BofA - The Flow Show A Short History of Bubble-240216

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Trading ideas and investment strategies discussed herein may give rise to

significant risk and are

not suitable for all investors. Investors should have experience in relevant markets and the financial

resources to absorb any losses arising from applying these ideas or strategies.

>> Employed by a non

-US affiliate of BofAS and is not registered/qualified as a research analyst

under the FINRA rules.

Refer to "Other Important Disclosures" for information on certain BofA Securities entities that take

responsibility for the information herein in particular jurisdictions.

BofA Securit

ies does and seeks to do business with issuers covered in its research

reports. As a result, investors should be aware that the firm may have a conflict of

interest that could affect the objectivity of this report. Investors should consider this

report as

only a single factor in making their investment decision.

Refer to important disclosures on page

9 to 11.

The Flow Show

A Short History of Bubbles

Scores on the Doors

: crypto 16.3%, oil 7.0%, US dollar 3.3%, commod 2.8%, stocks

2.6%, cash 0.6%, HY bonds

-0.3%, IG bonds -2.3%, gold -3.9%, gov bonds -4.0% YTD.

The Price is Right

: credit the “glue” of any bull market…IG bond spreads tight-as-a-

drum, close to post

-Covid lows of 86bps (despite record $310bn issuance); but equity

bull

so narrow…top 5 stocks = 75% of S&P500 YTD gain, top 3 tech stocks = 90% of

tech sector YTD gain

, US equity “breadth” currently worst since Mar’09 (Chart 2).

Tale of the Tape

: new consensus "all-weather" asset classes are corporate bonds &

tech stocks

…inflows to both on course for blowout years…YTD annualized $0.5tn to IG

bonds, $85bn to tech sector funds

– Charts 4 & 5).

The Biggest Picture

: long, illustrious bubble history…South Sea, Mississippi

monopolies

of 1710s, Dow in Roaring 1920s, gold in inflationary

‘70s, Japan in ‘80s, internet in ‘90s,

China 2000s, Great Bond Bubble 2014

-20, crypto, FAANG, tech disruptor derivatives; no

two bubbles alike (try blo

wing a couple yourself) but similarities to gauge Magnificent 7

today are

catalyst, price, valuation & "price of money" (see Table 1, page 2 for more).

Table 1: A Short History of Bubbles

Bubbles in Price, Velocity, Valuation, Yield

Source:

BofA Global Investment Strategy, Frehen (2012), Bloomberg, Global Financial Data, Refinitiv Datastream; velocity: price vs

200dma (%) at peak; valuation: trailing P/E; yield: direction of bond yields 3

-6 months prior to peak.

BofA GLOBAL RESEARCH

on page 2…

Bubble Pe ak R is e Decline V e lo c ity Valuation Y ie ld

Mis s is s ipp i C o. 1720 2955% -95% 73% n/a

South Sea Co. 1720 707% -89% 188% n/a

Roaring 20s 1929 153% -53% 21% 19x

Nifty F if ty 1972 153% -53% 9% 54x

G old 1980 428% -65% 142% n/a

Black Monday 1987 111% -41% 21% 19x

Japan 1989 149% -64% 12% 67x

Dotcom 2000 192% -73% 55% 65x

S a ud i A ra bia 2006 316% -67% 28% 124x

China 2007 513% -73% 37% 53x

G ovt bonds 2020 +$18.4tn -$18.3tn 33% n/a

Tech Disruptors 2021 384% -82% 62% n/a

FAANG 2021 229% -49% 15% 60x

C r y p to 2021 1662% -78% 49% n/a

Magn ifice nt 7 -139% -20% 45x

15 February 2024

Investment Strategy

Global

Michael Hartnett

Investment Strategist

BofAS

+1 646 855 1508

michael.hartnett@bofa.com

Elyas Galou

Investment Strategist

BofASE (France)

+33 1 8770 0087

elyas.galou@bofa.com

Anya Shelekhin

Investment Strategist

BofA

+1 646 855 3753

anya.shelekhin@bofa.com

Myung

-Jee Jung

Investment Strategist

BofAS

+1 646 855 0389

myung

-jee.jung@bofa.com

Chart 1: BofA Bull & Bear Indicator

Down to 6.

