Another month, another paradox emerges in the latest Bank of America Fund Managers Survey, which on one hand reveals that a record number, or 46%, of Wall Street respondents say stocks are "overvalued"...

... even as the number of investors expecting a "Goldilocks" economic scenario of above-trend growth and below-trend inflation, hit a record high 42%...

... and are positioning "pro-risk, with cash allocation unchanged at 4.9%.

Adding to the paradox, while investors are largely confident that stocks are the most overvalued on record, few expect a crash, and 36% responded that they have not bought equity hedges in August, up 1% from July.

Elswhere, for the 4th straight month, most fund managers responded that "Long Nasdaq" is the most crowded trade, followed ironically by "Short Dollar", a dramatic inversion from just a few months ago when long USD was considered one of the most crowded trades.

Asked what they see as the top "tail risk", most investors, or 22% of total, responded a Fed/ECB policy mistake.

This was followed by 19% who said a crash in bond markets and a new entry in the third spot, with 19% responding North Korea. Curiously, following the Howard Marks memo, fears about an ETF/quant driven liquidity flash crash have doubled to over 10%.

In a new question, 43% of respondents said that low inflation is structural, while 35% said cyclical and 21% said temporary.

Asked what would surprise them the most, a whopping net 49% said recession, while virtually nobody would be surprised by an equity bear market (-8%), inflation (-8%) and an equity bubble (-28%).

BofA also notes that "Anglo-Saxon political angst" reflected in lowest allocation to US stocks since Jan'08 and to UK stocks since Nov'08; in contrast EM & Eurozone remain consensus longs, while expectations of China 3-year GDP estimates rose up to 5.8%, highest since Apr'16.

Some other observations: the top sector overweight is banks (record high), followed by tech (though contrarians note tech allocation fell to 3-year low); energy allocation drops to 14-month low; allocation to staples/telecom/utilities ("defensives") still low, but starting to pick up.

Finally, BofA points out an "ominous inflection point" in the profit expectations indicator (58% in Jan, now 33%) - the profit outlook correlates with PMIs, equities vs bonds, HY vs IG bonds, cyclical vs defensive sectors; As Bank of America notes, any "further deterioration likely to cause risk-off trades."

