Eighty percent of the world's top fund managers have issued a shocking warning, believing that the U.S. will experience economic stagnation in the coming year, or even worse—a return to the 1970s-style 'stagflation,' where stagnation coexists with high inflation.

This conclusion comes from the latest fund manager survey published by Bank of America Securities. This monthly survey covers top pension and institutional investment managers globally, and the results show that about 70% of respondents expect stagflation, while another 10% believe there will be simply economic stagnation.

These findings are particularly noteworthy, as U.S. stocks are repeatedly hitting new highs, closely following the massive budget stimulus plan introduced by Trump. This plan will add an additional $500 billion to the federal deficit each year. Bank of America surveyed a total of 175 institutional investment heads and asset allocation leaders, managing a total of $434 billion in assets.

Surprisingly, despite the pessimistic economic outlook, these fund managers are unusually aggressive in their operations in U.S. stocks. The proportion of 'cash' (including government bonds, etc.) in their portfolios has fallen to less than 4%. Bank of America notes that when the cash ratio falls below 4%, it usually indicates that the market is overly exuberant and may face a subsequent correction.

This is a classic case of 'fear of missing out' (FOMO) trading: even with concerns in mind, fund managers know that missing out on a bull market could be more detrimental to their careers.

Interestingly, fund managers are also avoiding many asset classes that performed well during the stagflation period of the 1970s, which are typically seen as 'stagflation hedges.' These assets include energy stocks, real estate, and stocks of companies producing essential consumer goods (as opposed to discretionary consumer goods). Bank of America data shows that energy stocks, real estate investment trusts, and essential consumer goods stocks are currently the least favored by large institutional investors.

The most paradoxical phenomenon is that while fund managers predict stagflation, they are clearly avoiding the assets most capable of withstanding stagflation—short-term Treasury Inflation-Protected Securities (TIPS). These bonds promise to pay a fixed yield plus inflation compensation on a principal basis. Currently, low-risk 5-year TIPS guarantee a payment of 'inflation rate + 1.5%', 7-year at 'inflation rate + 1.8%', and 10-year as high as 'inflation rate + 2%.'

Whether stagflation will actually occur remains an unknown. After all, no one can accurately predict the future—this is precisely why diversified investment strategies are always revered.

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