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Why BofA Is Becoming Increasingly “Concerned About A Global Policy Error”

Courtesy of ZeroHedge. View original post here.

With traders, analysts and pundits growing increasingly worried that an inflationary burst is just around the corner and threatens to spoil the Goldilock narrative, here is a contrarian piece from the equity strategy team of BofA’s Ritesh Samadhiya, who says that contrary to expectations for a few behind the curve on rising inflation, the real threat remains deflation, and a “global policy error”, and as a result it is getting more, not less, vigilant despite its “long-term bullishness”

Why we are getting more vigilant, despite our long-term bullishness

The consensus has embraced the “synchronized global growth/higher inflation/higher bond yields” narrative.

Analysts are scrambling to find even more reasons to project even more tightening – inflation! Wages! Term premium! Less bond demand from the Fed! More bond supply from the US government!

We, on the other hand, are a lot more worried that global growth might be peaking (although robust), that wage inflation is unlikely to be a threat, and that a highly indebted world is too fragile to be challenged by central bank balance sheet contraction in 2019.

We are getting more concerned about a global policy error, of too much expected monetary tightening in the US, even as Chinese monetary policy is already turning south, see the China credit impulse 12-month change on Bloomberg.

For those who believe that tight labor markets lead to higher wages, take a look at Japan. A 25-year low in the unemployment rate (only 2.8%). Real wage growth? – 0.5% YoY in December. Even part-time workers’ wage growth has fallen from 3% YoY in mid-2017 to 2.1% in December.

It is unlikely to be Asian/EM fundamentals that will help us avoid drawdowns – it is likely to be US/Global market internals (stocks/sectors/markets at new lows, advance-decline ratios, percentage of stocks/sectors above various moving averages etc.) that will break down beneath a possibly calm surface, worrying about a possible policy error.

We are watching vigilantly.


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