First out of the cave - SocGen’s Albert Edwards. From the strategist’s latest Global Weekly:
One of the key lessons from Japan’s lost decade is that investors’ confidence that the
authorities are in control of events will ultimately drain away. In a balance sheet recession, one
should expect frequent downturns as the authorities balk at additional stimulus. Only then will
zombie investors, sucked dry of confidence, squeeze the remaining puss from equity market
valuations. Only then will the 20 year boil of equity market over-valuation be properly lanced.
Edwards is prepared to launch a full-on challenge to the idea that excess liquidity will continue to drive asset prices higher. He suggests the uptick in growth is actually sucking speculative money into risk assets.
That’s dangerous because the fragility of this cyclical recovery - and the shocking state of personal and state balance sheets - means frequent lapses back into recession are inevitable.
This happened in Japan, of course, in the 1990s:
This eventually drained hope away from zombie investors who then became sellers-on-rallies, rather than buyers-on-dips.
On the balance sheet front, Edwards notes that in the US the private sector as a whole is paying down debt faster than the government is able to pile it up. This, the SocGen man argues, is a headwind to growth that will be with us for a long time to come.
Similar sentiments on Thursday from Gluskin Sheff’s David Rosenberg, who’s pretty furious with this “flashy but very dangerous rally,” in which equities are up 60 per cent over a six-month span while US employment slumped by 2.5m over the same period. His response to the latest ADP employment numbers:
Of course, the mantra of many is that the pace of layoffs is subsiding – this was the smallest decline since July 2008 — and that this is actually encouraging news. How weak is that? It’s like saying that your golf score is going up but at a slower rate than it was last year. You can’t pay the bills and feed the kids on “less negative” employment data and we know of no sustained or solid recovery that has ever occurred on productivity growth alone.
Rosenberg is with the common man here:
It is not lost on the individual investor that equities have generated no net return over the last 11 years and that we are very clearly in the middle of a classic secular bear market. What is amazing, and indeed, encouraging, is that the long-term resolve of the investor is not being overwhelmed by greed as Wall Street strategists push the theory of pricing the market on “mid-cycle” earnings and economists push the theory that data that come in “less negative” is actually bullish.
Related links:
Bears, keep the faith - FT Alphaville
