Coming into 2023, BofA's resident bear and chief investment strategist, Michael Hartnett made two big predictions: i) sell the last Fed hike, and ii) every Fed tightening cycle ends in tears and a market crash.
Starting with the latter, we were briefly there in March when some of the largest regional banks (and certainly the biggest California banks) keeled over and imploded (making JPMorgan even bigger as it soaked up their deposits) as they collapsed under the weight of their underwater debt securities, but then the Fed decided to double down and using an instrument that effectively backstopped insolvent banks' deeply underwater duration exposure - the BTFP - it sent stocks flying as it injected hundreds of billions of fresh liquidity into the system. Of course, that was just a band-aid solution, and even though the BTFP has a 1 year duration, the Fed will not only never be able to unwind the BTFP, it will only get bigger and bigger, and as Hartnett correctly predicts in his latest Flow Show note "520 central bank rate hikes past 24 months likely ain’t finished breaking stuff (Chart 2)…stay bearish/defensive & sell the last hike."
