Much head scratching in the latest note from Albert Edwards.
The SocGen perma bear says he hasn’t got a clue what is going in financial markets at the moment or why investors believe the economic recovery is sustainable.
I’ve been doing this job long enough to recognise when the markets are entering a new phase of madness that leaves me scratching my head with bemusement. The notion that we are in a sustainable economic recovery is as ludicrous as it was in 2005-2007. But investors are back on the dance floor, waltzing their way towards the next, inevitable implosion – yet another they will no doubt claim in retrospect was totally unpredictable!
In July 2007, the then CEO of Citigroup, Chuck Prince, told the Financial Times that global liquidity was enormous and only a significant disruptive event could create difficulty in the leveraged buyout market. “As long as the music is playing, you’ve got to get up and dance,” he said. “We’re still dancing”. This of course was a variant on the Japanese saying “When the fools are dancing, the greater fools are watching.” Well, I suppose if Bernanke is specifically targeting the equity market with QE, who but the most curmudgeonly bear would not be gyrating their hips in time to the music?
Unlike Ben Bernake, I like to retain some sense of humility. And it’s at times like these that I really start to think I haven;t got a clue what is going on anymore. It really is a mad, mad, mad world.
However, Edwards clear on one thing – the bull market in bonds is not over – it’s just pausing for breath.
Having been underweight equities in our model portfolio now since the end of 1996, I am used to the derision that starts to be heaped upon my dogged views at these times. Since I turned structurally bearish, equities have spent far longer rising than they have falling. Bear markets tend to be quicker and more violent than bull phases so I tend to appear totally wrong most of the time. But let’s put the recent equity rally and bond sell-off into some sort of longer-term context. Can you see any break in the uptrend of government bonds? Not yet, I can’t.
Despite the savagery of the recent rise in yields, again let’s put this into some sort of longerterm, bull market context. Yields would have to rise above 4¼% before the bond bull market was to be seriously challenged. For the moment I remain a structural bond bull. I see yet another attempt from the authorities to levitate the equity markets to boost economic activity as I have always done; as an ultimately fruitless endeavour that merely produces bubble upon bubble and inevitably bust upon bust – each one bigger and more dangerous than the last.
Happy Christmas everyone.
The mathematics of inventories – FT Alphaville