I have always marveled at how major money managers consistently underperform the broad markets. Year in and year out, the masters of the universe get paid big bucks for results that could have been achieved for fewer fees.
Still, the beat goes on. While I completely understand their challenge of managing risks, it feels like they overreact and see the worst-case scenario far too often. This brings me to the latest survey on what big global money managers are buying and selling, and what they see.
Big Money Managers Bracing for Crash
The Bank of America Merrill Lynch (BofAML) Global Money Managers Survey’s exposure to U.S. investments from bonds to big tech and the U.S. dollar have helped, but the overall allocation is the equivalent of bracing for a crash landing.
- Global equities: -32 percentage points (the lowest level since March 2009)
- Bond exposure, highest since September 2011
- Cash levels, highest 2011
- Treasuries most-crowded trade: 27%
Other crowded trades:
- U.S. tech: 26%
- U.S. dollar: 18%
- Short European stocks: 9%
Do the markets move the Fed and the White House instead of the other way around? According to these money managers, Jay Powell and President Trump both have levels where they ‘cry uncle’. Interestingly, if the Fed cuts send the market higher, then we will never get to the capitulation number to move the White House.
- See Fed cut, S&P 500: 2,430
- See the Trump trade deal, S&P 500: 2,350
The questions are mounting, and I hope we get some answers. Will Jay Powell be rebellious like the Mockingjay of the Hunger Games fame, or will he ignore the stories the White House has looked at every legal avenue to oust him from the chairman role at the Fed? There are many that believe that December 19, 2018, rate hike was a signal to President Trump about Fed independence.
I’m not in that camp, however, the stakes are too high for the media’s fantasy of a rebellion at the Fed.
All eyes will be on the Federal Reserve and the all-important question-and-answer period after the conclusion. Lots of questions will be asked, although I’m not sure if any will zero in on the housing market. There’s no doubt it’s a major Achilles heel for this economy.
Remember residential investment? It has been negative in each of the past five quarters, and seven of the past eight quarters. Yesterday, housing starts swooned -0.9%, although permits were +0.3%, leaving many to guess if we are at an inflection point.
Yesterday, after the close, La-Z-Boy (LZB) posted mixed financial results with revenue coming in at $453.8, which missed consensus, although earnings per share were in-line. The initial reaction saw the stock getting scorched. This morning, we’ll get the latest on mortgage applications, which experienced phenomenal increases in last week’s release.
As of now, the housing starts missed and/or nicked the Atlanta Fed’s Gross Domestic Product (GDP) estimate back to 2.0% from 2.1%.
Fed in Spotlight (and its hot)
All eyes are on the Federal Reserve, which has all the elements of modern entertainment mixed with pushes for modern monetary policies and new objectives and ways to implement them. The entertainment part of today is the reality television impact of President Trump’s nonstop campaign to push Powell into rate cuts, even as he criticizes the European Central Bank for doing the same.
At the same time, China’s central bank (PBOC) has been pumping money into every orifice for the China economy. For the White House, this all amounts to central banks doing the patriotic thing at the expense of America where the Fed spent last year hiking rates.
Beyond the political intrigue, the Fed must counterbalance clear signs of strength with clear signs of weakness, coupled with dark clouds of uncertainty.
Jay Powell has made it clear; the Fed wants to keep the economy humming and avoid a recession. He doesn’t take it as simply part of natural cycle that the economy must dip into recessions. Sure, some say they are actually cathartic. The good news is Powell won’t push the economy into recession, but that’s almost what he did last year when he was working from the old Fed playbook.
This year he has said wage inflation isn’t price inflation, and in fact, the Fed’s greatest internal worry is whether that can move the inflation needle anymore. Purist wonder if the Fed is too impatient, and could trigger the economy to overheat, or be caught flat-footed without ammo to save the day if there’s an economic shock.
Handicapping Rate Cuts
In March, the FOMC showed no hints of rate cuts. Now, the street is looking at two to three:
- 23% June
- 82% July
- 94% September
As for today’s FOMC, it all comes down to one word:” “patience.” If it is removed from the statement, the street will cheer.