The Bond Bear That's Staying in the Cold
The great bond selloff is no match for Albert Edwards.
Societe Generale's top-rated global strategist and perennial doom monger is hanging on to his long-held view for yields to turn substantially negative. Never mind all the chatter about the end of the 35-year bull market in bonds and the Great Rotation back into stocks, and that President Trump's spending means inflation is back for good.
The herd has spoken, and Edwards doesn't buy it. And for those of us who remember that ignoring outliers is what got us into the financial crisis in the first place, he's worth listening to.
To be fair, he's not completely off piste. Near term, he sees U.S. inflation picking up to about 2.5 percent to 3 percent and the 10-year yield headed to 3.25 percent, same as a lot of people.
The similarities end there. For Edwards, this is merely the natural end of the growth phase of the business cycle, and in the normal order of things should be swiftly followed by a recession.
But this won't be just any recession. Wage growth is now pretty close to its pre-crisis average and he says it should accelerate in the early part of 2017. That will force the the Fed to raise rates at the wrong time, as growth sags, and for the wrong reasons, focusing on pay rather than the underlying economic weakness.
Fixing the error will require a bout of helicopter money, since central banks are already tapped out, and in the end bonds globally will all turn negative to the tune of minus 1 percent across the U.S., U.K., Europe and Japan.
The knock-on effect for equities does not make for family viewing but suffice it to say he sees the S&P a whole lot lower -- try a 75 percent drop. And it does not end well for China or emerging markets collectively either, as the dollar strengthens.
And then we'll be in a deflationary ice age -- a thesis which celebrates its 20th birthday this year. Brrr.
This doomsday view was looking pretty prescient when the world was collapsing in 2008. But eight long years of central bank largesse were all about trying to breathe inflation and growth back into the horse. So why the long face?
Edwards says Trump’s infrastructure plans will come too late to avoid a swingeing recession -- faster inflation will crush consumption first. And the Fed has stored up big problems by waiting too long to tighten policy -- looking through stronger credit growth is a worrying sign they haven't learned their lessons from the financial crisis. Another credit bubble looms, and when that bursts, the fallout from Lehman Brothers will look like a cake walk.
He's probably right that the Fed has delayed far too long, the second quarter-point hike in a decade is hardly rushing it. And it's hard to be confident in some of the fundamentals of their forecasting. Since the crisis it's consistently underestimated the labor market’s recovery -- initial jobless claims are at the lowest since the early 1970's. And house price growth has been 5 percent for a few years, so the time has long since passed to do something about this growing property bubble.
Even so, it's hard to see that Trump's spending will necessarily come too late and that the end of the U.S. consumer is nigh. The president-elect seems intent on cutting taxes, and plucking as much low-hanging fruit as possible to get to the new administration's stated goal of 4 percent GDP growth.
And surely, finally having a fiscal policy response -- after eight years of a gridlocked Congress -- takes the heavy lifting off monetary policy. So the world might yet muddle through.
And this is the nub. The problem with a long-held view is that you can't position a trade off of it, or show if the rate selloff we're all currently enjoying is entirely wrongheaded.
There's no doubting the depth of his analysis -- he's widely appreciated as being the sharpest bear for a very good reason. Just don't read his research alone on a dark and stormy night.
To contact the author of this story:
Marcus Ashworth in London at firstname.lastname@example.org
To contact the editor responsible for this story:
Jennifer Ryan at email@example.com