As time marches on, there are few of us left who were in the industry during the 2000 Nasdaq crash let alone the 1987 crash. I was there, and the one thing I have learnt is not to be complacent.
— Albert Edwards, July 18, 2024
Broken clocks, I know. Still, I got a hearty chuckle this week, in part at my own expense, when a couple of major developed market equity benchmarks suffered an out-and-out crash just three weeks after Edwards said a collapse might be imminent.
To be sure, Albert got the geolocation wrong. The Nasdaq didn’t crash, per se, although it did correct. The Topix and the Nikkei did. But I was nevertheless left to smirk, at myself, while re-reading the editorial I penned around Edwards’s crash call from last month. “Corrections happen all the time. Or at least they used to,” I wrote. And then: “Crashes (real ones) happen almost never.”
12 sessions later, the Nikkei plunged the most since 1987. “Almost never” indeed. As Albert put it last month, “bad stuff happens.”
On Thursday, in his latest, Edwards was in rare form while documenting the catalysts behind one of the more turbulent stretches for markets since the onset of the pandemic. “The immediate trigger might have been fear of recession, but other factors then ganged up to form a merciless lynch mob,” he wrote, calling it “very reminiscent of the events I witnessed first-hand in the October 1987 crash.”
The veterans among you — or anyone older than, say, 50 — know where he’s going with that. Edwards was talking about portfolio insurance, a kind of primitive precursor to the panoply of strategies, “innovations” and dynamic hedging techniques which, under the right (or wrong, depending on how you want to look at it) circumstances can accelerate and amplify modern selloffs. Or “blow the market to smithereens,” as Albert put it Thursday.
He alluded to modern market structure (“these days investors have even more sophisticated — explosive — strategies at their fingertips”), equated the August 5 VIX spike with Volmageddon (that’s not quite right, but I won’t split hairs) and conjured the October 2022 gilt meltdown. Naturally, Edwards snuck in a defense of Liz Truss, noting that according to a “little-publicized” BoE working paper, most of the surge in gilt yields during that episode was attributable to LDI hedging, not Truss’s budget, which is about like saying most of the deaths in World War II were attributable to bullets and bombs, not German politics: It may be true, but it largely misses the point.
Anyway, Albert reiterated his call for a Nasdaq crash — or a deep(er) correction — noting that although the media narrative generally says tech earnings jitters only surfaced this reporting season, “tech earnings optimism actually topped many months ago” in February.
The chart, above, is worth a look (why else would I highlight it, right?). “When EPS optimism starts to slide, tech stocks lose momentum and fall below their 200-day moving average, with the subsequent undershooting at least proportionate to the previous overshoot,” Edwards warned.
Does that mean the Nasdaq 100’s likely to fall below 15,000? Well, I doubt it. That’d be a near 30% drop from the highs. But I’ll confess it’s not as far-fetched as some of the more absurd equity crash calls we’ve heard over the past four years. It wouldn’t be a Jeremy Grantham-style “real humdinger,” and hell, it might even be healthy.
Consider this: At the highs last month, US big-tech was up 195% since the March 2020 lows. So, no, a 25% correction would hardly count as an existential disaster. And it’s a dip I’d buy, that’s for sure.
On the macro, Edwards painted the usual dire picture. He’s a reverse Bob Ross — Edwards’s trees are never happy. He cited several charts on Thursday. The figure below’s at least interesting, even as it’s a bit torturous for my liking.
“The equity market does not usually diverge from recessionary Kansas City Fed labor market data, but it has done so since the AI euphoria on the November 2022 ChatGPT launch,” Edwards wrote.
His overarching macro message was that the US economy’s headed for a recession. This time, he’s probably right.
“Now that [tech] EPS optimism is receding, we’ll soon find out who is swimming naked,” he said.
Keyword: “gOt”.
Thank you for the Bob Ross reference!
You seem to ink up your favorite funny quill for Alberts.
Love the portrait, graphic of him.
Yes, love the Albert portrait.
He wouldn’t wear that suit, though.
You are an artist and have some liberty in the matter.
That IS Captain Kangaroo’s suit, no?
If there’s one thing that took me too long to figure out is that too many talking heads omit all reference to timelines, let alone strategy or anything else that is paramount to personal investing decisions. I may have ~sort of~ had that down by the time I found Mr H, but reading him for years has certainly helped me in that regard.
H-Man, it has been sometime since we had a barn burner like 2008 or 2000. The consumer has had some heavy lifting to do and needs rates to come to the rescue with a little help from the Fed. Not sure that after 16 years without a barn burner there is a hall pass. (2020 was not a barn burner, more like a hiccup).
Are Edward’s trees more Tim Burton like? It wasn’t that long ago (Q4 2021 to Q4 2022) that the Nasdaq fell like 35% with many individual names losing much more. That was when NVDA sported a 1 handle pre split…perspective is important. Edward’s illustrations are food for thought. Appreciate the work here and the comments that follow.