‘The Salamander’s Tail (Risk) Has Regenerated!’, One Bank Literally Shouts

“Way” back on Monday, we brought you some short excerpts from a March 18 note penned by BofAML’s Ritesh Samadhiya and Ajay Kapur, who weighed in on deflationary dynamics and the prospect that we are currently witnessing “peak plutonomy, peak polarization, and potentially peak oligopoly”.

If that is indeed the case, Samadhiya and Kapur believe the world could be headed down the road to “more unorthodox potential solutions being offered”. Those “unorthodox solutions” may include sky-high tax rates and (gasp!) experiments in Modern Monetary Theory as central banks bump up against the theoretical “limits” of what they can do and ascendant populists push the envelope on fiscal largesse in the interest of fulfilling lofty campaign promises to disaffected voters.

Additionally, Samadhiya and Kapur believe we may be in for an even more vociferous anti-buyback push and a marked deterioration in sentiment towards oligopolies and big Tech.

Read more

‘Expect The Unexpected’: One Bank Ponders Peak Plutonomy, Peak Polarization, MMT And 70% Taxes

Kapur pens BofAML’s “Inquirer” series which we’ve highlighted in these pages on occasion, including the “Please Reflate” SOS in late December.

Well, the latest edition of the “The Inquirer” is out and it’s full of characteristically colorful quotes from Kapur who begins by lauding the Fed’s decision to pivot dovish in the face of mounting risks earlier this year. Notably, Kapur actually pairs that praise with a nod to Powell not being an academic.

After reiterating that tightening policy into a synchronized global slowdown is misguided, Kapur says it’s “fortunate” that “the Fed is led by a Chair who has spent time in Private Equity and Wall Street”. That, apparently, means “the old academic constraint at the central banks of ‘Yes it works in practice, but does it work in theory?’ is notably absent.”

That’s an interesting way to couch things, because as you’re acutely aware, Powell’s background (i.e., that he’s not an academic) was generally cited as the reason for his reluctance to bow to markets last year. Kapur seems to be suggesting that Powell’s experience in “the real world” (so to speak) was in part behind the Fed’s dovish pivot. That turns conventional wisdom on its head to the extent criticism of the Fed’s January relent has taken the form of charging Powell with reverting to the ways of his “Ivory Tower” predecessors.

In any event, Kapur goes on to say that “just as that salamander’s tail (risk) was cut off [by the dovish pivot], it has now re-generated!”

Oh no!

He elaborates, noting that “data are even weaker since early January, and global inflation surprises have collapsed to levels that previously ignited QE policies.” And then there’s the 3M-10Y inversion. What does it all mean, Ajay?

Well, for one thing, the inversion probably means that irrespective of what stocks do, US PMIs are going to fall. “In ALL 8 cases of yield curve inversion since 1960, the US PMI fell for the subsequent 12 and 18 months”, BofAML writes.

(BofAML)

Analysts across desks have spilled gallons of digital ink pounding out research over the last week on what happens to stocks after inversions. For his part, Kapur notes that it’s 50-50 both for EM and US equities.

(BofAML)

Never one to mince words, apparently, Kapur then cuts straight to the point (and you can take “cuts” figuratively and literally here).

First, he indicts rates forecasters and in the process reiterates his demographics-based assessment of disinflation. “Interest rate forecasters have had a questionable 37-year track record – since 1982 they have looked for yields to rise, and been wrong [and] since 2005, they have looked for higher yields EVERY year, and overpredicted 85% of the time”, he flatly states, before reminding everyone that “we are old, indebted and unequal”.

Speak for yourself, man.

We jest. Kapur is correct and he is also correct to say that “old, indebted and unequal” is a “disinflationary combination” which in turn “presages continued low rates.”

If you’re curious as to whether that means Kapur and Samadhiya concur with the market when it comes to the chances of a rate cut by year-end 2019, the answer is yes. In fact, they write that they “won’t be surprised if it is earlier.”

Finally, when it comes to whether “this time is different” on the curve, Kapur has the following message, which we’ll just present without further comment:

Over history, commentators who argued that “this time is different” and the yield curve inversion doesn’t matter for the economy have been wrong. Running a leveraged book with a negative carry is the best way to understand why an inverted yield curve chokes off credit, and lowers growth