6 from 6.8

Source:

BofA Global Investment Strategy The indicator

identified above as the BofA Bull & Bear Indicator is

intended to be an indicative metric only and may not be

used for reference purposes or as a measure of

performance for any financial instrument or contract

, or

otherwise relied upon by third parties for any other

purpose, without the prior written consent of BofA

Global Research. This indicator was not created to act as

a benchmark.

BofA GLOBAL RESEARCH

Extreme

Bullish

Extreme

Bearish

Sell

Buy

6.6

Accessible version

The Flow Show

| 15 February 2024

Weekly Flows: $16.1bn to stocks, $11.6bn to bonds, $0.6bn from gold, $18.4bn from

cash.

Flows to Know:

• Cash: largest outflow in 8 weeks ($18.4bn);

• IG bonds: 16th straight week of inflows ($10.3bn past week);

• Equities: largest 4-week inflow ($59.5bn) since Feb’22;

• Tech funds: 6th straight week of inflows ($2.3bn past week);

• Consumer funds: largest outflow since Dec’20 ($1.3bn);

• Materials funds: largest inflow since Apr’22 ($1.6bn).

BofA Private Clients: $3.4tn AUM…60.9% stocks, 20.8% bonds, 11.6% cash; private

clients reducing cash (cash & T-bills 14.4% of AUM, lowest in 8 months), extending

duration (5th largest weekly inflow ever to T-notes ), not chasing stocks (outflows 5 of

past 7 weeks); ETF flows buying TIPS, Japan, EM debt, selling bank loans, dividend & HY.

BofA Bull & Bear Indicator: dips to 6.6 from 6.8 on lower equity market breadth and

S&P500 & oil hedging; bigger picture is positioning bullish… BofA Global FMS cash

levels plunge from 4.8% to 4.2% in Feb & $60bn equity inflows past 4 weeks; catalysts

for BofA Bull & Bear Indicator to hit "sell signal" coming weeks…EM debt inflows, EM

equity inflows ≈$10bn, less SPX hedging, breadth improves via 10% China/HK rally.

A Short History of Bubbles: quick & dirty comps vs today’s Magnificent 7…

• Catalyst: bubbles driven by technological innovation, new geographical sources of

growth, and very crucially central bank easing; AI bubble was kick-started by Fed

response to SVB and ChatGPT…just as Plaza Accord kick-started Japan, LTCM the

internet, 9/11 the housing bubble of 2000s, COVID ($30tn of policy stimulus) crypto

and so on; even Mississippi and South Sea Company bubbles caused by amendment

to English usury laws in 1714 which forbade lending rates over 5% as UK & France

needed to borrow to finance ceaseless war…no different today;

• Price: bubbles (obvs) mean huge trough-to-peak asset gains; 140% gain in

Magnificent 7 past 12 months closing in on 180% rise in Dow Jones in 1920s &

150% for both Nifty 50 in ‘70s & Japan stocks in ‘80s, but not quite 190% gain of

internet bubble (everyone's fave comparison) nor 230% surge in FAANG stocks from

COVID lows; note exponential price gains ("velocity" or big deviation from moving

averages) another classic bubble symbol…Magnificent 7 currently 20% above

200dma vs the 30% "oversold" metric of 9 equity manias covered in Table 2;

• Valuation: trailing PE for Magnificent 7 currently 45x…it ain’t cheap but true that

bubble highs have seen dafter valuations… 54x for Nifty Fifty, 67x for peak Nikkei in

'89, 65x for Nasdaq Composite in 2000 (and staggering 205x for Nasdaq 100), 60x

in 2021 for peak FAANG;

• Bonds: direction of bond yields key bubble metric as "abnormality" of bubble infects

other assets & economy); in 12 of 14 observed bubbles, bond yields rising as bubble

peaks/pops; tightening financial conditions via policy or rising real rates (if central

banks have no backbone) the constant catalyst for the "pop"…4% real rates popped

internet bubble, 2% popped Chinese stock bubble, 3% popped subprime, surge in

real rates from -100bps to +150bps in '21/'22 popped bitcoin, FAANG, ARKK; given

significantly higher levels global debt today versus history 10-year real rates,

currently 2%, likely need to rise to 2.5-3% to end AI, Magnificent 7 mania.

The Flow Show |

15 February 2024

Table 2: A Short History of Bubbles

History and characteristics of bubbles

Source:

BofA Global Investment Strategy, Frehen (2012), Bloomberg, Global Financial Data, Refinitiv Datastream; velocity: price vs 200dma (%) at peak; valuation: trailing P/E; yield: direction of bond yields 3-6 months

prior to peak.

