“A few weeks back, I doubted US 10-year yields could reach the lofty heights of 1.50% without equity markets imploding. I was wrong,” begins the latest missive from SocGen’s Albert Edwards.
Albert was too hard on himself. He wasn’t entirely “wrong.”
Whenever you employ bombast (e.g., “implode”) you’re likely to be at least a little bit “wrong,” but equities most assuredly weren’t amused with the rapid selloff in bonds.
In fact, big-cap US tech briefly fell into correction territory, due almost entirely to the backup in yields. Some of the most speculative corners of the US market suffered grievous losses. And the Hang Seng Tech index fell into a bear market.
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Indeed, the backup in rates reverberated across global equities, prompting a deluge of despondency.
“The 10-year bond yield at around 1.6% is not good for asset valuations and there is no prospect that the yield increase will stop in the near-term,” one Hong Kong-based PM told Bloomberg last week.
So, while the world didn’t end, benchmark US yields at 1.50% (and beyond) didn’t exactly get a warm greeting from stocks, especially not those trading at stretched multiples.
But, Edwards’s point was simply that the S&P didn’t fall off a cliff, and while the Nasdaq 100 did de-rate, there was nothing apocalyptic about it. In fact, big-cap US tech was still trading at 26X coming into this week (figure below).
The lack of any real chaos (or, more to the point, still loose financial conditions) spared the Fed the trouble of having to jawbone the market prior to the March FOMC. “The Fed has been able to resist the bond market’s invitation to intervene,” Edwards went on to say Thursday, before cautioning that “the invitations will continue to arrive on its doormat and ultimately they will be forced into accepting by the weakening equity market.”
Maybe. But that generally assumes bond yields keep rising and in disorderly fashion. Yields need to spike enough to undermine not just “FOMO” (and there’s an ETF for that now, by the way) but also “TINA.”
In his latest, Albert cited his fixed income colleagues, who upped their 10-year forecast to 2% last week. “I hesitate to claim again that the equity market will slump before we get to 2%, but the real and present danger is of a reversal of the TINA sentiment that drove up equities as bond yields fell,” he wrote.
Of course, Albert recently suggested 10-year US yields could still dive below zero, the recent backup notwithstanding. Apropos (sort of), he took note of February’s lackluster (or “benign” if you were hoping for a cool print) February core CPI read from Wednesday. He likes “hard core” inflation better, and it’s below 1% — annually.
“Core CPI is very weak, especially if you exclude the summer 10% pop in second-hand car and truck prices,” Edwards said Thursday, adding that, if you ask him, “the blue line best represents underlining inflationary pressures.”
If that’s the case, core is near record lows, and in Albert’s view, is poised to “fall much further [as] always happens coming out of a recession when productivity surges.”
The paradox is that if this prediction pans out, and the Fed decided to obsess over perpetually “limp” (as Edwards describes it) core inflation, that would be justification for more easing and the persistence of accommodation, especially when considered in the context of a policy regime that now aims to overshoot.
So… buy stocks?
Or maybe the weak inflation should make me feel less guilty about still having 5% in cash.
I have everything in the market and basically am putting my efforts into not selling or trading.
Looks like Dems will be addressing infrastructure next, hence more money printing. My plan is to hold through the bumps.
I wonder what Albert and, for that matter, what H would say about the Christie’s auction of Beeple’s NFT.
I scrolled through some of the 13 yrs worth of daily art images that Beeple just auctioned for which he netted $50M. Honestly, some of H’s digital art is equal to or even better.
Of course, buy stocks. And, short volatility just as the NY Fed does to clean up minor market mistakes as they take place. Makes everyone holding feel good. We wouldn’t want anyone to fall asleep at night and have a bad dream of falling asset prices.
Next thing you know, someone starts having dreams of price discovery and the unencumbered, legitimate flow of capital, and things start to get really out of control.
While I appreciate this kind of token sarcasm better than anyone, the problem is just that it scared regular people away from financial assets for nearly a decade, which in turn cost people money.
The great irony of internet portals and newsletter writers who trafficked in shrill rhetoric about central banks killing price discovery, is that they generally did so while simultaneously pseudo-advising their readers to stay away from financial assets.
The obvious question is: If you know price discovery is dead, and you truly believe that central banks will levitate asset prices or even administer them, then why would you not be a raging bull? Why would you not front-run that assumed central bank buying and tell everyone you know to do the same thing?
I agree with everything you said. And, to answer your question, unfortunately I have a mind and memory of how capital markets should function. My mistake has been a belief in a system that would inevitably realise that the current way of doing things would not succeed. I placed far too much belief in the responsibility of our “leaders” that they would actually do each thing they said, starting from many years ago. Whether a Fed official, an open markets operation desk, a Treasury secretary and down the line through the C suites of what used to be investment banks. Unfortunately, the proverbial can has continued to be kicked down the road. And, here we are now. All time highs ad infinitum, to where, no one knows, but, if dissected from the beginning, anyone with integrity would not have done. To my personal defeat, my mind has not allowed illogical complacency.
What I’ve always tried to keep in mind is that my time on this planet is limited. In the grand scheme of things, my lifespan doesn’t even register on history’s timeline. So, my thinking has always just been: “Well, it doesn’t have to be sustainable. It just has to persist for a few more decades.”
As Harley Bassman likes to put it: “I will caveat that although I am certain of the denouement, it is possible its date is vastly longer than my career.”
True statements. By the way,I love the artwork used in your missives.
Thanks, my friend
Correct me if I’m wrong but arent the soft ycc controls employed by cbs disinflationary? If you’re trying to juice CPI wouldn’t additional “easing” be counter productive?
“In his latest, Albert cited his fixed income colleagues, who upped their 10-year forecast to 2% last week.”
There’s definitely been a rush from the sell side to revise year-end 10y UST yield forecasts to 2.0%. I just wonder with the Fed likely to maintain forward guidance and the ECB and BoJ both likely to keep bund and JGB yields suppressed, can the 10-year even get to 2% let along stay there for a sustained period given the FX-hedged yield advantage?
Charm, seems like there will be a lot of US supply for non-CB’s to sop up, not only the Treasury supply but also the last rush of US Corporate supply as CFO’s try to grab what probably seems like “the last chance to lock in low rates”.
So unless the current QE pace is increased by Fed, then the market will have to absorp, and will likely want a few more bp’s, you know … for the effort.