In his latest weekly Flow Show, BofA’s Michael Hartnett touches on a familiar topic: the rise of global populism and where it ultimately ends: “the end of central bank independence“, which he calls the ultimately populist policy.
Confirming something we have said since inception and explaining – once again – the advent of such phenomena as Brexit, the European backlash against immigrants, and of course, Donald Trump, the BofA strategist writes that “central bank policies of QE, NIRP, ZIRP have unquestionably exacerbated the gap between Wall St & Main St in past decade.”
Meanwhile, the wealth gap continues and in the latest quarter the US private sector financial assets are now 5.5x greater than US GDP, an all-time high, with the bulk of said financial assets held by a tiny fraction of the population.
With the great divide between the haves and have nots continuing to grow – despite the election of numerous populist leaders in nations around the globe, most recently Malaysia, Austria, and Mexico – BofA warns that the inability of monetary & fiscal policy, global synchronized recovery, and record corporate profits to create sustained wage growth, investors must discount more protectionism, redistribution & ultimately debt monetization via central banks in coming years… all trends that a recession would dramatically accelerate.
Hartnett then present the one asset class which he thinks will be the ultimate winner in the coming class wars:
gold is the secular beneficiary of the War on Inequality; investors note gold has fallen to its lowest level versus the S&P 500 since 2002.
That said for gold to be the “secular winner”, populism has to win the war on inequality, which also means defeat central banks, and they won’t go easy.
So what to do until then? Here Hartnett has two words: “Japanification” and FAANG, and notes that amid praise for the ongoing bull market, things are not quite as they seem, to wit:
profits, tax cuts, buybacks galore in 2018…and yet just 9 out of 45 MSCI country equity indices have outperformed 3-month T-bills (up 0.8%) YTD; cross-asset returns remain scant…US dollar & commodities 3%, stocks 2%, cash 1%, high yield & government bonds -1%, investment grade bonds -3%;
There is one exception to the market’s poor performance YTD: “the invincible US tech stocks, which trade as though interest rates will never go up”. And maybe they won’t: using a chart he has shown before, Hartnett notes that BoJ zero rates will lead an impotent ECB – at 0% until some time in 2036 – while anchoring Fed rates via more than $10tn of negatively yielding debt as well as dread of an inverted yield curve.
Hartnett then concludes with something we discussed earlier: the apparent infallibility of tech, and FAANGs in particular:
until investors fear the Fed there is little fear of FAANG stocks.
Which explains the relentless ascent of the FAANGs: as the tech strategist said last week, “Market Mocks And Loves The Fed.” If and when that changes, it will be time to cash out and finally make the shiny yellow metal great again.