In the latest installment of his popular weekly “Flow Show” series, BofA’s Michael Hartnett leveraged the bank’s Global Fund Manager Survey to conjure “12 angry trades” for 2024.
The cinema reference will likely be lost on many readers. If you haven’t seen 12 Angry Men, it’s a classic. If you have some time between the fourth and fifth screening of Elf in your living room this holiday season, give it a shot.
I covered the highlights from the November BofA fund manager poll earlier this week. One key takeaway was a consensus view around lower long-term yields. Fund managers are bond bulls.
In the figure below, from Hartnett’s latest, he lists a dozen consensus views among professional investors (in the right-hand column) alongside the outcome which, if realized, would count as contrarian in the context of the professional consensus (in the left-hand column).
Some of the contrarian outcomes are less plausible than others. I doubt seriously that the geopolitical environment will improve, for example. US-China bilateral relations could thaw a bit, but other than that, the world will remain a very dangerous place.
If there’s a contrarian outcome that bears mention it’s the notion that inflation, yields and short rates could all surprise to the upside in 2024. At this juncture (and particularly after this week), markets are confident in the commencement of a Fed pivot from ~Q2 predicated on receding inflation and softer growth. That’s emboldened bullish rates bets, and it’s also changed the duration zeitgeist.
“The Treasury market is shifting from an environment in which the default stance was to sell toward one in which buying has become the new go-to,” BMO’s Ian Lyngen and Ben Jeffery said. “It’s becoming consensus that the Fed won’t be compelled (or able) to execute another rate hike during this cycle, therefore investors for whom monetary policy stability was a prerequisite for buying now have the green light.”
Personally, I think a negative NFP print between now and, say, March, is highly likely. Inflation’s another story. I won’t venture anything like a prediction on when core price growth will ultimately meander near enough to target for Fed officials to tentatively suggest the job is done. What I would say, though, is that price stability by way of recession still seems eminently more likely than a scenario where core inflation recedes to target “on its own” and stabilizes in such a way that Jerome Powell braves a “mission accomplished” speech. Even in a best case scenario (i.e., no recession and a smooth glide path back to two-handle core PCE), a declaration of victory is unlikely to come before 2025.
Hartnett added an amusing caveat. The “most unexpected outcome of 2024 is probably that consensus finally gets it right,” he said.
With a building consensus that the Fed is done, and high for only slightly longer will prevail, I worry about the Fed relying more and more on hawkish comments and warnings to nudge financial conditions in the right direction if needed, rather than overtly countenancing another hike, even if it would only be a relatively meaningless 25 additional bp. Doesn’t feel like the market is ready for that. The Fed’s own lips are often more more market-moving that any dot plots, no matter how quickly either become stale.
Nobody asked, but since we’re getting an early start on 2024 bold predictions:
1. Markets see margin expansion and earnings growth on the back of a weak labor market and AI advancements, particularly in tech.
2. Interest rates head back near 0 as unemployment picks up and inflation comes down more than expected.
3. Stock market will hit all-time highs with S&P and Nasdaq up 10% over previous high water marks due to aforementioned dynamics that create another everything rally.
4. If we get a Biden-Trump rematch, surveys overestimate Trump’s support and Biden wins more comfortably than last time around.
5. Geopolitics actually do settle down as Russia gets stuck in a quagmire and no one in the Middle East wants to get involved in a direct confrontation with Israel.
6. The Vikings win the Super Bowl (ok, that might be a bridge too far).
Yardeni argues that the Fed will justify 3% inflation with productivity making up the difference, seems possible.
That would be a bummer for retirees, whose numbers are growing by many thousands a day, and our federal debt servicing predicament.
Why? You get COLA adjustments.
Also, what “federal debt servicing predicament?” There’s no predicament.
I’m going to start pushing back on this canard every, single time I see it.
If the Fed wanted to, they could cap US bond yields overnight. If Jerome Powell said, tomorrow, “We’re doing YCC now, 10-year US yields will not exceed 4%,” that’d be the end of it.
And for the umpteenth time, the cost of servicing the debt is irrelevant because we issue the currency that the debt payments are denominated in. And it’s not “debt.” Treasurys are interest-bearing dollars.
Even if you want to call it “debt,” there will never (ever, ever, ever, ever) be a time when the US can’t service that “debt” unless the US decides not to. The US can’t, by definition, default involuntarily.
Please, for the sake of everyone’s sanity, try to understand this: It is philosophically impossible for the US to default involuntarily. The only way the US can “default” is if the US decides to stop paying its own bills. That decision will not (indeed, cannot) be a consequence of running out of money. The US can’t run out of money because the US is the literal source of money, and unlike, say, a gold mine or an oil field, the money isn’t finite. It’s infinite. Any luminary or hedge fund manager or Republican or banker who tells you otherwise is either lying or they’re an idiot. It’s just that simple.
The problem is, there’s a major political party in this country that doesn’t see things the way you do and is determined to use shutdowns over the “debt” and the possibility of default to drive its agenda, including less federal spending and changes to entitlement programs that would negatively impact future and, perhaps, current beneficiaries of those programs. Prceptions of our growing “indebtedness” have driven the political debate in this country since at least the Reagan presidency, and imo it will require a political solution, not the Fed, to fix the “problem.”
Nobody’s going to materially alter entitlements. That’s a political death sentence. As for the default agenda, it’ll be “fine” right up until any orchestrated default event isn’t remedied expeditiously. When Republicans see what would happen in the event of, say, a two- or three-month standoff wherein the US refuses to stand behind the collateral that makes the world spin, they’ll get frustrated by the reality: It’s not a tenable strategy. It’s a tenable brinksmanship strategy, and that brinksmanship might be “extendable” for a month or maybe two, but after that, it’ll become readily apparent that in fact, voluntary default isn’t an option, at which point the GOP will have to figure out another way to hold the country (and the world) hostage. I almost wish this uncured default scenario would go ahead and play itself out so that everyone can be disabused, once and for all, of the silly notion that default is a viable bargaining chip.
It is certainly true that Treasury bonds are interest-bearing dollars. And yet for longer duration Treasuries, a shrinking pool of price-sensitive buyers have recently been demanding higher interest …on those interest bearing dollars. Perhaps it’s because they are concerned that the dollars they will be getting back might be worth less than the dollars they gave up to buy the longer duration Treasuries. The next 30 yr Treasury bond auction might be interesting. The recent volatility in bond market can’t just be summarily dismissed. If inflation stays down then bond volatility should cool off and many concerns become moot. The holders of longer duration Treasuries for the past 3 yrs have endured some pain if they have had to mark to market their holdings. And then there’s the magic of compounding interest particularly with higher interest rates. The FED can certainly be the buyer of last resort of Treasuries and they can certainly expand their balance sheet. I think we will be fine because there isn’t any monetary regime that can challenge the dollar despite the recurring fever dreams of BRICS, as Mr H has eloquently explained in previous articles. I’m actually surprised the dollar hasn’t hit parity with euro yet, considering the stagnant economies in western Europe and their dependence on the sputtering Chinese consumer for luxury goods.
If old members of the permanent policy elite are really worried about inflation and the deficit, one of them will discuss changing some of the W and Trump tax cuts in exchange for other cuts. I am not holding my breath. It was refreshing to have the teamsters bring up the GM ceo $29 mill paycheck….