Searching For Lehman. Finding Civil Unrest

Lehman! GFC! Dot-com! LTCM! Lions, tigers and (especially) bears. “Oh, my!”

From time to time, when I grow especially weary of sensationalized market coverage, I have to remind myself that the vast majority of humanity enjoys being entertained. And because we humans harbor a perverse fascination with calamity, there’s only one thing that entertains us more than hypothetical catastrophes: Allusions to, and accounts of, real catastrophes that are far enough in the rearview to make us comfortable talking about them. (We’re careful to avoid making catastrophe jokes “Too soon.”)

With that in mind, media outlets reveled Tuesday in the latest installment of BofA’s popular Global Fund Manager Survey. The July vintage featured the word “Lehman” 10 times, which I suppose is apt considering the number of Lehman-like readings on the survey’s various measures of investor positioning and sentiment.

Global growth optimism dropped to an all-time low, for example, as the net percentage of respondents expecting a stronger economy registered -79% (figure on the left, below).

At the same time, profit expectations were the worst ever, including Lehman and COVID (figure on the right, above). That’s a reflection of pervasive concerns around margins in an environment characterized by high input costs, rising wages and expectations for slower sales as inflation curtails discretionary spending and central banks bleed demand to combat inflation.

You’ll note that the yawning disparity between investors claiming to be Overweight equities and expectations for growth has now nearly resolved — decisively in favor of risk reduction. For months, survey respondents stuck with stocks despite expressing palpable concern about the global economy. No more, apparently.

With some 90% of global assets underperforming T-bills, it’s small wonder that relative equity allocations versus cash have now likewise reached Lehman levels (figure on the left, below).

The net percentage saying they’re Overweight cash was two standard deviations above the long-term average (figure on the right, above). At 5.6%, the average cash level as a percentage of AUM was the highest since October of 2001 (“Dot-com!”).

A net 58% of respondents to BofA’s survey said they’re taking less risk than usual. That was up 10 points in a single month and marked a new record, exceeding… you guessed it, Lehman.

Some combination of “Inflation” and “Hawkish Central Banks” has topped the tail risk list for 15 of the last 17 months. The two “breaks” occurred when investors ranked the war in Ukraine and “Global Recession” higher on the risk list.

A more granular breakdown showed a very large MoM jump in those identifying persistently elevated inflation as the top risk (figure above).

From time to time, I point out that the FMS tail risk list is very often comprised of ostensibly separate risk factors which, when considered holistically, are really just the same risk viewed from different vantage points.

Apropos, “civil unrest” made a cameo on this month’s ballot (red in the figure, above). Because what do you get when you combine high inflation, recession, increasingly onerous interest rates and war?