Add SocGen’s grouchy permabear Albert Edwards to the growing list of bond bears.
In his latest letter, the SocGen strategist echoes what we have said earlier this week, namely that equities are wobbling as yields rise above key threshold levels, and says that he agrees “with the bond bears that US yields will continue to rise, causing more problems for equities” … with one footnote, a predictable one: “I do not believe bond yields have yet seen a secular bottom. I repeat my forecast that US 10y yields will fall below zero.”
He is right: once the current infatuation with the reflation impulse is over which has been made possible by a record drop in the US savings rate offset by a historic surge in credit card usage – a carbon copy of what happened in 2011 when the ECB went so far as to hike rates assuming the recovery was here, and unleashing the worst debt crisis in European history – central banks will revert to doing what they do best: nationalizing capital markets and crushing savers with financial repression, the likes of which have not been seen yet.
In any case, it’s good to see that despite his recent vacation to Jamaica, Edwards’ gloomy disposition is right where he left it back in gloomy London, and as he admits “I can reassure readers I am restored to my bearish best.”
Edwards’ bearish sentiment was only boosted by this week’s market performance, to which he offers the following commentary:
So used are we to the relentless rise of the equity markets, seemingly without pause, this mini-tremor actually felt like an earthquake. But maybe this is the start of something more.
Maybe indeed, because in the very next sentence Edwards goes all out: “Certainly, as we explained at our Conference, the current conjuncture feels similar to just before the 1987 equity crash. All that was missing was the slanging match over the weak dollar between the US and Europe, but we duly got that while I was away.”
Ah yes, the dollar, but before the trade wars truly begin, everyone is watching something else: the yield on the 10Y, where Edwards differs from the consensus we observed earlier, and believes that a bull market will only truly start once yields rise above 3.00%:
Every man, woman and child seems to have decided that the US 10y bond yield has broken out of its long-term downtrend and we are in a bond bear market. Our own excellent Technical Analyst, Stephanie Aymes, shows that 3% (not 2.6%) is the key long-term breakout yield we should be watching. But she thinks that 2.64% was also significant as this means the RSI downtrend has now been broken (see bottom panel in chart below) and a run to 3% is now perfectly plausible. That though does not mean the bond bull market is over.
Edwards then decides to take a shot at the “great rotators” out of equity and into debt noting that…
With much anticipation the US 10y bond yield broke the critical 2.6% many regard as key to defining whether the current bull market is still intact or not (see left-hand chart below). With yields now closing on 2¾% and the 30y closing on 3.0%, many see this as a great time to dump bonds and switch into equities.
… however, he cautions that “this might not be so wise (see right-hand chart below):
Why? Because, quoting Stephanie Pomboy and showing our chart from yesterday, Edwards points that according to the MacroMavens economist, “stock prices are now be the biggest threat to the economy – even more than the Fed. Heaven forbid the market ever goes down”. (The latest monthly reading just out shows a further surge above previous peaks see right-hand chart below.)
Edwards then points out something else we showed on Monday: all the spending growth is thanks to a plunge in US personal savings:
US consumer spending growth is running way above growth in real average hourly (or weekly) earnings (see below). This gap is sustained by a slumping savings ratio, not jobs growth.
Then, taking a hint from yet another post on ZH – ironically also referencing 1987 and David Rosenberg’s math on the latest GDP print – Edwards again highlights the “shocking slump” in the household saving ratio (SR) from 3.3% in Q3 to 2.6% in Q4, and also quotes Rosenberg saying that “without this decline in the SR, consumer spending would have only risen a paltry 0.8% in Q4 against an actual rise of 3.8%, and GDP would have risen only by 0.6% against an actual out-turn of 2.6%!” This quickly leads to the next rant:
The Feds easy money policies have driven household net wealth to new highs and the SR has fallen hand in hand in the last two years. The US has now got double bubble trouble (ie bubbles in both corporate and household debt). Just like 2007, this is another economic boom fuelled by an unsustainable credit bubble that will inevitably blow up with a rooky Fed Chairman in place.”
So in conclusion, Edwards’ deflationary “Ice Age” is still with us, and eventually US rates will tumble, ultimately turning negative. “Why do I think yields could go negative?” Edwards asks rhetorically? “Well I expect that the true extent of how close the US is to actual outright deflation, and hence how high real yields currently are, will soon be
revealed. But before US 10y yields turn negative, expect them to visit 3% first.”
And somewhere in the sequence of events, the SocGen strategist expects the crash of 1987 to make a repeat appearance. And why not: until just a few days ago, the stock market had its best start of the year since, well, 1987. It’s what happened later in the year, however, that matters more.