“Sell the rips”

Michael Hartnett at BofA, conductor of the bust. The jury is still out on the structural story for me but the cyclical is spot on. I still say the Fed does not pivot before oil takes down the commodity complex. That may mean the outperforming ASX has a greater downside risk than other bourses…

Heard on the Street: “3600 is the new bull case”.

Tale of the Tape: US GDP was $24.4tn in Q1…global equity market cap collapse sinceNov’21 peak is $23.4tn; stock market basically dropped by 1 US economy in 6 months.

The Price is Right: Saudi stock market down >10% in 10 days = peaky oil price; resources (see flows), REITs, Big Tech, US$ the pre-recession vulnerable longs (Chart3).

The Biggest Picture: markets are great storytellers…the story of 2022 is “inflation shock = rates shock = recession shock”; the larger story of the 2020s is regime change (Chart 2), higher inflation, higher rates, higher volatility, & lower asset valuations, driven by trends in society (inequality), politics (populism/progressivism), geopolitics (war), environment (net-zero), economy (de-globalization), demographics (China population decline), all inflationary, all favor cash, commodities, real assets, volatility, small cap, all damage bonds, credit, private equity, tech stocks.

Weekly Flows:$1.4bn from gold, $5.2bn from equities, $7.6bn from cash,$12.3bn from bonds; for every $100 of inflow to IG/HY/EM debt since Apr’20, $27 has been redeemed; for every $100 of inflow to global equities since Jan’21, $4 has been redeemed.

Flows to Know: credit redemptions continue, largest EM debt outflow since Mar’20 ($6.1bn), largest HY bond outflow in 14 weeks ($4.3bn), largest bank loan outflow sinceMar’20 ($1.6bn); outflows tech & financials, largest outflow from energy since Sep’16 ($1.7bn), largest outflow from materials since Oct’14 ($2.0bn, Charts 12-16).

BofA Bull & Bear Indicator: tumbles to 1.5 from 2.0 in unambiguous contrarian buyterritory on redemptions in developed market stocks & HY/EM debt, deteriorating equity breadth, bearish May FMS (Chart 1);note BofA Global Breadth Rule also @ contrarian”buy” signal level (i.e.>88% of equity indices trading <50d & 200dma).

Capitulation: Capitulation Watch (Table 1) says FMS cash/macro + breadth =capitulation & BofA Bull & Bear <2; but institutional &private client AA + equity flows not at capitulation lows; and of course true capitulation = Fed capitulation, and systemic event & unemployment rate rise required first; bottom tactical line is tape v vulnerable to bear rally but we would still argue“sell-any-rips”.

History Lesson 1: 19 US equity bear markets past 140 years…average price decline =37.3% & average duration 289 days; if repeated today’s bear ends Oct19th2022 withS&P500 at 3000, Nasdaq at 10000; Japan yen & Swiss franc hedges for this…pretty much every Wall St crash past 40 years seen sharp, quick yen appreciation (Chart4).

History Lesson 2:EPS/GDP forecasts heading lower…debate shifts to correct multiple…some say 21stCentury multiple of 19x still appropriate, we say 20thCenturymultiple of 14x more appropriate for stagflation (Chart 5).

Bulls say: feral, fearful, dystopian price-action…this is what bear markets are, and the tape shows big damage already; bulls can say “inflation shock” largely priced-in, “rates shock” too, once “recession shock” discounted lows will be set; key for bulls now is JOLTs data (job openings currently 11.5mn)…needs to pullback below 10mn…to induce bullish peak wages, peak yields, peak dollar narrative

Bears say: unanticipated cyclical risks are…

•Wall St leads Main St…Wall St assets are 6.3x greater than US GDP (Chart6)…as seen in 2020 quickest route to deep recession is via Wall St crash (and vice-versa),

•Recession…housing & labor markets only just at inflection points…see US purchase loan applications(Chart 7), see tech & retail layoffs (retail = 12% job gains past 2years, leisure & hospitality 33%-Chart 8),and higher unemployment = social unrest; meanwhile China house prices negative once again (Chart9),

•Policy paralysis…inflation hinders Fed reaction function, polarization hinders fiscal policy reaction function in a crisis, recession,

•Banksarguably safest part of financial system yetBKX index trades below highs of’07, ’18, pre-COVID ’19 (Chart10)…break below 100 would scream recession and/or credit event, tighter lending standards in coming quarters (Chart11),

•Credit events…still think $18tn of negatively-yielding debt to $2tn in 9 months means liquidation & deleveraging & default risks high…leveraged loan market cracking, systemic risk from bond/stock/real estate deleveraging in risk parity (RPAR), private equity (PSP)high, PE exposure to syndicated loans high, sovereign wealth funds, credit events in speculative tech, shadow banking, US consumer buy now, pay later models, European credit/banks/housing, Emerging Markets, zombi ecorporations, and so on…and the Fed has not yet begun QT.

Houses and Holes

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