On Wednesday, Albert Edwards wants to thank you.
Why? Because apparently, a lot of the haters out there are closet Albert Edwards fans.
How does he know? Here’s how (from this morning’s note):
I would like to thank our kind readers. The results of the 2017 Extel Survey of analysts have just been announced and we are delighted that we have topped the poll in the Global Strategy category for the 14th year in a row a record-breaking achievement for any sector team! It is particularly gratifying that clients value our particular (peculiar?) style of research. We really appreciate this wonderful level of support.
See that’s how it goes with haters. In public, they’ll deride you, but in private they’re poring over your product – whatever that product happens to be.
[Aside: It reminds me of the time two of my (supposedly) Mac-hating colleagues (one based on the east coast and one on the west) were trying to talk each other through a Windows update and when push came to shove, they ended up whipping out their iPhones and FaceTiming to walk each other through a PC problem.]
And for those of you out there who really don’t like Albert, well you’re probably feeling pretty damn salty about his 14th consecutive Extel Survey win (here’s the urban dictionary definition of “salty” for those of you who aren’t fluent in slang).
Anyway, Edwards “wasn’t going to write this week” (that’s a direct quote), but since you just proved how much you love him, he decided to roll out the Ice Age charts.
Here they are along with some brief excerpts including (of course) a dire prediction about equities.
The big Ice Age call was that the tight positive correlation between equity yields and bond yields that market participants had enjoyed since 1982, driven by ever-lower inflation, would break down. The Ice Age thesis, drawing on our observations of Japan, predicted that while interest rates and bond yields would continue to fall, equity yields would decouple and begin to rise on a secular basis.
One important implication of the Ice Age thesis was that widely used metrics from the 1980s and 90s, such as the bond/equity earnings yield ratio, would break down. Hence you should no longer buy equities when this ratio fell to 0.8 as they would be undergoing a secular de-rating.
These ideas seemed mad back in 1996, but having witnessed events in Japan through the 1990s we understood that the same forces would prevail in the West. Indeed on some metrics, what happened to the US bond/equity yield relationship closely mirrors that of Japan.
So why is it then that the US equity market has raced to all-time highs? Has the Ice Age thesis broken down? To be sure we saw strong cyclical rallies in the Japanese Nikkei within Japan’s own equity Ice Age secular bear market, but nothing as explosive as this.
The counter-argument to the Ice Age thesis is not just the unusual longevity of the current equity bull market. The key is that equity yields have re-coupled with declining bond yields (see chart below). If this is, as we strongly believe, an aberration and the equity yield reconnects with the red dotted arrow, then investors should be petrified of the next equity bear market.