 fell to 2390, suggesting the “Powell put” strike price is about -12% below current levels.

Other banks also stepped in with: according to BNP Paribas, a 6% drop in the S&P 500 Index to 2,500 would be the resistance level that would prompt a response from Powell. “A 10 percent to 15 percent drop in equities is usually the difference between noise and signal,” BNP Paribas analysts said in a note. Meanwhile, Evercore ISI has put the “Fed Put” below the 2,650 mark.

Other were more skeptical, with BlackRock and River Valley Asset Management say the real economy remains relatively insulated from the stock meltdown. “The correction that we’re seeing in the stock market obviously is something that they pay attention to,” Scott Thiel, deputy chief investment officer for fundamental fixed income at BlackRock in London said in an interview on Bloomberg TV. But “the bar is very high to change Fed monetary policy.”

…click on the above link to read the rest of the article…

Did The Nasdaq Bubble Just Burst?

Regular readers will recall when back in March, Bank of America cautioned that after the tech bubble in 2000, the housing bubble in 2006, we were witnessing the third biggest bubble of all time: the e-Commerce bubble.

Well, after several weeks of sharp volatility which has hammered tech stocks, slammed momentum trades and hurt growth factors, the tech sector is once again sharply lower after hours largely on the back of disappointments from Google and Amazon, with the  ETF which tracks the Nasdaq 100 dropping about 2%, and threatening to slide back into a bear market.

The reason for this latest weakness in the QQQs may be that investors are finally realizing that the latest Nasdaq bubble may have popped, if for no other reason than what is shown in the Bloomberg chart below: namely revenue growth at the two e-commerce titans, Google and Amazon, appears to have finally peaked.

Granted, the decline is not in revenue but in revenue growth, however when investors are already beyond skittish about peak earnings, a slowdown in the second derivative may be all they need to sell now and ask questions later. Which may explains why FANG stocks are all sharply lower after hours as the market begins to reasses just how much longer the “e-commerce bubble” as defined by Bank of America has left before it pops…

Zero-Down Subprime Mortgages Are Back, What Could Possibly Go Wrong?

Ten years after the collapse of Lehman Brothers, banks are once again taking bets on the same type of loans that nearly collapsed the economy amid a flurry of emergency bailouts and unprecedented consolidations.

Bank of America has backed a $10 billion program from Boston-based brokerage Neighborhood Assistance Corporation of America (NACA), to offer zero-down mortgages to low-income borrowers with poor credit scores, according to CNBC. NACA has been conducting four-day events in cities across America to educate subprime borrowers and then lend them money – with a 90% approval rate and interest rates around 4.5%.

It’s total upside,” said AJ Barkley, senior vice president of consumer lending at BofA. “We have seen significant wins in this partnership. Just to be clear, when we get those loans with all the heavy lifting here, we’re over a 90 percent approval, meaning 90 percent of the people who go through this program that we actually underwrite the loans.”

Borrowers can have low credit scores, but have to go through an education session about the program and submit all necessary documents, from income statements to phone bills. Then they go through counseling to understand their monthly budget and ensure they can afford the mortgage payment. The loans are 15- or 30-year fixed with interest rates below market, about 4.5 percent. –CNBC

That’s what’s going to help people who’ve been locked out of homeownership to really become homeowners and to build wealth,” said Bruce Marks, CEO of NACA. “It’s a national disgrace about the low amount of homeownership, mortgages for low- and moderate-income people and for minority homebuyers.”

NACA founder Bruce Marks

To participate in the NACA lending scheme, borrowers can  have credit scores – but will need to go through the education course and submit all necessary documents, “from income statements to phone bills,” reports CNBC. Then they undergo budget counseling to ensure they can afford the mortgage.

…click on the above link to read the rest of the article…

Danske Bank – Who helped them Launder?

Danske Bank – Who helped them Launder?

A couple of days ago the always good Francis Coppola wrote a piece for Forbes entitled,

The Banks That Helped Danske Bank Estonia Launder Russian Money

In it she made the simple but essential point that  while Danske Bank, through its Estonian branch, had laundered $234 billion,

…Danske Bank Estonia couldn’t do this by itself. Much of the money was paid in U.S. dollars, and for that, it needed help from other banks. Banks that had access to Fedwire, the Federal Reserve’s electronic settlement system. Big banks, in other words.

