* Coming Soon: When Janet Met Mario
Strategically: BofAML base case = “deflationary expansion”; slow, jerky transition to
higher growth/higher rates, led by the US, China soft landing; AA = long US dollar, long
volatility, long real estate, long stocks/short bonds, UW EM, commodities; higher
conviction requires unambiguous Q3 trough in GDP & profits, XLF>$26 & ADXY>110.
Tactically: “sellers into strength” as our trading rules flip from “buy” to “neutral” & Fed
hike approaches…December could be the first time since May’94 (a year of bond
crashes, defaults & most intriguingly, a weak US$), that investors experience a Fed rate
hike & a European rate cut in the same month (see Chart 1).
* QE Jenga
The “tail risks” to “deflationary expansion” are high. Like a game of Jenga, a bull market
built by central banks can collapse if further BoJ/ECB QE and Fed hikes engender US
dollar spikes & US EPS & EM/commodity swoons, FX-wars & volatility rather than a fullblown
recovery. Gold & volatility are the natural hedges to the bearish scenario of
“Quantitative Failure.”
* The Ultimate Inequality
Alternatively, a world dominated by (ineffectual) QE, technological disruption &
inequality could cause excess 2016 valuations in “uber growth” (tech, CA real estate,
“unicorns”), a rally in “uber value” & a “pop” in “yield” & “shadow banking” as rates
belatedly rise to curb Wall Street excesses. As in 1998/99, we think a bold “über-barbell”
would outperform in this environment.