On Thursday morning, I set about highlighting the latest from SocGen’s Albert Edwards, but I ended up on a detour about Jerome Powell’s fraught tenure as Fed Chair.
As regular readers are well apprised, editorial detours are a fixture in these pages. Simply put: I start typing and see where it goes.
Sometimes, I’ll circle back and write the pieces I meant to write initially. Invariably, they’re shorter.
The overarching point of Edwards’s Thursday missive was to suggest not just that the Fed won’t be able to normalize policy, but that, in a more general sense, “easy money comes at a heavy price [and] central banks have become slaves to the bubbles that they blow.”
He cited housing as a particularly egregious example. I’ve obviously dedicated copious amounts of space lately to the housing market, and with good reason. Prices are at record highs and the most recent data pretty clearly suggests affordability is starting to chip away at what analysts assumed was bulletproof demand.
Edwards pointed to a composite of OECD indicators (a price-to-income gauge and a price-to-rent index).
The figure (below) is an average of those two. Bloomberg used it in an article published last week.
For Edwards, housing is an impediment to Fed tightening and if you ask him, the bond market knows this.
“I believe the bond market just doesn’t believe the Fed can follow through on its tougher talk… because having created another huge, real-terms house price bubble, they are trapped,” he wrote, referencing the figure (below, from SocGen).
A reader asked me last week whether I believed housing prices would be lower five years from now. The truth is, I have no idea, because nobody really knows anything with any degree of certainty. This week’s Fannie and Freddie drama has obvious implications for the US market. But, I’d be inclined to believe that absent additional central bank largesse, prices will almost surely fall from post-pandemic peaks.
Edwards cited a heatmap from Bloomberg economics (you can have a look at it for yourself in the linked article above) on the way to delivering the following assessment which is hyperbolic even by Albert’s high standards for hyperbole:
But when it comes to blowing house price bubbles, Bloomberg Economics believes there isn’t even room for the Fed on the medal podium. This is now a global property bubble of epic proportions never before seen by man or beast and it has entrapped more CBs than just the Fed.
Finally, Albert returned to a favorite talking point — the discrepancy between reported profit growth for America’s largest firms and a broader gauge.
The culprit here is “huge inventory profits,” Edwards remarked, on the way to saying that while it makes sense that stock market profits “dominated as they are by the FAANGs, are doing much better” than the BEA’s nation-wide gauge, “on another level… it is extremely concerning because certainly in the past these divergences usually prove temporary and are resolved in a market collapse.”
I’m not sure “certainly” and “usually” work well together in that quoted passage, but Albert has a unique ability to make contradictions seem somehow compatible.