Who would have thought that all it would take for banks to turn from raging permabulls to cautious bears is just a modest 10% drop in the stock market from all time highs.
And yet, in a note today, that’s roughly the metamorphosis that Ritesh Samadhiya of BofA’s underwent when in a note to client, he puked all over the bank’s broader, and bullish economic and market outlook, and instead said that “we think the risk is that nominal global growth SLOWS a lot more than consensus believes.” To be fair, Ritesh had been warning about the threat of deflationary forces for a while, so at least since January, his caution has been spot on.
Here are the details:
What we think – slower growth, little inflation
We are NOT buyers of the tight labor markets-higher wages-higher inflation-higher bond yields story (check out insignificant wage growth in Japan and Australia – both with very tight labor markets with very high labor force participation rates as examples of the weakening link between unemployment and wage growth).
We think the microfoundations of the wage setting process are not properly appreciated by macro investors/analysts. (If you work for an industry with just a few, large names, try asking your boss for a substantial bonus.)
We think the risk is that nominal global growth SLOWS a lot more than consensus believes – Three Chinese leading indicators are falling – the Bloomberg China Monetary Conditions index (CHBGMCI)…
… the China credit Impulse 12-month Change (CHBGREVA)…
… and the China Marshallian K (gap between M2 growth and nominal GDP growth).
Global economic surprises are falling, and so are some leading indicators in the US. Asset prices that reflect global growth are stalling (Dr Copper, Dr Halliburton, Dr. Sotheby’s etc).
We disagree with the bearish bond consensus.
And now we wait for other internal BofA groups to follow in Ritesh’ footsteps, eventually spilling over to other banks who will then be forced to cut their S&P targets, which however may take a while especially since Wall Street “thought leader” Goldman still expects 3 more rate hikes in 2018, a forecast which is imploding before our very eyes with every percent drop in the S&P.
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