In case you weren’t already spooked enough about global equity markets after Wednesday’s bloodbath on Wall Street and the harrowing follow-through in Asia, Albert Edwards is out with the following not-at-all comforting message on Thursday morning:
Equity investors are facing the four horsemen of the apocalypse thundering towards them.
Looks like at least one person thinks our Wednesday warning about “locust plagues, pestilence and famine” should be taken literally.
When last we checked in on Albert, he was busy explaining that contrary to various media reports, he did not in fact call for an imminent recession in a note dated September 20. Rather, last month’s back up in yields compelled him to revisit his infamous “Ice Age” thesis on the way to suggesting that a technical breakout doesn’t necessarily presage the end of the decades-long bond bull market.
Needless to say, bond yields have exploded higher since Albert last wrote on September 26 and if you were wondering where he was during last week’s bond rout the answer is of course the Amalfi Coast.
“I experienced this potentially epoch-changing event in the most pleasant of surroundings”, Edwards writes, in his latest note out Thursday morning, before explaining that last week was his 10th wedding anniversary. To wit:
Yes, I got married in the middle of the financial crisis! Rowan and I had never been to the Amalfi Coast and after visiting Positano we used Sorrento as a base to see the ruined towns of Pompeii and Herculaneum.
Albert thinks you can probably learn something from “the cowering skeletal remains in Herculaneum”.
Investors, Edwards says, “have a big decision to make.” Here’s how he recommends folks think about things at this critical juncture:
Is the eruption in the bond market subsiding? Is it safe to stay in equities and return to normal domesticity, or should they flee? Its all very well to say that the victims of Pompeii and Herculaneum should have heeded the warning signs in the weeks leading up to the devastating eruption of 79AD. But equity investors might be ignoring similar early warning signs that the bond market is giving.
Albert goes on to admit that he was “most surprised” that 10Y yields managed to push higher despite the massive spec short. More than a few folks thought the following chart hinted at an imminent squeeze and Edwards was at least partially in that camp.
“It seemed that every man, woman and child was already bearish and so who was left to sell?”, Edwards asks, before noting that “clearly someone was!”
Yes, “clearly”. He goes on to recount the narrative behind last week’s run up in yields, catalyzed as it arguably was by a blockbuster ADP report, a turbocharged ISM print and a September jobs report that, while missing on the headline, was accompanied by a dramatic upward revision to the already solid August figure. Edwards also notes how Powell is forcing the market to reassess the Fed’s conviction:
The speech last week by Fed Chair Powell was interpreted as unusually upbeat – referring to a remarkably positive outlook for the economy. This contributed to the surge in expectations for further tightening throughout next year. For, although expectations for tightening in the first half of next year had been rising for some time, until very recently this had merely pulled rate hikes forward from H2 to H1. In recent weeks, expectations of more rate hikes have risen sharply in both halves of next year and even spilled into 2020.
I’ll just go ahead and cut straight to the chase here. Edwards isn’t giving up on his long-held convictions. “Let me lay my cards firmly on the table”, he writes, before insisting that “despite the highly significant technical breech of the critical 3.05% long-term secular downtrend, I still stand by my forecast that US 10y yields will go deeply negative in the next recession (to around minus ½-1%).”
As far as what happens to equity investors in the near-term, Edwards links to a Telegraph piece about Mount Vesuvius on the way to implicitly suggesting you’re going to be “fried alive.”