Bank of America: “This Is The Most Consensus Trade In The World”

One week ago, BofA chief investment strategist Michael Hartnett laid out his reasoning for why a market correction is imminent:

Global stock market cap up a massive $18.5tn (= US GDP) since Feb’16 lows
3P’s (Positioning, Profits, Policy) thus closer to peak than trough: BofAML Bull & Bear Indicator was 0 in Feb’16, now 6.9; global EPS growth was -6% YoY in early- 2016, now 14% YoY; $2.0tn of asset purchases by central banks YTD but Fed & ECB will taper next 6 months
Q4 “top” in equities and credit driven by:
a. pricing-in of US tax reform (= peak Policy),
b. rise in MOVE index (= peak Positioning),
c. rally in oil + trough in Chinese RMB + upgrades to global GDP (= peak Profits)

Tax reform = “peak policy” = buy rumor, sell fact; passage of reform or cuts = quicker Fed balance sheet reduction + less share buybacks as capex accelerates; US equities lose 2 big tailwinds next year (since 2009 lows S&P equity market cap up $15.3tn, Fed’s balance sheet up $4.5tn, share buybacks up $3.5tn)
Big jump in the MOVE index of US Treasury market volatility (i.e. “bond shock”) catalyst for cross-asset volatility (QE has neutered impact of bond volatility on equity prices but the negative correlation will return as monetary policy normalizes)

Fast forward to today when… nothing at all has happened, again: stocks are at new all time highs, the VIX is back to a whisker above 8, junk bonds issued by “emerging” countries with unpronouncable names are 5x oversubscribed, and complacency abounds despite the world being one tweet away from nuclear war.

There are two discrete reasons for this:

The first is that the great rotation – of bagholders – is in its final stretch as institutions dump in near record volume to retail investors. According to EPFR data cited by …read more


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