Albert Edwards has been doing the same sellside strategy job for three decades, and that being the case, he knows that when Benjamin Franklin said death and taxes were the only two things certain in life, he (Franklin) left out “one other certainty”.
“At this time of the year sellside strategists will always wheel out their year-ahead forecasts [and] these will without fail predict a rise in both equity markets and bond yields”, Albert writes, in a note dated Tuesday. For Edwards, these biases “really are the symptoms of a congenital condition so deeply ingrained it will never change”.
To be fair, the upside bias on equity targets could be in part a reflection of the fact that, over time, stocks tend to rise. The bond yield forecasts are less forgivable, though. After all, the bond bull is in its third decade. The tendency to suggest that yields will be higher a year hence is obviously the product of strategists being unwilling to implicitly adopt a pessimistic outlook on the economy, although Albert’s colleague Subadra Rajappa has no such qualms.
“It is bond strategists that really leave me perplexed, in that – in the teeth of a relentless bull market raging since 1982 – they still consistently forecast a year-ahead rise in yields against the trend”, Albert says, underscoring the point.
As you can see, bond bears have only been correct three times in a decade.
For anyone not steeped in the current macro narrative, a consensus is forming around the notion that with the interim trade deal between the US and China “done” (and the scare quotes are there for a reason), and with some six-dozen rate cuts set to work their way through and manifest in better economic outcomes, yields should rise in the new year, led by breakevens.
Albert briefly rehashes this, noting that “the upward move in US and global bond yields in the second half of this year has been a partial rebound consistent with slightly stronger economic data”.
As a reminder, Edwards was vindicated perhaps more than ever before over the summer, when developed market bond yields went into free fall. German bund yields touched lows below -0.70% in August, when the global stock of negative-yielding debt ballooned above $17 trillion.
Albert, true to form, isn’t convinced that any pro-cyclical rotation is in the cards, let alone one accompanied by a sustainable rise in yields that would vindicate bond bears.
He cites the disappointing November retail sales report, suggests ADP may be a coal mine canary and reiterates his concern that CPI could “fall away”, backing up that contention with a familiar allusion to the prospect of a rapid deceleration in the dominant shelter component.
That would be “a massive shock”, Albert muses, adding that the US could be “closer to outright deflation than many believe”.
It would also be a “massive shock” to one of our readers, who on Monday took to the comments to exclaim that according to what he/she had just read on someone’s random blog, hyperinflation was just “months” away (we deleted that remark because it had no basis whatsoever in reality).
As far as the yield forecasts for 2020 are concerned, Albert isn’t entirely alone in recognizing the futility of the situation. Back in February of 2018, Morgan Stanley’s Matthew Hornbach declared that “history has shown consensus estimates for Treasury yields are usually wrong [and] everyone understands that accurate point forecasts rarely occur”. We haven’t heard any similar lamentations from him lately.