Bank of America Global Research reported Friday that weekly flows to cash hit their highest level since May 6, $40.9 billion. Inflows to bonds were the third largest ever at $24.5 billion; and gold took in $3.8 billion, its second largest inflow. Equities had redemptions of $3.8 billion, or 0.6% of total assets.
Fixed income, in particular, sparkled, as investment-grade bonds enjoyed their third best week with $14.5 billion of inflows. Munis, too, celebrated with their fourth biggest inflow ever, $1.9 billion.
The report noted that investors have sold stocks over the past 12 months, and the trend needs to reverse if global stocks are to reach new highs versus global bonds.
BofA’s report lays out two themes that dominate investors’ thinking this summer.
One theme is what BofA calls the Great Repression, whereby $8 trillion of monetary stimulus via central bank asset purchases has stomped on interest rates, corporate bond spreads, volatility and bears.
The report cites the U.S. fiscal deficit, which rose from 7% to 40% of GDP in the second quarter, causing volatility in the U.S. Treasury market to decline to a record low.
Examples of “repression” yields include Italian and Greek 10-year government bonds, down to 1%; U.S. commercial mortgage-backed securities and investment-grade corporate bonds at 2%, and U.S. 30-year mortgage rates, at an all-time low of 3%.
The U.S. Federal Reserve has made bulls a winner in every asset class, the report notes, as gold, bonds, credit, stocks and real estate are all well up from March lows.
Moreover, the levered cross-asset risk parity strategy — allocated across global equities, Treasuries, commodities and Treasury inflation-protected securities (TIPS) — has hit an all-time high.
According to the report, an “all-weather” portfolio comprising an allocation of 25% each in stocks, bonds, cash and gold was up by 18% over the past 90 days, compared with a historic annual average gain of 7%.
Now, second-quarter bearish narratives for financial markets — BofA cites the end of globalization, Democratic election sweeps, Japanification of economies (referring to deflation and anemic growth) and narrow leadership of some growth stocks benefitting from lockdowns — are transforming into bullish narratives.
Bullishness is relative, though. True, the world equity market cap has made a round trip from $89 trillion to $62 trillion and back to $87 trillion, but financial conditions are unlikely to become easier in the July/August period of “peak policy” stimulus, according to BofA.
Its strategists are looking for a summer dip in risk assets, with the S&P 500, for example, falling to 3,050. (The index closed Friday at 3,215.)
The Great Repression goes hand in hand with BofA’s second theme, the Great Debasement.
Interest rate repression, it says, means that investors cannot hedge the inflationary risk of a $11 trillion global fiscal stimulus with “short bonds.” Instead, investors are elbowing into “short U.S. dollar” and “long gold” hedges.
According to the report, U.S. dollar debasement is emerging as the default narrative for the U.S. economy with excess debt, insufficient growth and maxed-out monetary and fiscal stimulus.
“We believe the correct historical analog is the late 1960s when themes of ‘smaller world,’ ‘bigger government,’ ‘monetary & fiscal excess’ led to positive nominal returns but also inflection up in inflation,” the report says.
The report notes a secular market trend of deflation dominating inflation. It says $100 of earnings per share in 1995 now stands at $1,500 in the tech sector, but just $425 in everything else. Yet in 2021, GDP in dollar terms is forecast to rise $1.3 trillion in China and $767 billion in EU plus the U.K., compared with $612 billion in the U.S.
Global fiscal stimulus is this year’s other big trend, and it supports rotation from deflation to inflation. The report notes that traders are finding that semiconductor stocks are already discounting ISM Manufacturing Index levels of less than 60.
These themes of repression and debasement are best played out with investments in commodities, high-yield bonds, and global stocks over U.S. stocks — European stocks are at 70-year lows versus U.S. stocks — using an S&P 500 dip to add to global stocks.
Here’s how BofA’s private client portfolios are now allocated: 58.8% stocks, 21.9% bonds, 13% cash — the latter reflecting last week’s biggest outflow from cash since April 2019.