BofA GLOBAL RESEARCH

Chart 2: Worst equity market “breadth” since Mar’09

S&P 500 vs S&P 500 Equal-Weight (relative price)

Source:

BofA Global Investment Strategy, Bloomberg

BofA GLOBAL RESEARCH

Chart 3: AI “baby bubble” maturing

History of asset bubbles

Source:

BofA Global Investment Strategy, Bloomberg

BofA GLOBAL RESEARCH

Chart 4: Inflows to IG bonds on course for $0.5tn in ‘24

IG bond fund flows (annual cumulative, $bn)

Source:

BofA Global Investment Strategy, EPFR (2024 YTD annualized)

BofA GLOBAL RESEARCH

Chart 5: Inflows to tech on course for ~$85bn in ‘24

Tech fund flows (annual cumulative, $bn)

Source:

BofA Global Investment Strategy, EPFR (2024 YTD annualized)

BofA GLOBAL RESEARCH

Bubble Inde x S ta rt Peak R is e Decline V e lo c ity

D u ra tio n

(years)

Valuation

(P/E)

Bond

y ie ld

Polic y

ra te

Mis s is s ipp i C o . C A C A ll-T ra da ble 7/31/1718 1/31/1720 2955% -95% 73% 1.5 n/a

South Sea Co. South Sea Co. 2/2/1720 6/25/1720 707% -89% 188% 0.4 n/a

Roaring 20s Dow J ones 3/30/1926 9/3/1929 153% -53% 21% 3.4 19x

Nifty F ifty Blue-chip NY SE stocks 9/30/1966 12/31/1972 153% -53% 9% 6.3 54x

G old G old ($/oz) 4/27/1978 1/21/1980 428% -65% 142% 1.7 n/a

Black Monday Dow J ones 9/20/1985 8/25/1987 111% -41% 21% 1.9 19x

Japan Nikke i 225 10/23/1986 12/29/1989 149% -64% 12% 3.2 67x

Dotcom Nasdaq 9/23/1998 3/10/2000 192% -73% 55% 1.5 65x

S a udi A r a bia Tadaw ul 5/27/2004 2/26/2006 316% -67% 28% 1.8 124x

China Shanghai 6/6/2005 10/16/2007 513% -73% 37% 2.4 53x

G ovt bonds Negative-yielding debt 7/31/2014 12/11/2020 +$18.4tn -$18.3tn 33% 6.4 n/a

Tech Dis ruptors ARKK 3/18/2020 2/16/2021 384% -82% 62% 0.9 n/a

FAANG NY SE FA NG 3/18/2020 11/4/2021 229% -49% 15% 1.6 60x

C r y pto B itc o in 3/13/2020 11/10/2021 1662% -78% 49% 1.7 n/a

Mag n ific e n t 7 Mag n ific e n t 7 12/28/2022 -139% -20% 1.1 45x

0.60

0.65

0.70

0.75

0.80

0.85

'07 '09 '11 '13 '15 '17 '19 '21 '23

S&P 500 vs S&P 500 Equal-Weight (relative price)

+1 St. Dev

-1 St. Dev

ARKK

100%

200%

300%

400%

500%

600%

700%

800%

900%

1000%

'77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16 '19 '22 '25

Gold

Japan

Asia

Internet

Housing

China

FAANG

Biotech

Bitcoin

1600%

1200%

1400%

-$168bn

(2022)

$168bn

(2023)

$503bn

YTD ann.

-300

-200

-100

100

200

300

400

500

600

'05 '07 '09 '11 '13 '15 '17 '19 '21 '23 '25

IG bond fund flows (cumulative, $bn)

$20bn

(2022)

$44bn

(2023)

$84bn

YTD ann.

-10

'05 '07 '09 '11 '13 '15 '17 '19 '21 '23 '25

Tech fund flows (cumulative, $bn)

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Tradingideasandinvestmentstrategiesdiscussedhereinmaygiverisetosignificantriskandarenotsuitableforallinvestors.Investorsshouldhaveexperienceinrelevantmarketsandthefinancialresourcestoabsorbanylossesarisingfromapplyingtheseideasorstrategies.>>Employedbyanon-USaffiliateofBofASandisnotregistered/qualif...

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