BofA-ML retains bearish stance ahead of 10-year commemoration of Lehman Bros. crash

Investors are already positioned 'bearishly', but that potential positive for financial markets was likely to be swamped by the recent peaks in corporate profits and economic stimulus, strategists at Bank of America-Merrill Lynch cautioned.

One of the indications of peaking momentum in global growth were global trade volumes, which they said were already at "recessionary" levels.

Simply put, if no one is left to sell, then asset prices will often head higher as buyers begin to step in.

But first, BofA-ML believed it would be necessary for the US central bank, the Federal Reserve, "to blink" and for Chinese authorities to step-up their game with a big policy easing.

Those would see 'corporate profits' and 'policy' kick-in alongside 'positioning', the "three P's" as BofA-ML called them, as positive drivers for risk assets.

For the Fed, given the high degree of financial leverage in the US economy, the message was that: "Wall St deflation, rather than Main St inflation, is the quickest route to recession."

Hence their expectation that rate-setters in the US would blink, in December at the earliest.

"The politics of inequality aside, perhaps the best argument for financial assets is simply that US policy makers cannot take the risk of letting asset prices cause a recession (US financial asset prices as a share of US GDP are at a record high)," they explained.

US private sector financial assets were standing at 550% of US GDP at the time of writing, versus just north of 450% just before the start of the Great Financial Crisis.

In 1990 meanwhile they were at roughly 330%, versus about 455% in 2000.

And how will we know that Chinese policy-makers have eased "big"? Follow South Korea's Kospi equity index and the price of copper, the strategists recommended.

On a related note, the overarching theme behind their take on things appeared to be the receding tide of quantitative easing.

In 2016, central bank net asset purchases reached $1.6trn, rising to $1.7trn in 2017, falling to a mere $0.16trn year-to-date 2018, with global liquidity seen starting to shrink by year-end.

It is against that backdrop that the "classic" canary in the coal mine - stress in Emerging Markets - had re-appeared, or disappeared, if one prefers.

"Ultimately, the Fed will work out that a levered financial market and economy can't cope with higher rates and they will stop [tightening policy] [...] share buybacks with borrowed money is leverage, private equity are leveraged equity portfolios, tax cuts financed with Treasuries is leverage, pension fund liabilities in excess of assets."

As an aside, and with under one month to go until the 10th year since the crash of Lehman Brothers, BofA-ML mused: "Just as fascinating are all the many assets that 10 years later actually remain below their Sept 14th 2008 levels […] oil, industrial metals, equity markets in Italy, Spain, Russia, Brazil, Turkey, global equity sectors such as energy & utilities, and most glaring of all, the European & the Japanese banks; the central banks prevented debt deflation, but they did not inflate indebted assets."