Coppola then named the banks involved.

J.P. Morgan, Bank of America and Deutsche Bank AG all made dollar transfers on behalf of the Estonian branch’s non-resident customers. And according to the Wall Street Journal, Citigroup’s Moscow branch may have been involved in some financial transfers in and out of Danske Bank Estonia.  (bold emphasis added by me)

So, Bank of America, Deutsche Bank and J.P. Morgan moved money OUT of Danske and in to dollar denominated accounts elsewhere, (see section 19 of Danske’s internal investigation). but that is only half the story. It leaves the huge unanswered question,

who moved the money in to Danske Bank’s Estonian branch in the first place?  

The accounts through which the money was laundered are non-resident accounts.  Non-resident simply means the people or entities which hold the accounts do not live in Estonia. So how did these non residents deposit their money in Danske’s Estonia branch?  Either they physically transported $234 billion dollar’s worth of their local currencies in trunks and suitcases from their own country, in to Estonia and to the bank, or it had to have been deposited electronically. Which would mean some other banks, in addition to those mentioned by Forbes, were involved.

…click on the above link to read the rest of the article…

Is China Losing Control? Yuan More Volatile Than Euro For First Time Ever

For the first time, FX traders are grappling with wilder swings from China than Europe.

As Bloomberg notes, the offshore yuan has been more volatile than the euro all month after first overtaking the shared currency in July, according to 30-day realized data. And while euro uncertainty remains relatively bracketed between 6 and 8 for the last two years, yuan volatility has soared from 2 to almost 9 – the highest since 2015’s devaluation.

The narrow spread (lower pane) shows China is moving to a more “flexible arrangement” when it comes to managing its currency, Bank of America analysts wrote in a note, predicting the yuan will weaken more this year.

For now it appears the temporary respite from Yuan’s freefall, that ‘mysteriously’ occurred right before the US-China trade talks, has begun to lose momentum.

But while Yuan has become increasingly volatile, the realized volatility of gold (when priced in yuan) has collapsed to record lows

Perhaps supporting the idea that the Chinese care more about the ‘stability’ of the yuan relative to gold then to the arbitrary US dollar fiat money.

So is China losing control? Or is this just as they planned?

“EM FX Never Lies” – BofA Warns As Brazilian Real Is Routed

Mohamed El-Erian warned overnight that Brazilian policy makers are “in quite a tricky position — and there’s little room for error,” and judging buy this morning’s rout in the real, he is dead right.

Crippling nationwide trucker strikes, which prompted the resignation of Petrobras CEO, and forced Brazil and Argentina to roll back their planned fuel-price increases have, according to Bloomberg’s Davison Santana, undermined their already fragile currencies and deter investors eager for signs authorities are serious about putting fiscal accounts in order.

Brazil’s projected budget deficit as a percentage of gross domestic product stands at 7.4 percent, the highest among major emerging-market peers.

The gap, as El-Erian explained succinctly, leave government with a stark choice: keep borrowing or cut spending.

As Santana notes, borrowing more isn’t a healthy option. Higher deficits make currencies less attractive, leading to rising interest rates that reduce growth and erode government revenue in a cycle that ends up, you guessed it, swelling the deficit. Reining in spending typically makes more sense. That’s why it’s all the more remarkable that Brazil recently capitulated in their efforts to remove artificial price controls that kept fuel costs low. After all, it’s much harder to reduce spending while maintaining subsidies.

So where does this leave the real? It means authorities will have to keep intervening in currency markets, a costly use of foreign-exchange reserves that can only stop for good once the nations tackle their underlying fiscal problems. And indeed, after Brazil’s real tumbled to a two-year low on Tuesday, the government effectively tripled its support – which has already failed dismally.

A month ago we explained how critical the Brazilian Real is to identifying just when the Emerging Market turmoil will go viral.

…click on the above link to read the rest of the article…

BofA’s Striking Admission: Markets Will Soon Begin To Panic About Debt Sustainability

In the latest BofA survey of European fixed income investors (both IG and high yiled), the bank’s credit analyst Barnaby Martin writes that “after fretting about inflation at the start of the year, April’s credit survey shows that the biggest concern has reverted back to “Quantitative Failure”, driven by the recent data slowdown.”

