albert edwards economy inflation S&P 500

Albert Edwards: You Are Going To Be ‘Mighty Pissed’ When Your Wealth ‘Evaporates Before Your Very Eyes’

"The risk is that the market is hugely vulnerable if it hears a distant bark, let alone feels its bite."

Albert Edwards is back with is tri-weekly weekly.

You’re reminded that Albert is like Gandalf (the wizard, not JPM’s Marko Kolanovic): “Albert Edwards is never late. Nor is Albert ever early. Albert arrives precisely when he means to.” 

Well, Edwards “meant to” arrive today, and so that’s “precisely” when he arrived and he’s revisiting something he mentioned in his last note. Namely this point from his October 26 missive:

Wage inflation has been the dog that didn’t bark this year – or indeed the wolf that didn’t howl.

The nightmare scenario for equities would be if US wage inflation flickers back to life and investors not only decide that they are too far behind the Fed dots, but they also decide that the Fed itself is behind the tightening curve.

So that’s the context for today’s note which find’s SocGen’s incorrigible (but affable) bear delivering some characteristically colorful musings on wage inflation, complete with a history lesson on “Red Robbo.”

The overarching theme here is the tedious and increasingly contentious Phillips Curve debate. Edwards begins by channeling another affable SocGen employee, Kit Juckes…

Quoth Kit, quoth Albert:

What matters from here, of course, is the outlook for inflation. Clients tell me that strategists fall into one of two camps – those who believe faster wage growth and the revival of the Phillips Curve is just around the corner, and those who have completely given up: they see no reason to look for higher inflation and they therefore have no reason to expect the range in bond yields to break. The ranks of the latter camp have grown dangerously large and this is now the consensus view. Maybe that’s why the dollar is making such heavy weather of bouncing.

And so the implication there is the same as it was before: namely that if wage inflation shows up and causes everyone to question whether everyone else is behind the curve (and “behind the curve” has at least three applications in that context, so it’s a triple entendre), the market is in trouble. On that point Edwards goes on to quote another SocGen employee: himself…

Quoth Albert, quoth Edwards:

Indeed throughout this cycle wage inflation has been ‘the dog that failed to bark’. The risk is that the market is hugely vulnerable if it hears a distant bark, let alone feels its bite.

Next Edwards sorts through the standard explanations for why wage inflation isn’t showing up before citing some evidence for the contention that we might not be measuring what we think we’re measuring. The upshot of it all is best captured in this excerpt:

The supposed flattening of the Phillips Curve (which effectively means that low rates of unemployment result in more moderate wage inflation) is probably the most important economic event boosting asset prices at the moment, because it is prompting a much more relaxed pace of central bank interest rate increases than would usually be the case.

Additionally, he flags the disconnect between a benign inflation backdrop and positive economic surprises. To wit:

My former colleague, Paul Jackson, now at Source ETFs, points out that normally positive economic surprises of this size would generate a sizable bond sell-off (see chart below) but not now.


On the rare occasions the close correlation above has broken, it is because the US data might be upbeat, but it is weaker elsewhere eg see end 2014 above when strong US data did not prompt a rise in yields (see below). Currently all regions’ economic data are surprisingly strong. Hence the lack of a more pronounced bond-sell is most curious and also worrying.


Of course that backdrop – i.e. benign inflation but generally upbeat econ data – is part and parcel of the whole “Goldilocks” rationale for risk assets. Markets can point to steady growth as a reason to stay long and to subdued inflation as a reason to believe central banks won’t get too aggressive and thereby short-circuit the risk rally.

Implicit there is the idea that if inflation does show up and central banks are forced to act without the market’s “consent” – well then look out.

Now who’s ready for the punchline? [Raise your hands]

Here’s Albert to deliver it as only he can…

More Americans plan to take a holiday in the next six months than ever before (see chart below). No wonder it was so difficult to book hotels in Yosemite National Park and Lake Tahoe next May! I know US consumer confidence has been booming on the back of a surging equity market, but cheap money has also prompted the consumer to book holidays galore. When the bubble bursts, households will be mighty pissed that it’s not just their wealth that evaporates in front of their eyes but their ability to vacation like never before.


4 comments on “Albert Edwards: You Are Going To Be ‘Mighty Pissed’ When Your Wealth ‘Evaporates Before Your Very Eyes’

  1. You certainly can’t stir all the FL winter visitors – cotton tops, snowbirds and or snow geezers – here on FL’s Treasure Coast with a traffic batton. Damn hard to make them drive the speed limit in a 35 mph speed zone and none apparently are aware of the invention of the turn signal. I’ve never seen A1A and US 1 so full of hesitant, lost, doddering and or just generally incompetent northern drivers, but on these roads they are. Perhaps like migratory birds they too know a big inflation storm or even a more catastrophic economic event – is coming and they want to make that one last trip to sunny FL and Disney World.

    Coastal real estate prices just took a big and unwarranted percentage jump and as much as 100% over last year on some houses – just like they did in 2005. Crazy shit it seems is just in the air pretty much everywhere. Some animals present strange behaviors before earth quakes and volcanic eruptions. It must be one of the human animal’s surviving sixth sense/instinct kind of things. Whatever it is, it seems everyone knows it’s coming.

  2. Tom Swift Jr. says:

    My brothers tell me it’s worse on the Sun Coast (or as they call it “The Wrinkle Coast”). They’re waiting for the dip (crash) to buy more rental property. Y/Y the last 2 months have seen a hesitant drop in prices and volume on residential sales.

  3. Irb says:

    Of course they’re behind the curve on curbing inflation, because they want more inflation. Careful what you wish for. Cuz inflation may not be as easy to stop as the bernank said it’ll be. Not without getting a financial crisis like yellen said won’t happen in our lifetime.

    How do you think stocks and bonds, having historically low yields, would react to accelerating inflation? Standard bond-stock portfolios and risk parity trades look vulnerable.

  4. […] The snail’s pace of policy normalization in the U.S. (and especially in Europe and Japan, with the latter having not even begun to tighten) has in large part been justified by the fact that inflation has yet to materialize in the way you might expect it to given how long accommodation has remained in place. Recall this from Albert Edwards’ latest: […]

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