At the end of August, BofA’s Michael Hartnett told us contrarians were waiting for two coming events to flip risk-off: a US-Iran capitulation that delivers the last leg down in oil, and a midterm vote in which Main Street picks “affordability” over higher stock prices. Four weeks later, one Fed hike and a whopping 60bps move higher in 10Y yields which has sent them to 19-year highs, the BofA CIO has added a twist: an Iran deal may not be the all-clear after all, because if oil drops another $10 and yields keep rising, that’s when the real risk-off begins.
In his latest Flow Show, titled “China in a Bull Shop” , Hartnett starts with his weekly scoreboard. Obviously, it’s been a great year for oil, a fine one for stocks, and a miserable one for anyone who took “bonds are a hedge” literally (and, remarkably, after a catastrophic plunge in the spring, bitcoin has erased almost all of its YTD losses):

Scores on the Doors: oil 62.5%, global stocks 12.7%, US stocks 12.5%, US dollar 3.0%, cash 2.7%, HY bonds 0.6%, gold -1.1%, IG -2.8%, bitcoin -3.7%, govt bonds -4.0% YTD.

Then come the two Zeitgeists of the week. The first one sounds like it was written for the Eccles Building:

“Policymakers never run out of ammunition. But they can run out of credibility, and when they do, more ammo needed to restore financial order.”

The second gives the note its theme:

“Trump would love Xi’s bond yields, but Xi don’t want Trump’s stock market.”

The chart shows the joke is about as good as the data. US stocks relative to US Treasuries have gone vertical. Chinese stocks relative to Chinese government bonds are near the lows, because Chinese yields are stuck at the floor amid a multi-year deflationary collapse sparked by the 2021 bursting of the Chinese housing bubble. Each side wants what the other one has.

The Biggest Picture

Hartnett’s framework is familiar to regular readers: the 2020s are an era of fiscal excess, political populism, de-globalization, resource colonization, trade/AI wars and an inflationary boom. In one chart, that’s US nominal GDP up 63% in the past six years while the price of the 30-year US Treasury is down 60%. For comparison, that is roughly what happens to a meme stock... except this one is the world’s “risk-free” asset.

His conclusion: until yields start to hurt growth, investors will stay long stocks (waiting for a blow-off top in tech stocks) and short bonds (waiting for a blow-off top in yields).
Hartnett’s regular “Ins and Outs” cheat sheet has more of the same. Out: Fed independence, QE, globalization, US exceptionalism, the Magnificent 7, private equity, the US dollar. In: Fed deference, YCC, AI capex excess, MicroCap, banks, “populist socialism” and gold.


Tale of the Tape: From "Bonds Will Break Warsh" to Warsh Breaking Bonds

Back on August 24 we wrote that “Bonds Will Break Warsh At Jackson Hole.” Four days later, the new Fed chair tilted hawkish, with 12-month PCE at 3.7%, and he followed through on September 16 when the Fed hiked for the first time since July 2023 and penciled in one more hike for 2026. Hartnett tallies what that did to markets:

Since Warsh flipped hawkish at Jackson Hole, 10Y yield +60bps, US$ +2%, stocks -1%; bad news…new global monetary tightening cycle (60 hikes this year vs. 20 in ’25) as central banks scramble to restore credibility.

That’s the bad news. The good news, according to the BofA strategist, is that stocks seem to believe the central banks will succeed. The Magnificent 7 peaked when the Fed cut in October 2025 and broke out to new highs when the Fed hiked last week. Markets have apparently decided a Fed that hikes is the bullish one.