“I believe this almost 50% equity rally from the March 23 low will fail”, SocGen’s Albert Edwards writes, in his latest weekly missive, which begins with a half-dozen bullet points lambasting the Fed for its role in inflating asset bubbles.
Edwards says he’s “stunned” by Jerome Powell’s willingness to countenance speculative excesses across risk assets.
I have doubts as to whether Albert is genuinely “stunned”, but like a vintage rock ‘n’ roll band that can still pack a stadium after decades in the business, Albert knows how to delight his audience — he plays the hits early and often.
Edwards says that over a quarter century, he’s “become used to the disingenuous nonsense central bankers have spouted to justify their never-ending willingness to blow asset price bubbles”.
But, like other Fed critics, Albert says he’s particularly disenchanted with Powell, who he calls “probably the biggest disappointment of all [given] his initial grandiose, bubble-busting rhetoric”.
It’s true that Powell began his tenure as Fed chair with something of a principled flourish, but let’s not ignore the elephant in the room. The idea that he was going to get away with a double-barreled (i.e., rate hikes and balance sheet normalization) tightening campaign considering i) Donald Trump’s penchant for citing the Dow as a real-time job performance barometer, and ii) the necessity of keeping a lid on dollar strength amid the trade war, was always a pipe dream.
Powell was destined to embark on a rate-cutting cycle. The alternative was being stripped of the chairmanship. Let us not forget that multiple reports in early 2019 indicated White House counsel explored the legality of demoting Powell for “allowing” the stock market to sell off during the fourth quarter of 2018.
In any event, Powell’s rationale for ignoring the
reality possibility that the Fed is now in the process of inflating what Jeremy Grantham on Wednesday called “the fourth ‘Real McCoy’ bubble of my investment career”, is that the Fed’s mandate is to use the tools at its disposal to safeguard employment and stable prices.
Currently, the unemployment rate is the highest since the Great Depression and the US is flirting with outright deflation. Core has been negative for three straight months, and annually, we’re close to seeing the EKG (as it were) flatline on the headline gauge.
We can all argue the point until the cows come home, but the bottom line is that monetary policy has been left largely on its own in the post-financial crisis world. Trump pushed the fiscal envelope, but before that, fiscal policy around the world was generally characterized by belt-tightening at best, and austerity at worst.
There’s nothing “wrong” with keeping your fiscal house in order, but if you say to monetary policy “It’s all on you guys and gals”, then nobody should be particularly surprised when asset bubbles inflate at a rate that far outstrips improvements in the real economy. After all, the transmission mechanism from low rates and QE is self-evidently more efficient when it comes to financial markets than it is at bolstering growth.
In any case, Edwards describes himself as “incredulous” and here’s why:
I thought we had all now understood in the wake of the 2008 GFC that one of the principal causes of that collapse was that central banks were too focused on their narrow inflation targets. Quiescent CPI inflation excused the Fed from raising interest rates and allowed the build-up of huge asset price bubbles which, when they burst, collapsed the economy and the supposedly ‘strong’ banks. Post the 2008 GFC there was supposed to be more focus on financial stability and not just on the supposed health of the banking sector.
That’s all true, of course, but again, I would suggest that one way to help alleviate this state of affairs is to reimagine fiscal policy.
After thoroughly berating Powell and his predecessors, Albert pivots to make a few points about his “Ice Age” thesis which, you’re reminded, is currently transitioning to what Edwards calls “The Great Melt”, a period in which he says aggressive fiscal expansion enabled by monetary largesse will finally begin to thaw the deflationary permafrost.
Edwards’s critics focus almost exclusively on his notoriously bearish outlook for equities. I’m not sure if Albert is fully apprised of this, but that obsession on the part of his detractors is in no small part due to the trumpeting of his bearish stock calls by “fans”.
I put “fans” in scare quotes, because some of those who comment on his work don’t strike me as fans in the sense that they appreciate the decades he’s spent developing a nuanced theory about the evolution of crucial macro themes.
Rather, they are “fans” in the sense that they cherrypick the best quotes from his bearish stance on equities in order to generate the most internet eye-balls — i.e., the most clicks.
While that’s fine (I suppose), what I would note is that over the years, that self-serving behavior on the part of some online commentators has had what I believe to be an extremely pernicious effect — namely, it has chipped away at the credibility of an otherwise highly informative framework for analyzing trends in the global economy. It has, in my opinion, done a disservice to economics itself by effectively relegating Albert to a category where he might not necessarily belong.
Consider this passage from Edwards’s Thursday note, for example:
We have persisted with our Ice Age thesis since the end of 1996. While most commentators focus on my bearish call on equity markets, the Ice Age has played out almost exactly as envisaged in terms of the inflation and bond outlook. But despite my being on the wrong side of the biggest equity bull market in history, since the end-1996 Ice Age inception the total return of global 10y+ government bonds (ICE BoA index) has kept pace with global equities (see lefthand chart below). Even in the US where equities have massively outperformed the world equity index, US10y+ gov bonds have only just been pipped by equities (see right-hand chart below).
My guess is, most casual followers of Albert’s work over the years (and by “casual”, I mean those who read excerpts in the financial media, whether mainstream or otherwise) are not aware of the points Albert makes in that short passage.
And that’s a shame. Because those are some pretty important points.
In fact, if you’re someone who has been under the impression (based on the kind of coverage Albert’s work has received over the years) that Edwards has been “wrong” for decades, those very simple points might be enough to make you rethink your whole assessment.
But it’s not just the big-picture comparison (i.e., between stocks and bonds over the period) that gets short shrift.
Tragically, almost all the nuance in the “Ice Age” thesis is habitually swept aside by those who cover Albert’s work in favor of more headline (i.e. click) friendly coverage. In fact, one commenter and a pair of readers who e-mailed me recently, expressed regret that they don’t know more about the “Ice Age” thesis because, as one put it, “I get the feeling it was largely correct”.
Indeed it was – “largely correct”, that is.
And Albert knows how correct it was better than anyone. Here’s another passage and visual from his Thursday note, for example:
Another key element of the Ice Age thesis has come right, namely the de-rating of equities as an asset class relative to bonds tracking closely what occurred in Japan 10 years earlier.
I could go on and on. And Edwards could provide you with dozens upon dozens of visuals with short descriptions to drive the point home further.
The bottom line is that, as an architect of macro frameworks, Edwards may be a veritable Frank Lloyd Wright.
The problem is, the general investing public doesn’t know it, even if clients do.
Why? Why is it that? Why is it that the only thing the general investing public thinks of when they think of Albert Edwards is “wrong” calls on equities?
Far more importantly (just to put this in concrete terms): Why has “Albert Edwards Ice Age thesis” been the #1 referral term from internet searches to this website for two years running?
I have a thesis of my own on that and it’s pretty simple. Albert Edwards has a lot of fans out there who care only about one thing: Co-opting his gift for penning delightfully trenchant critiques of boom-bust cycles and central banker follies for their own purposes, whether that be generating web traffic, satisfying their need for confirmation bias, or simply scoring points (followers) on social media with zingers about policymakers.
If these folks were really fans, they’d focus more on the macro framework that Albert has spent his entire career developing, especially now that it’s come true.
Maybe if the tenets that informed that framework had received even a fraction of the attention afforded to the zingers, the world would know Edwards as the man who developed a remarkably prescient theory 24 years ahead of its time, as opposed to the guy who missed the bull market in stocks.
Just a thought. Or two.