There's a lot to worry about out there.
And that's not me being hyperbolic.
To be sure, permabears have taken a horrific beating in the post-crisis era. Blame it all on financial engineering (companies leveraging their balance sheets to buy back shares and artificially boost the bottom line and the value of their equity). Call it a foolhardy and invariably ill-fated exercise in bubble-blowing by the world's foremost monetary authorities. Or just call it pure madness, but at the end of the day, if you bought in 2009 and held until 2016, you'd be doing pretty well regardless of whether you were in fixed income or stocks.
Now sure, that may all come crashing down along with the entire fiat system, thrusting the world back into some kind of barter system where beads and beaver pelts become currency, but until that happens, I imagine most investors will take what central bankers have given them (just don't hold those negative yielding bonds to maturity and make sure and get out before rates rise).
Anyway, as the bulk of the world's most important central banks enter what is likely to be the final act of what has been a truly epic experiment in what I like to call "mutant Keynesianism," you should remember that in "The Boy Who Cried Wolf," the wolf finally did come.
And there are a lot of potential wolves out there.
That's why this month you've seen the flight to safety accelerate. Here's the yen (NYSEARCA:FXY), for instance:
And 10Y bunds, on which yields turned negative Tuesday for the first time in history:
How about JGB 10s? Yep, there too:
So just what is it that has everyone spooked? Well, we know the answer(s) already:
- the Fed
- the BoJ
- China (and by extension, EM)
But that's just the broad strokes. Let's take a look at what BofAML's clients said in this month's survey and how those responses differed from last month's.
First, here's what the biggest concerns are in the event the Fed pulls the trigger:
And here's a look at what clients are most concerned about overall:
Finally, here's how investors are likely to interpret a hypothetical hike:
Note that three of the six things investors are most concerned about (including number one) are geopolitical outcomes. That speaks to the point that I habitually pound the table on: namely that you cannot understand markets without understanding politics. Now, more than ever, you need a completely holistic approach.
If you ask me though, I think the major risk here is a soaring dollar and the resumption of EM (NYSEARCA:EEM) outflows triggering a series of self-feeding crises across the emerging world (including China).
And on that note, I'll leave you with two charts, one from BofAML showing dollar longs at multi-year lows and one from Deutsche showing the extent to which beleaguered (if recently resurgent) EM currencies track the USD. Interpret as you see fit.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.