“We’re bearish despite ubiquitous bear sentiment,” BofA’s Michael Hartnett said, flatly.
He’s adamant, that one. But he’s also been right. Generally speaking, anyway.
Elevated cash yields and the appeal of short-dated US Treasurys and IG corporate credit can still bleed equities. That’s probably an underappreciated risk.
Retail equity flows have yet to reflect full capitulation. Over the latest weekly reporting period, EPFR data showed more than $9 billion flowed into global equity funds (almost $19 billion to ETFs, partially offset by more than $9 billion from mutual funds). US equity funds took in $12 billion.
The figure on the right (below) shows the disconnect between fund manager equity positioning (anecdotally, from BofA’s monthly survey) and the 12-week moving average of equity fund flows as a percentage of AUM.
The simple figure on the left (above) needs no explanation. The gap between two-year Treasury yields and S&P dividends is now approaching 300bps.
“Investors [are] flooding into short-duration bonds,” Hartnett wrote, in the latest installment of his popular “Flow Show” weekly. The “equity risk is this continues via rotation from stocks.”
He called long T-bills and short-dated Treasurys the “main trade.” You get “big yield” and a “hedge for recession and credit events.” The “pain trade” is new wides in credit spreads and a “flush” lower in the S&P to pre-COVID highs around 3,300. The bear market rally narrative may be “too consensus,” Hartnett cautioned, while reiterating that a recession or a credit shock could be right around the corner.
Note also that US commercial bank deposits are dropping fairly dramatically on a six-month basis (figure below).
Hartnett called that “disorderly.” Deposits are down more than $350 billion from the peak. Rotation to T-bills and other higher-yielding cash alternatives is a “big factor,” he remarked, but he didn’t eschew the opportunity to sketch an ominous parallel. The “last great disorderly drop in bank deposits was 1994,” he said, alluding to the Orange County and Mexican peso credit events.
Finally, Hartnett pointed to what he called the “great irony” of 2022/2023. “Main Street has too little supply of energy, commodities, housing and labor,” which is inflationary, while Wall Street has “too much supply of bonds, stocks and leverage,” which points to deflation.
I’m reminded of my own remarks regarding the Fed and its supposedly decent track record of controlling inflation.
“Is it realistic to suggest that small panels of technocrats were more influential in shaping the macro landscape over a four-decade period than globalization, demographics, technology, offshoring, deregulation and the corporate profit motive combined?” I wondered, in late June.
An alternative history of central banks’ contribution to disinflation post-Volcker might assign more credit to the spectacular busts they inadvertently facilitated than to political independence, forward guidance or inflation targeting. How ironic would that be?
I can see from your chart on cash flows that the current monthly period Is the lowest amount in the period defined starting in Jan 1973. I see little bumps compared to our current period, this must be an ominous sign.
Plus it’s a Rolling Six Months chart, so the amount of sustained ongoing withdrawals YTD necessary to manifest that print… yikes.
Still, less terrifying if you just assume everyone is simply shifting their deposits into T-bills. Likewise, you could think of it as just the giant pile of cash accumulated during Covid simply unwinding.
I like your comment about pandemic banking deposits shifting into T-bills. Seeing all those deposits accumulate during the pandemic was wild. With rising rates, T-bills are an understandable choice.
I noted a bit of potential doom and gloom in the comment below, but I’m still finding companies with a good story to tell, (and I might be kidding myself) but I believe I will begin to realize a return on these new investments (maybe even next year), despite the global chaos I expect to see. It is a strange world.
We get little signs of a possible coming market capitulation. But I’m afraid the real deal will have a broad and international scope, and it will tie into the war in Ukraine, NATO involvement, weapons of mass destruction, Chinese economic turmoil, and Russian defeat at a huge cost – mostly to Russia, but badly impacting Europe. I do not wish to be a doomsayer, but this thing called Russia has a genuinely destructive momentum. The Russian society appears to be mired in delusion and confusion – to the extent of a mass pathology – that has probably latent for decades but has come light more visibly because of its conduct in the Ukraine.
Please Dave it is not the Ukraine but Ukraine. Calling it the Ukraine is one of thousands of ways Russia has tried to insist that Ukraine is not a nation but simply an area of Russia. Loosely Ukraine can be translated as ‘in the borderlands or endlands’ and that is what Russian propaganda has been insisting that Ukraine is – the borderlands of Russia, where you can’t have NATO or a functioning democracy. I know you didn’t know but now you do.