“Risk assets en fuego as Goldilocks schools us bears,” wrote BofA’s Michael Hartnett, in the latest installment of his popular weekly Flow Show series.

In the past, Hartnett has described himself as a “patient bear.” I can’t speak for him, but I know a lot of other bears, and their patience is wearing thin with major US benchmarks at YTD highs and pushing further into bull market territory.

This week was, of course, all about evidence of US disinflation, which Hartnett suggested was overhyped. “June CPI in truth [was] only slightly better than expected,” he said. Frankly, I don’t agree with that assessment. The CPI report, when taken as a whole, was unequivocally good news for the Fed. That doesn’t mean it’ll last, and it doesn’t mean headline inflation won’t inflect higher as base effects turn less favorable, but I don’t think there’s much use in pretending it wasn’t a bullish development.

Hartnett flagged the “big easing of financial conditions” discussed at some length here in “Powell Gets Rally Fed May Live To Regret.” “Markets added two more Fed cuts in 2024 for 160bps of easing,” he remarked, calling that “way too much” absent a hard landing. The most important read-through from the CPI report, he went on, was the extent to which it might’ve removed the tail risk of a Fed policy mistake in the back half of the year — the odds of the Fed tightening the economy into a recession are lower now.

Ultimately, though, Hartnett retained what I can only describe as a skeptical view. “We’ll look to short risk assets in late August, early September,” he wrote. It wasn’t entirely clear who “we” is, nor was it clear which “risk assets” would be “shorted,” or how. As a reminder: Hartnett’s missives are best read as big-picture takes. His style is eminently engaging and his charts are creative. That’s why he’s popular. That’s why people read Flow Show. It’s not really about trade recommendations, or at least not as I’ve ever read it. With that in mind, the figure below is interesting. It shows a complete breakdown in the relationship between the Big 3’s combined balance sheet and big-cap US tech.

“The correlation between central bank liquidity and the Nasdaq disconnects on CPI and A.I., plus SVB reminding investors that central banks are quicker to add than withdraw liquidity,” Hartnett said. And yet, the “liquidity drain is set to continue,” he warned.

Between them, the Fed and ECB will drain more than $100 billion per month and US Treasury issuance will “nullify oodles of MMF cash,” Hartnett wrote. That latter point is important. The wall of cash that inundated money market funds largely found its way into the Fed’s RRP facility. The hope is that Treasury’s cash rebuild will be predominately facilitated by RRP transformation. That would limit reserve drain, but it’d also mean less “dry powder” to be deployed in risk assets. “Just” $1.767 trillion was parked in the RRP garage on Thursday, the least in 15 months+.

It’s not just a waning liquidity impulse that could limit equity gains going forward. Hartnett also flagged the risk of headline CPI inflecting higher, and possible consumer retrenchment.

Pandemic savings buffers are dwindling, bank earnings Friday betrayed some evidence that consumers are beginning to struggle and the resumption of student loan payments in the US is a de facto liquidity withdrawal.

“US retail sales and BAC credit card spend are now negative,” Hartnett observed, cautioning that although Goldilocks “rules risk assets for now,” the situation could look different within a few months.