One of my former colleagues is trying to persuade me to apply for the vacant job as Governor of the Bank of England. I note that Philip Hammond, the UK Finance Minister, said “We are looking, obviously, for a candidate of the highest calibre”. Well darn it! If they fail to find someone of the highest calibre, but are willing to hire someone who is most certainly not establishment, I’m up for the job! I do have some key credentials for the job namely the ability to withstand trenchant criticism and to think out of the box. I’ve also already worked there between 1983-86 as an economist. I still even get BoE pension newsletters! — Albert Edwards, April 25, 2019
A couple of weeks back, I was a chatting with a friend who asked if I’d seen a recent YouTube video that featured a popular CNBC personality gratuitously deriding SocGen’s Albert Edwards.
I admitted that I hadn’t. I also indicated that I’d rather not subject myself to that kind of thing, because the idea of a FastMoney “trader” (and I use the term “trader” very loosely there) going out of his way to shoot an actual video dedicated to lambasting a beloved sellside stalwart (and, as far as I can tell, a really nice guy) was about the most distasteful proposition imaginable to me.
Begrudgingly, I watched roughly 45 seconds of what amounted to some guy’s vlog, and it was even more absurd than I thought it would be, which is really saying something.
For one thing, the “interview” wasn’t really an interview – videotaping your friend asking you questions doesn’t count. On top of that, the guy conveniently set things up to where a giant, framed poster of his own book featured prominently in the background (Got to get those residual sales!).
The point of the whole thing – I guess, although I really don’t know because I clicked out of it before it hit the 1-minute mark – was to tilt at the Albert Edwards windmill in the interest of bragging about how well stocks have performed over the course of a decade’s worth of liquidity injections from central banks.
You might find Albert’s bearish missives distasteful or even disingenuous, but if you can’t find something to like about Edwards’s weekly notes, then there’s something wrong with you, not with him. Take the passage excerpted here at the outset, for example. That’s from Albert’s latest note, out Thursday morning, and if you were having a bad day, reading that might well have made it a little bit better.
By contrast, I can’t say that I’ve ever watched CNBC’s “Halftime Show” and come away feeling refreshed or otherwise in better spirits/humor than when I turned it on.
The rest of Albert’s Thursday note is equally enjoyable, even if you don’t agree with the broad-stokes premise, which, essentially, is that the YTD collapse in cross-asset vol. presages something bad. To wit:
The collapse in volatility in all asset classes marks the calm before the storm. Equities have rallied strongly ahead of any rebound in the economic data. But they always rally as the Fed tightening cycle ends irrespective of whether the economy goes into recession – which it does 75% of the time!
Touching on collapsing vol., Albert writes that “in the FX and bond world, moves in prices up and down tend to be pretty symmetric in magnitude and so low vol could precede a big move in either direction [while] in the equity world, low vol is associated with subsequent slumps in equity markets as declines in prices tend to be far more sudden and savage than rallies.” Equity “melt-ups”, Edwards reminds you, are less common than “meltdowns.” You could quibble with some of that, but the general point(s) stand.
He goes on to flag some of the same charts and stats mentioned earlier this week by Kevin Muir (of Macro Tourist fame) in “One Group Will Be Spectacularly Wrong“.
Much of the YTD exuberance has of course stemmed from expectations that dovish Fed policy and Chinese stimulus can prolong the cycle. Edwards underscores this:
The two main reasons for an improvement in investor sentiment have been firstly the abrupt Uturn in Fed policy reducing fears of an imminent US recession, and second, a similar easing of Chinese monetary conditions resulting in a firming up in their economic data. Investors feel that this already very long cycle may yet have the legs to stumble on and on…
And he calls the disconnect between the S&P and ISM evidence that stocks are “running on hope”.
Next, Edwards reminds you that it’s not just stocks (and credit) that have surged. “Industrial commodities have also rallied strongly despite the very weak global PMIs [and] despite the surge in risk assets, nominal bond yields in the west have barely risen”, he writes.
Of course that latter point (about DM bond yields) is part and parcel of 2019’s big contradiction (or maybe not, because calling it a “contradiction” entails not considering the possibility that the post-crisis market mode is now the “norm”) wherein bonds have surged on central bank dovishness and growth fears, while risk assets have rallied concurrently on the apparent assumption that either i) policymakers will succeed in “reflating”, or ii) the “growth scare” narrative was more ghost story than reality.
At the same time, though, Edwards notes that the chart in the left pane above suggests US yields should actually have fallen more in the new year. That said, the following chart shows that the bond rally is generally consistent with the change in negative economic surprises.
Moving quickly through the rest of the note, Edwards expounds a bit on what we said above about the possibility that investors’ faith in policymakers’ capacity to reflate may be misplaced. He uses the obligatory David Rosenberg shout-out to make a point that a lot of folks (not all of whom are of the bearish persuasion, by the way) have made recently – namely that it’s not uncommon for stocks to rally in and around the last Fed hike.
“Traditionally the equity market rallies after the final rate hike and any rally should be sold into if you believe the economy is headed into recession”, he says.
But the thing is, nobody believes that, apparently. Because according to the latest edition of BofAML’s closely-watched Global Fund Manager Survey (out last week), 86% of respondents believe the inversion of the US yield curve does not signal an impending recession.
Ostensibly, that represents the “smart money”, but Albert isn’t so sure there’s a distinction. To wit:
So are you going to pile into equities along with the dumb money? Are you feeling that lucky?
There’s a ton more in Albert’s full note, but coming full circle to the discussion above about some folks’ penchant for suggesting that Edwards has been “wrong” to be skeptical of stocks during a central-bank-liquidity-fueled rally (turbocharged by buybacks), we’ll just leave you with another anecdote from Thursday’s note, which serves as a helpful reminder that Albert is about more than predicting poor stock performance…..
Just this minute our Chief European Economist, Michel Martinez, has returned from a client meeting and wandered over to my desk bearing an unusual gift from a longstanding client. There is no need to declare this gift with compliance because I’m not sure of the resale value of my June 2003 Global Strategy presentation. It is, as they say, priceless! One of the slides outlines a Plan B, my thoughts at the time on what the Fed and western central banks would be forced to do in the next recession. Looking at it now, what were then considered mad ideas now seem remarkably prescient namely: 1) reduce interest rates to zero; 2) increase liquidity and expand the monetary base; 3) purchase T-Bonds and/or use options to limit the upside on bond yields; 4) direct loans to the private sector; 5) intervention in the FX market; 6) an explicit inflation target to raise inflation expectations; and finally, 7) fiscal measures. As usual I was about 5 years early, but I was thinking along the right lines.