BofA: We Are Witnessing The Biggest Asset Bubble Ever Created by A Central Bank

The comments below are an edited and abridged synopsis of an article by Tyler Durden

We are currently in the longest-ever central-bank-induced bull market of all time.

BofA: We Are Witnessing The Biggest Asset Bubble Ever Created by A Central Bank | BullionBuzz
Global bubble over city

Every time the Fed tries to manage asset prices, it blows another bubble: Commenting on the hyperinflation in stocks, Bank of America’s CIO Michael Hartnett said that the “lowest interest rates in 5,000 years have guaranteed a melt-up trade in risk assets,” noting that the latest e-commerce bubble (Amazon, Netflix, Google, Twitter, eBay, Facebook) is up 617% since the financial crisis, making it the 3rd largest bubble of the past 40 years.

Fast forward two years, one failed attempt at normalizing interest rates, one QE4, and one historic P/E multiple expansion melt-up later, when the same bull market leadership in growth assets has led to the unprecedented result that the top five stocks now account for a greater share of S&P500 market cap than ever before.

The bubble may be the biggest ever, but the action observed now is hardly new, and there is a familiar word to describe what is going on—distribution—as the smartest and richest money in the room (private clients) continues to quietly sell stocks to retail investors even as it buys more and more bonds.

Putting it all together, what does Hartnett—who, like Morgan Stanley’s Michael Wilson—has been reluctantly bullish into this melt-up, think happens next, and when will he finally sell? His answer:

“We stay ‘irrationally bullish’ in Q1: positioning not yet euphoric and Fed caught in liquidity trap; we expect rising probability of a Minsky moment to coincide with peak positioning and peak liquidity in Q2 triggering big top in risk assets; sell S&P500 when PE >20X, go short credit and stocks when new lows in bond yields and US dollar appreciation becomes disorderly bearish signaling tighter Fed liquidity and sparking recession/default fears.”

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