Société Générale's Albert Edwards: "There Is An Earthquake Happening In Government Bonds"
We have a couple quibbles with Mr. Edwards' presentation, neither major.
As long-time readers know, we are fans, more after the jump.
Via ZeroHedge:
Albert Edwards, who is traditionally seen on Wall Street as a permabear, has been having one heck of a year.
While the financial media peanut gallery takes exorbitant joy of
mocking Edwards' gloomy predictions, which it tends to equate with
forecasts of crashing equities even if Edwards doesn't actually make
equity trade recos, the truth is that Edwards was alone against
consensus, predicting months earlier that US bond yields could tumble,
chasing both Germany and Japan into sub-zero territory.
And as the deflationary "Ice Age" unexpectedly re-emerged in May with
a bang, Edwards was right and everyone else was dead wrong.
This is how Edwards recapped his take on the recent - and future - moves in bond yields:
A key part of the Ice Age has been the prediction that US and
European 10y government bond yields would fall to levels never
previously seen – replicating Japan’s experience. We were told that this would never happen in the west because policymakers would not make the same mistakes Japan made! But with European yields plunging to new negative lows and the US yield curve giddy with inversion, the sceptics are now seriously contemplating the brave new world in which US 10y bond yields fall below zero.
So in addition to taking a well-deserved victory lap in being the
sole strategist to get the move in yields correctly, Edwards instead
doubles down, and predicts that it is about to get a lot worse as "there is an earthquake happening in government bonds." What's behind this ongoing tremor? Why central banks, as usual. To wit:
One thing that amazes me about the current cohort of global central
bankers is the lack of insight into the fact that their extreme loose
monetary policy and financial repression may actually be making
deflation in the real economy worse – despite clearly succeeding in
creating rampant inflation in financial assets. To be sure some
of the major players in the central banking orbit, such as ex-Fed
Governor Kevin Warsh, have broken out of the QE group-think that grips
the minds of central bankers. Warsh has openly stated that financial
repression has exacerbated, rather than cured, our economic ills.
To be sure, the thesis that the Fed is stimulating asset
(hyper)inflation while depressing the broader economy and crushing the
middle class, is hardly new: we have been preaching just this since
2009, and we are glad that this perspective is finally starting to
attract more followers. In fact, none other than the world's largest
bond manager recently predicted that the Fed is on the verge of losing
control over the markets (for those confused, that's the "game over"
phase for the 10 year bull market). Which is why we can commiserate with
Edwards, who writes that "the foundering of the current
economic cycle and the imminence of its likely end has rammed home to
investors the clear failure of financial repression to generate anything
other than the most feeble of economic recoveries and no sustainable
cyclical upturn in economy-wide inflation - either in wages or in
prices."
Of course, another thing we have spent much of the past decade is
comparing the Fed to the USSR's centrally planned regime and "five-year
plans", and that's what Edwards also touches on today, noting that the
Fed's failure to stimulate the economy, "has nurtured the current trend
towards even looser monetary policy via the increasing influence of the Modern Monetary Theorists", i.e., helicopter money socialists who promise everything, but can only guarantee currency destruction and hyperinflation.
Edwards also mentions a breath of potential fresh air amid the Fed's
ranks in the face of the likely new Fed nominee, Judy Shelton, who
"compares the Fed interest rate setting with the USSR’s Gosplan",
something we have done for years. We can assure readers that anyone who
is willing to call out the Fed and tell the truth about the dogma behind
its actions, will never be admitted on the actual Fed, so there little
point in discussing Shelton's fate: she will never make it through the
nomination process.
That, however, doesn't mean that one can just stick their head in the
sand and pray that the US economy is doing well. It isn't. In fat, as
Edwards notes, "the rumblings of the US bond market have now
turned into an ear-piercing scream that a recession is close and the Fed
needs to start cutting rates quickly" (even if, in an ironic twist, the futures market is already pricing in the next rate hike cycle after the fed cuts rates 3-4 times between now and the end of 2020).
Worse, a recession may not only be close, it may in fact be in the
readview mirror; This is notable because with the US economy on the edge
of the longest expansion on record - recall that in July, this will become the longest U.S. economic expansion on record at 121 months. (charted below is the length of past expansions 1854-today)...
I didn't realize he was still alive. There was a time when he moved
markets, then he started predicting earthquakes. Then he called the
crash of 2000 within 24 hours of it's March 10 Nasdaq peak of 5048.
After the MW piece are a story, a stub and a bit of history.....
Second quibble: Whether you are using the 3 mo./5 yr; the 3mo./ 10 yr. the 2's/10's whatever, the period after the inversion can give you stupendous equity returns so we are faced with the decision whether-or-not to play a dangerous little game, riding the bubble knowing full well it is a bubble or retiring to the sidelines.
We'll have more on the time lags between yield curves going inverted and equity downturns and recessions later this summer but for now one of our favorite economists with one of our favorite stories.
This
paper presents a case study of a well-informed investor in the South
Sea bubble. We argue that Hoare’s Bank, a fledgling West End London
bank, knew that a bubble was in progress and nonetheless invested in the
stock: it was profitable to “ride the bubble.” Using a unique dataset
on daily trades, we show that this sophisticated investor was not
constrained by such institutional factors as restrictions on short sales
or agency problems...
The two most important parts of the paper "II. Hoare’s Trading
Performance" and "III. Causes of Success" are definitely worth a couple
minutes.
