I didn’t actually mean to suggest last week that a recession was only six months away – as was written up in the press.
That amusing bit is from Albert Edwards, whose latest weekly missive is called “Its always brightest before dusk (OK I made that up!)”.
Last week, in light of the latest move higher in yields (particularly in the U.S.), Albert asked if the world was finally thawing from the “Ice Age”, an allusion to his most famous investment thesis.
If you actually read that note, it’s true that Edwards didn’t really say that a recession was but a scant six months away. Rather, he was trying to make a point about technical breaks not necessarily presaging the end of the decades-long bond bull market. Here’s the actual quote and accompanying visual:
As Q3 progressed yields slumped towards 4% as the market began to sniff the recessionary vapours in the air (see chart below). Equities ignored the signs of course, and made new highs in October 07 a few weeks after the Feds first rate cut.
But by December, less than 6 months after the June peak in yields, the US economy had entered the very worst of recessions. Might history repeat itself?
Of course the media will be the media, so “Might history repeat itself?” was transformed into “Albert Edwards says recession coming in six months”.
Our coverage was more honest. Albert’s note was about the bond selloff and what it means for his Ice Age doctrine.
Then again, it’s never completely inaccurate to say that Albert Edwards thinks a recession is possible in the next six months because i) anything is possible, and ii) it’s Albert Edwards (I’m pretty sure he’ll get a chuckle out of that).
That brings us to Thursday’s note, which finds Edwards simultaneously walking back and doubling down on his recession call. Here’s Albert quoting David Rosenberg:
The inference drawn last week that a recession may be only six months ahead may be a tad premature. Maybe David Rosenberg is right instead? He highlighted the incredible 10-point surge in the Conference Board headline measure of Consumer Confidence in just the last two months to 138.4 (see chart below). As David points out, this is now the highest level of consumer confidence since Sept 2000 yet a recession began seven months later. Hence maybe my unintended prediction last week of a recession in six months was premature but by only a month!
The U.S. consumer, Albert says, “has gorged on optimism until they are fit to burst.”
That’s one way to put it. Alternatively, you could say (as we did), that American consumers have “overdosed on ‘covfefe’ and are now the highest they’ve been in 17 years.”
That, even as the Fed is on the verge of creating restrictive conditions in an effort to apply the brake on a late-stage expansion that’s been turbocharged by deficit-funded stimulus. Do note that the hard and soft data is beginning to diverge markedly:
In the same vein, Edwards notes that when it comes to ebullient consumer confidence in the U.S., “expectations have risen far more quickly than has confidence in the current situation”. Here’s the expectations gap plotted with an inverted 2s10s:
While there’s something of a lag there, Albert notes that the labor market confidence data is “more coincident” with the curve and as such, “the yield curve should steepen if (or when) optimism in the jobs market turns down.”
Remember, when it comes to worrying, it’s not necessarily the inversion you should fear, but the subsequent steepening. Depending on what inversion you’re looking for, we haven’t actually seen the curve invert yet, but what we have seen is a near inversion and amid the recent bond selloff, we’ve seen signs of steepening.
“And indeed the 10y-2y curve has steepened in recent weeks in the US”, Albert goes on to write, effectively narrating that chart from Bloomberg, before observing that “normally though at this stage of the cycle the 2y yield falls more quickly than the 10y, not the reverse as now!” That is, perhaps, a failure on the Fed’s part to bring shocks back to the front end and otherwise normalize the mode of the curve. There’s more on that in “Transparency, Trust And The ‘Fed In Wonderland’”.
In any event, the bottom line is that recent euphoria in the sentiment data might well be a contrarian indicator. We’ll leave you with the opening two lines from Albert’s Thursday note:
Extreme optimism abounds on the US economy and stock market as measured by multiple surveys – the latest being the Conference Board measure of Consumer Confidence. But in the same way that it is ‘always darkest before the dawn’ surely the opposite is also true. What is undoubtedly true though, is that extreme levels of optimism are associated with impending recessions.