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Now let’s hear from Copium Bear

Well, this seems helpful:

Email inbox traffic today can be grouped into two distinct themes. There’s the “contagion risk from a run on an atypical San Francisco lender appears to be minimal” theme, and then there’s the “WOO GENERALISED BAD MOJO” theme. Robin, Alex and our colleagues on prime FT have already written at length and in depth about contagion, etc, so let’s hear from someone in the “bad mojo” camp.

The research note headline above is from Bank of America strategist Michael Hartnett, whose thesis for a very long time has been that crisis follows tightening cycles like winter follows autumn:

US Fed Funds target rate % © BofA

Under BofA’s Flow Show brand, Hartnett’s notes have a unique gnomic quality, like he’s dictating imperatives while being pursued by a literal bear. Here, reproduced in full, is his bit about the potential spillover of credit events from tech PE and VC lending:

Government debt, shadow banking/private equity, crypto, speculative tech, real estate, CTAs, CLOs, MBS…so many potential catalysts for systemic deleveraging event that sparks policy panic/end of Fed tightening; truth is source of event irrelevant (who named UK gilts as credit event of ‘22), simply that it will happen and will cause policy makers panic (BoE restarted QE last Oct) and investors must be ready at that moment to deploy cash in new leadership assets which outperform in era of higher inflation.

An anaphora running through his latest is the sharply higher effective federal funds rate. A year ago it was 0 per cent. Two-hundred-and-ninety global rate hikes later it’s 4.5 per cent and “headed for 6”:

Market pricing for Fed Funds rate % © BofA

Add in a US yield curve that was last this inverted in the early 1980s . . . 

© BofA

…and dollar hoarding that’s at a record . . . 

US money-market funds, total assets © BofA

…and a US real estate sector that’s already flashing red:


Bad. Mojo.

Back when the Fed funds rate was 0 per cent, Tesla’s $850bn market cap exceeded that of the whole UK and continental European banking sector, Hartnett notes. (For reference Tesla’s market cap is $542bn at pixel time and the Stoxx 600 Banks Index has a total value slightly above $1tn; chart here.)

Spin forward a year and the Nasdaq has been “bearishly aping Dow Jones in 1973-74” amid the same “investment backdrop of war, oil shocks, fiscal excess, labor strikes, Wall St-Fed co-dependency [and] stop-go policy.” Hartnett illustrates the point with a two-axis graph, neither of which starts at zero:

The Watergate era was tough for the Fed, which flip-flopped twice on tightening. The proper pivot only came in December 1974, after the US unemployment rate jumped by a full percentage point to 6.6 per cent, Hartnett says.

And similar to today’s rangebound equity markets, the Watergate era was one of co-dependency between the Fed and stocks. Hartnett illustrates the point with a two-axis graph, neither of which starts at zero:

As for the present, restless workers mean sticky inflation, he continues. That means labour will outperform capital, Main Street will beat Wall Street, etc. Also:

Russia/Ukraine/NATO war, US/China tech war, Isreal/Iran tensions all getting much worse, electorates yet to pushback…fiscal spending on war, supply chain disruptions, commoditiy bull markets…old world was 2% growth, 1% inflation, 0% rates…new world of 2020s is 2% growth, 4% inflation, 4% rates…

You get the idea.

Given the parlous state of . . . basically everything, investors are left playing payrolls poker with today’s US jobs report, Hartnett says. And absent a soft number the “crashy vibes of March” are set to worsen, he concludes.

Stay safe, everyone.

Update 1:30pm GMT: . . . . . . . . . . . oof.

US Labor Feb Nonfarm Payrolls +311K; Consensus +225K 

US Feb Unemployment Rate 3.6%; Consensus 3.4% 

US Feb Average Hourly Earnings +0.24%, or +$0.08 to $33.09; Over Year +4.62% 

US Feb Private Sector Payrolls +265K and Government Payrolls +46K

Read the full article here

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