Indeed, as the chart below shows, whereas the evolution of “biggest risks” for Euro investors indicated that strong growth at the start of the year provoked worries over rising inflation, “the recent data moderation has meant that these concerns have quickly given way to worries about a lack of inflation – and thus “Quantitative Failure”.”  And yes, it took just three months for the market to make a 180 and worry not about inflation, but deflation, and a Fed that may be pursuing too many rate hikes into 2018. As Martin notes, “the speed at which inflation concerns have flipped highlights the slim margin of error for a “goldilocks” economic backdrop in ’18.”

In retrospect, however, the sudden reversal is probably not that much of a surprise: as we showed this morning, according to the Citi G-10 Eco Surprise index, after hitting the highest level since the financial crisis, economic surprises promptly tumbled into the red just three months later, confirming how tenuous and fleeting the so-called “global coordinated economic recovery” had been all along.

And yet this sudden reversal puts the Fed and central banks in a major quandary. Recall that in a world with over $200 trillion in debt, amounting to well over 300% of Global GDP, the only saving grace is for the debt to get inflated as the alternative is default, either sovereign or private.

…click on the above link to read the rest of the article…

China’s Plunge Protection Team Arrives: Urges Companies To Boost Stocks, “Avoid Selling”

Over the weekend, we along with Bank of America and probably most carbon-based traders wondered if any central bank or government official would step up on Monday and intervene in the markets, either verbally or directly. The answer emerged overnight, when China officially urged controlling investors in listed companies to boost their holdings and told some mutual funds to limit equity selling this week, Bloomberg reported,  citing sources.

The directive from the Chinese Plunge Protection Team was sent out over the weekend, when the China Securities Regulatory Commission (CSRC) and other regulators “advised and encouraged” some major stockholders to purchase more shares in the mainland-listed firms they invest in. The regulators also called on some mutual funds to avoid being net sellers of equities as well.

The Shanghai Stock Exchange said on Friday that it has issued warnings and limited intraday trading to prevent large equity sales that affected the market’s stability. Meanwhile, the China Securities Investment Services Center — a body serving smaller investors that’s managed by the CSRC — said major shareholders can boost investor confidence by purchasing stocks, Shanghai Securities News reported on Monday.

Additionally, the CSRC, which is also known as the “National Team” once it begins manipulating markets, told Chinese brokerages to provide trading summaries from last week to the regulator as well as trading plans and previews for this week.

To some, the intervention was only a matter of time: Chinese shares on the mainland plunged the most in two years amid last week’s global market turbulence, fueling speculation the government would step in to calm trading, as it did repeatedly during past selloffs in 2005 and 2006 as well as ahead of the 2007 Party Congress.

…click on the above link to read the rest of the article…

One of BofA’s “Imminent Market Crash” Indicators Was Just Triggered

Early last month, we showed that one of Bank of America’s “guaranteed bear market” indicators, namely the three-month earnings estimate revision ratio (ERR) which since 1988 has had a 100% hit rate of predicting upcoming bear markets, was just triggered. As Bank of America explained at the time, “since 1986, a bear market has followed each time that the ERR rule has been triggered.”

The only weakness of that particular indicator is that while a bear market always followed, the timing was unclear and the upcoming bear could arrive as late as two years after the trigger hit.

Well, fast forward to today when overnight another proprietary “guaranteed bear market” indicator created by the Bank of America quants was just triggered.

As we explained earlier today, as part of the unprecedented, historic rush to dump cash and buy any stocks that one can find, BofA’s “Bull & Bear indicator” surged to 7.9 – effectively 8 – a level that is indicative of broad market euphoria, and the highest it has been since March of 2013, or nearly 5 years ago.

There is another, far more important, reason why the triggering of the Bull and Bear Indicator is a remarkable event: according to Bank of America back-tests, not only does this particular indicator also have a 100% hit rate once triggered…

but on 11 out of 11 signals since 2002, the market dropped on average 12% after it was triggered.

And yes, it also works in the opposite direction: the last Bull & Bear indicator flashed was a buy signal of 0 on Feb 11th 2016. Since then the S&P has been up on 22 of the next 23 months.

Finally, and most importantly, unlike other “bear market” indicators which confirm if a crash is imminent but not when, this one gives an explicit time window: the market always dumps within the next 3 months once a Sell signal has been trigerred.

…click on the above link to read the rest of the article…

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