Thirteen years of financial excess won’t be unwound by a 6-month bear market: BofA chief investment strategist

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

BofA Securities chief investment strategist Michael Hartnett remains among the most bearish Wall Street pundits. His weekly Flow Show research report was typically succinct (my emphasis),

“Putin/China catalysts to be less bearish H2 but bull run needs peak CPI, peak yields, Fed done by ‘23… unlikely without big recession and/or big credit event (which disconnect between banks & yields has implied – Chart 2); sell SPX 4200 … The Big Flow: ‘everyone bearish but no one has sold’ … for every $100 of inflow since Jan’21 just $2 of outflow from tech, $3 from equities ($12 from REITs, $22 from resources, $58 from financials, $93 from IG/HY/EM credit); note contrast with GFC … 3Ps: of the 3Ps, we say Positioning closest to green light for risk appetite/trade higher, but Profits and Policy don’t yet give green light for new bull trend; and don’t think Wall St unwinds financial excesses of past 13 years with a 6-month garden variety bear market.”

“Hartnett: “everyone bearish but no one has sold”” – (research excerpt) Twitter


BMO economist Priscilla Thiagamoorthy detailed the sharp slowdown in U.S. industrial activity,

“U.S. factory output has remained a bright spot through much of the pandemic, despite a slew of headwinds including supply issues, hiring challenges, and skyrocketing prices. But now, there are signs that the outlook may be dimming. The Philly Fed index for current business conditions dropped 9 points to -12.3 in July, marking the second straight negative print. And, the outlook for six months from now fell to the lowest level since 1979. On an ISM-adjusted basis, the gauge declined 4.6 points to 48.7, entering the contractionary zone for the first time since May 2020. There have been false signals in the past where the index slumped below the 50-mark only for manufacturing growth to forge ahead—most notably in 2016. However, with demand now weakening quickly amid the Fed’s aggressive tightening path, all signs suggest a slowdown in manufacturing output is likely. “

“Philly Slump (BMO)” – (research excerpt) Twitter


In a separate BofA research report, analyst Helen Qiao described events in China where a major pillar of the country’s growth is being threatened by widespread mortgage payment boycotts,

“Media reports on ‘mortgage strike’ raised renewed concerns on the property market turmoil in China. Homebuyers in 80 cities threatened to cut off mortgage payments for at least 230 pre-sold but stalled property projects. The main cause of the problem was liquidity crunch of distressed private developers and insufficient funds left in the pre-sale escrow accounts to cover project completion… we believe Chinese authorities will have to intervene promptly to fend off a downward spiral in the property market. Otherwise, such widespread mortgage-suspension incidents could hit confidence and send shockwaves to both the demand and supply sides, exacerbating the current property market downturn that has lasted since 2H21 … Given the fiscal strains and concerns about moral hazard, top decision makers are unlikely to roll out any top-down ‘bazooka’ measures to tackle the problem. The most likely policy outcome is to have local governments, local government financing vehicles (LGFVs) and state-owned enterprises (SOEs) step in to complete unfinished projects batch by batch. This solution, if carried out successfully, has the potential to backstop the housing market and gradually rebuild confidence”

I know from website traffic statistics that Report on Business readers tend to skip over China stories. This one is important however as Chinese housing construction is a major driver of commodity prices.

“BofA on China’s mortgage strike crisis” – (research excerpt) Twitter


Diversion: “Do these heatwaves mean climate change is happening faster than expected?” – M.I.T. Technology Review

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