“The Fed Blinks,” blares a headline in an investment strategy piece from Bank of America Merrill Lynch today, one that takes the tone that the Fed catered to those on Wall Street who were warning of a threat to the main street economy if the Fed lifted rates.
BAML: Interest rates “lowest in 5,000 years” at depression levels
As short term interest rates are the “lowest in 5,000 years,” running at the zero level not seen since the Great Depression in 1930, a BAML piece from Chief Investment Strategist Michael Hartnett along with Investment Strategists Brian Leung and Garrett Roche notes seven primary thoughts.
The first thought is that the Fed caved to threats that China and withdrawing stimulus from Wall Street could reverse what little main street recovery that has occurred to date. The bigger picture is that this recovery is different from others, “thanks to low rates/oil/unemployment,” but the component troubling economists, deflation, remains low as a result of three factors: debt, tech disruption, demographics.
BAML: Fed in “tactical delay,” also known as a “stay of execution for the ‘liquidity era'”
The delay in the Fed rate hike was viewed by the bank as a “tactical delay,” calling it a “stay of execution for the ‘liquidity era’” but it could have more ominous meaning if a strong rally does not ensue. The combination of an “ultra-dovish Fed” and bearish market sentiment could be hinting that a recession and/or default is imminent, according to the report, which is looking for the S&P 500 to reach the 2040 to 2070 level in light of a soft touch by the Fed recently.
A key point could be the rolling over of the Federal Reserve’s monetary base, known as M1 as the report says that liquidity could be peaking. The peak in M1 could result in a peak in excess returns. The best anecdote to fears could be stronger global growth.
In a “deflationary recovery,” the report recommends “growth, yield and quality” which it predicts will “remain structurally bid.” In such an environment they recommend maintaining long exposure to the U.S. dollar, long volatility as well as real estate and stocks, “but upside for risk assets now (are) constrained until unambiguous handoff from liquidity to growth” market environment occurs.
This story first appeared in ValueWalk.
Photo: Philip Dehm