Higher For Longer is Crowded

Bulls Are Back

Bank of America’s latest Fund Manager Survey shows money managers are now the most bullish since November 2021. We are far from euphoric levels, but the signs of excess are certainly building… Just look at GME and AMC’s stock prices this week.

Cash allocations are showing even more bullishness. The average cash level is at the lowest level in over a decade despite ‘cash’ paying way more than it did the entire post-2008 world given the Fed’s rate hikes.

Think about this: For years cash and money market funds paid virtually 0% interest. And now with FREE money offering 5.5% yields, managers have less cash than before and would rather put more into an equity market sitting up at 21x earnings.

Everyone Scared of Inflation

For months we have been screaming from the roof tops that inflation is embedded in the system and it would climb higher in 2024. Well, that is exactly what has happened. It remains a growing concern of investors, per BofA’s Fund Manager Survey.

However, just because structural inflation is in the system, that does not mean we cannot have a deflationary recession scare. Euphoric equity prices and fears of inflation have seemingly forgotten that recession exist.

Although the road has become bumpy inflation won’t be heading back to its 2022 peak anytime soon. Core inflation in the April CPI was 0.29%, basically in line with economists' expectations for the first time this year.

12-month change: +3.6% (a three-year low)
6-month annualized rate: +4.1% (highest since July)
3-month annualized rate: +4.1% (down from 4.5% in March)

However, retail sales have been soft and forward-looking indicators have been soft. This speaks to stagflation.

In Canada, deflation and recession should be what investors are afraid of. Canadian business insolvencies have soared to the highest level in nearly 20 years. There were nearly 800 insolvency files in January - which is >40% more than filed a month before. Compared to the same month last year, this represents a whopping 129% spike. It seems the massive rise in interest rates are finally impacting pain. Why did it take so long? Refinancing.

In the USA, 41% of Russell 2000 companies are not profitable. Imagine what would happen when small caps would need to refinance their debt at the current much-higher interest rates. This is what is happening to Canadian companies and what is on deck for US companies, namely small caps.

Here is a simple fact that nobody is talking about: If rates fall and we have a mini-recession in late 2024 / early 2025 that will actually be the best outcome in the long-term. Low rates will open the door to term-out debt. If rates don’t fall, thousands of US companies will hold off on refinancing and drive straight into a wall (pun intended) of maturities in 2025-2028.