With the exception of the post-tax cut melt-up in early 2018, “optimism,” defined as faith in above-trend growth and well-anchored inflation, has never been higher.
Or at least not according to respondents in BofA’s monthly Global Fund Manager survey, which polled 217 panelists with a combined $576 billion in AUM.
The December vintage shows optimism blowing past levels seen during the recovery from the financial crisis. What you see in the figure (below) is “consistent with an “uber-Goldilocks view,” BofA’s Michael Hartnett wrote Tuesday.
At the same time, a net 78% of respondents believe corporate profits will rise. That’s a record, with the previous peak coming in March of 2010.
Reflecting the same rampant reflationary ebullience, yield curve expectations touched a new record in the December survey as well. A net 76% expect a steeper curve.
As you might imagine, this is all part and parcel of vaccine optimism. When asked when inoculations will begin to manifest in stronger economic outcomes, 42% said the second quarter of next year. 28% said Q1.
While COVID-19 was still the biggest tail risk (the virus has held the top spot every month since the pandemic began), a 30% “conviction rate” (if you will) was down eleven percentage points from November. Notably, “fiscal policy drag” made the list, coming at number three.
Amusingly, “inflation” took the number two spot. Taken as a whole, that suggests some cognitive dissonance among investors.
After all, a lackluster fiscal impulse isn’t exactly conductive to skyrocketing inflation. Or at least not if it ends up undercutting aggregate demand.
Inflation as a tail risk? That’s weird. Max we might get annually the next two years is maybe 4% per annum.
Maybe the inflation entry in the “tail risk” chart can be interpreted as the anticipated loss of capital for bond holdings across the longer and of the curve. Maybe a better entry would have been “unorderly rate increase.” I don’t know, just guessing.
I think there’s a decent subset of “smart” money that believes more fiscal support / money printing will result in higher inflation.
Perhaps it is the inevitable response to inflation (raising rates) which is the boogy man, not the inflation itself. The diet of low rate financing hasn’t built much of an economic athlete. But it lives, marginally.
Until I became a reader of these pages, I thought the FED action created inflation. I now realize I was likely fed a line by retail talking heads. I can think some of the ‘smart’ money is no more informed than I was.
I like to say that since ‘smart’ people think alike then those ‘dumb’ people are also thinking alike as well. ‘Smart’ should be informed and ‘dumb’ should be uninformed.
While the phrase is a misuse of the words ‘smart’ and ‘dumb, it gets the point across to those not inclined to language nuance.