Three mighty macro narratives on collision course for markets

See the latest Australian dollar analysis here:

Australian dollar climbs with global stock surge

It is fascinating to watch macro analysts diverge into three distinct narratives covering the future of this business cycle. Conveniently for us, the three narratives are represented to three investment banks’ views.

The first we might describe as “good news is bad news”. It’s captured by Bank of America which sees overwhelming US fiscal support leading to major market dislocation and confrontation with Federal Reserve policy which will be forced to implement yield curve control:

  • Scores of the Doors: bitcoin 99.9%, oil 23.3%, global stocks 4.0%, US$ 2.1%, cash0.0%, HY bonds-0.2%, IG bonds-4.8%, government bonds-5.2%, gold-8.9% YTD.
  • Price is Right: tech/FAANG stocks peaking at 33% of global equity market cap in Q1(Chart5)…since Mar’20 lows US regional banks (KRE) have outperformed FAANG stocks.
  • BofA Bull &BearIndicator:rising again, up to 7.3(Chart 1); 10-year [email protected]%, HYinflows >$10bn, EM debt >$5bn among triggers requiredfor 8.0“sell signal”.
  • Catch-21: Fed’s Catch-22 in‘21…vaccine +fiscal excess + bond issuance+inflationary boom = higher yields, which via tighter financial conditions can short-circuit recovery; but YCC (fixing yields to please Wall St) = dollar debasement (to fund>$4tn“twin deficits”– Chart2) and/or asset bubble (worsens inequality); little wonder Bitcoin is ‘21’s “safe haven”(new BofA Research piece on Bitcoin).
  • we say utilities & staples good defensive hedges.

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