Global fundies spooked by inflation

ZH has a great summary of the BofA fundie monthly:

Below we present some of the highlights from the latest FMS, which finds that a record number of investors are taking “higher-than-normal” risk, up to 25% in February the highest on record…

… for the following reasons: Net 91% of investors now see a stronger economy in 2021, with the majority or 34% saying it’s a V-shaped recovery, up from just 10% 9 months ago…

… 1st time since Jan’20 investors want CIO’s to “increase capex” rather than “improve balance sheet.”

And even though millions are still out of work, Powell has assured markets that he won’t hike unless 500,000 jobs are created each month until the end of 2022, resulting in record high inflation expectations…

… profit expectations (the net percentage of FMS investors expecting global profits to improve over the next 12 months fell 3ppt MoM to 84%, showing profit expectations peaked in Jan) ….

… and yield curve expectations close to record highs.

And with a record number of investors flooding into risk assets and expecting surging prices, it is hardly a surprise that FMS cash level timbled to just 3.8%, the lowest since Mar’13 (incidentally, just before Bernanke “taper tantrum” which is ironic since a new taper tantrum is on deck)…

…. also explaining why the allocation to stocks & commodities is highest since Feb’11.

Which is not to say that there are no risks: in February, investors viewed top “tail risks” as vaccine rollout (28%…timing of positive impact has slipped to July)….

…. with taper tantrum (25%) and inflation (24%) second and third. A bubble curiously was just 4th…

… because in one of the most bizarre observations, just 13% of investors think the U.S. equity market is in a bubble – which is hilarious because it is painfully clear that not only the market but the economy are both in a fiscal and monetary stimulus fueled bubble but once again people are happy to lie to themselves if it means goalseeking their thesis. At the same time, 27% think early-stage bull market, 53% late-stage bull market.

Meanwhile, there has been a reversal in the most “crowded trades” where the top spot is once again “long tech” (35%)…

… taking over from “long Bitcoin” which was the top crowded trade last month with 27% (which as we said at the time is idiotic since most finance professionals can’t even put the bitcoin trade one), and in 3rd spot was short dollar (13%).

So in terms of investor positioning, the FMS shows that cyclical consensus is “cyclical” with high exposure to commodities, EM, industrials, banks relative to past 10 years…

… but Jan wobble caused investors to top-up “safety of growth” exposure via tech, health care, US stocks.

And while there is nothing to fear but fear itself, what should one do if everything goes tits up? According to BofA, the best hedgees are the anti-Goldilocks, contrarian trades, as the Feb FMS indicates “peak Goldilocks” is now behind us as hopes for higher growth-lower inflation peak (down from 47% in Nov’20 to 40% in Feb’21) with higher growth-higher inflation continues to tick up to all-time highs 35%.

As Hartnett explains “bubble move and/or big inflation in 2021 best played via FMS laggards e.g. energy & UK stocks; conversely longs in EM, commodities, industrials most vulnerable to “peak profits” narrative; either way consumer staples a smart contrarian accumulator in H1.”

David Llewellyn-Smith
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