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One Analyst Reminds ‘Old, Grizzled’ PMs That ‘We’re Late In The Cycle’ Is Not Research

Take that, "old, grizzled PMs."

Listen, Wells Fargo’s Chris Harvey seems like a fun guy.

I don’t know Chris, so maybe I’m wrong, but any analyst who appreciates that there’s palpable spillover risk from Bitcoin to other risky assets (see here and here) and who knows what it means to be watchin’ out for the “POPO” (see here), is a friend of mine.

From what I can tell, Chris tends to lean bullish, although I can’t say that definitively because you know, there’s only so much time in a day and I haven’t conducted any kind of robust historical analysis of his research.

What I can say for sure is that his tone is usually on the “constructive” side, if you will, and his latest note is no exception.

One thing I like about Harvey’s stuff is that he’s got an engaging style that lapses into the colloquial on occasion and that’s a welcome relief for those of us who often find ourselves mired in esoteric discussions about shit like the rebuilding of the term premium for hours on end.

Well in his latest short missive, Chris wants you to know that “Investors realizing ‘We’re late in the Cycle’ is not research” rather, it’s “an observation” from PMs who might be “old and grizzled”. To wit:

Conversations suggest there’s been some major back and forth between Analysts (generally younger & less seasoned) and PMs (usually older and grizzled). In 2018, seasoned PMs have been worried about a turn in sentiment as the curve flattens and fears of a cyclical peak crescendo. Initially, PMs appeared to be taking a ‘sell the news’ regardless of results and analyst opinions. Now, the analyst story of solid earnings / guidance, improving fundamentals and valuation seems to be gaining traction.

Investors realizing ‘We’re late in the Cycle’ is not Research. A year ago investors were told we’re late in the cycle. Two years ago investors heard the same proclamation as well as three. We think individuals are realizing that’s not research; it’s an observation.

Yes, “it’s an observation”, but one that need not be the exclusive domain of “old and grizzled” PMs. In fact, anyone who looks at the 5s30s can make that “observation”:

30Y2

(BBG)

But listen, Chris does have a point. We’ve suggested on any number of occasions that the first signs of U.S. curve inversion need not necessarily presage an imminent recession. Here’s what one strategist I spoke to last month said about this:

I think in general that this whole discussion about curve inversion as a predictor of recession is incorrect. I mean, there was some connection in the past, but causation has changed. The connection no longer holds. Even in 2007, the curve inverted for different reasons; it didn’t know about the recession, otherwise we would have avoided it.

Still, you can’t completely ignore the signals. If you want a rambling take on this complete with a bizarre mix of analysis, liquor and Richard Pryor references, you might enjoy “‘We Got No More Liquor!’ These Yield Curve Inversion As A Recession Predictor Probabilities Are Sure To Be A Hit At The Bar.”

Getting back to Chris Harvey, he has the following to say about the curve:

Don’t be Afraid of the Curve: It’s a Typical Fed Tightening Cycle. Typically in a Fed Tightening Cycle: The Yield Curve Flattens, the Market Multiple Contracts, Equities experience a 5-10% pullback, and this is more or less what we’ve seen in 2018. Historically, EPS Growth continues at a healthy clip and ultimately price follows growth. In recent days, we’re beginning to observe that connection.

Wells

So there you go. A rationale for not panicking.

Now, Chris, if you please, we would thoroughly enjoy an update on the “POPO” and whether they’re still stakin’ out the trap.

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1 comment on “One Analyst Reminds ‘Old, Grizzled’ PMs That ‘We’re Late In The Cycle’ Is Not Research

  1. I would be wary of any “it’s different this time” type of talk. Rate inversion happens ahead of recessions by a variable number of months, and tightening cycles are accompanied by rising stock prices (late-stage bull market).

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