Albert Edwards On The Market: "I Do Not Really Have One Scintilla Of Doubt That This Will All End In Tears - Again"
Sometime we wonder if we are the only ones who are stunned by the ridiculousness coming out of the stock market on what seems a daily basis. Luckily, there is at least one other person out there who, like us, take a bemused approach to the endless insanity. As Albert Edwards says in his latest note: "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 that vein, it is not surprising that Edwards shares our disdain toward the Chairman:
Very little surprises me anymore in this business. But even I was surprised by Ben Bernanke's comment on CBS's "60 minutes" that he has "100% confidence" that he can act quickly to stop inflation getting out of control. Surely if there is one thing Ben Bernanke should be 100% confident about, it is his own fallibility. Remember this is the man who was not only adamant that US house prices would not decline, but refuted the very notion that there was even a house price bubble in the first place! I realise these guys have to pretend that they know what they are doing, but you would have thought that, having been at the epicentre of the biggest economic and financial crash since the 1930s, he would show a little humility and uncertainty. Apparently not.
But when the entire system, the whole global ponzi pyramid, knows it has no choice but to continue ploughing ahead, as otherwise the consequences would lead to the end of the financial system as we know it, what can one do but join the banks...
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. Although on the sell-side I think I remain a lone voice of bearishness, there are other commentators who share my extreme scepticism of the current situation.
You are correct Albert, even though in this case you refer to another Zero Hedge long time favorite, Fred Hickey of the High-Tech Strategist.
In his last missive he makes the very simple point that we have seen the current pattern of behaviour before. We saw it in 2005-2007 and in 1999-2000. In both cases easy money conditions led to asset bubbles and reckless investor behaviour. Now we are seeing it again even more blatantly, egged on openly by the Fed. Without wanting to sound as over-confident as Ben Bernanke, I do not really have one scintilla of doubt that this will all end in tears ?- again.
What is the primary driver of Albert's scepticism? Deleveraging, deleveraging, deleveraging.
We keep making the point that while the private sector de-levers, continual growth disappointments are almost inevitable -? as seen in the wake of the 1991 recession (see chart below). History suggests growth jitters of this autumn will come back again and again.
Far more important is the correlation between bond yields and equity valuations, for the period that Edwards has coined the trademark phrase of "The Ice Age" (i.e., the time over the past 12 or so years in which equities have gone exactly nowhere even as cost of credit has plunged):
In the 1990s, we were still in the midst of a secular equity valuation bull market where equity and bond yields enjoyed a tight positive correlation. In a post-bubble, Ice Age world, lower bond yields go hand in hand with higher equity yields. So, in contrast with the early 1990s, we are locked in a secular bear market for equity valuations.
Edwards also has some amusing observations on the plight of a bears in an environment in which the market spends far more time going up than down... but when it does go down, the move is savage and instantaneous:
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.
Albert's target for the next equity "challenge point": 4.25% on the 10 Year, which is the upward bound on the historical 10Y channel.
Despite the savagery of the recent rise in yields, again let?s put this into some sort of longer-term, 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.
Since the 10 Year has moved by 100 bps in about a month, this means that should the move continue, we may get an advance look on what stock performance in 2011 will look like just around the corner...
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