Albert Edwards Takes On Rail Traffic, The Dollar And Idiot Sell Side Analysts (Most Of Them)
Albert Edwards is threatening to upstage David Rosenberg, with his ever
increasing (healthy) cynicism that permeates all his recent letters to
an ever greater degree. His latest missive "As the Japanese say,
?Darkness lies one step ahead?" is yet another pinnacle in this
escalation. Exhibit A: the following summation: "Now, I have to admit
that I?ve been working in finance since the very start of the long bull
market in 1982. It?s been fun and I?'ve met many very interesting
people over the years. But there are an awful lot of puffed-up toucans
in this business, strutting around and fluffing themselves up so as to
appear incredibly self-important."
The reason for this
condemnation arises from Edwards' concern that Buffett may
have jumped the shark with his purchase of BNI and his "all clear" call
on America. Zero Hedge readers know we follow the APA data weekly, and
we have yet to see any material improvement, or any tangible shift in
the deterioration cycle. Edwards seems to agree:
We all know that Warren Buffet is not one of those. The investment guru's foray into railroads this week has attracted much attention. The FT's Lex column called it "one almighty bet on the US economic recovery." Funnily enough I was looking at railroad traffic earlier in the week. It was notable, I thought, that on a seasonally adjusted basis, there is very clear evidence that the cycle is stalling out (see chart below).
Never one to mince his words, Albert throws a zinger aimed directly at the morons who rush over each other to perpetuate self-fulfilling upgrade or downgrade circle jerk prophecies:
While I'm on the subject of gurus, I've come to the very sorry conclusion that many sell-side strategists purport to be financial gurus, yet strangely move from job to job as their employers find them to be empty vessels. There are very few in this business I would wrap my arms around, kiss on both cheeks and embrace as a true guru.
And in closing, some very useful observations on the dollar, and continued margin improvements:
The dollar may be breaking upwards (see chart above). If this is the start of a large upward
move, driven in large part by huge short positions that might be forced to be unwound, this
may crush correlated risk positions. In addition, the end of the $300bn Fed program of buying
US Treasuries last week is causing jitters. Yet amid the noise one should focus on the longterm
fundamentals (see chart below). Nominal quantities matter.
Although arithmetically, bond yields are a statistical artefact of short-term interest rate expectations, the above chart shows that trends in nominal GDP growth are the key driver. In the 1960s and 1970s, the continuous tendency of nominal GDP to grow well in excess of current bond yields provided an irresistible driver for higher yields. Conversely, the collapse in nominal GDP growth below bond yields in the early 1980s marked the start of the long bull market that continues to this day. Indeed, it is notable that nominal GDP growth is once again so far below bonds that a major move down in yields may be very close indeed. The continual ebbing of nominal quantities towards the deflationary Ice Age end is something we continue to bang on about in these pages. The charts below, for example, highlight what is happening to wage and benefits inflation. This cycle has ground wage inflation even closer to zero. And indeed the private sector data is even weaker than what you see below.
Now a bull would say this is all jolly good news as company profits can be increased by continued cost cutting and margin expansion. But as Andrew Lapthorne pointed out in a recent note, with margins already so very high, it is impossible for companies to cost-cut their way to sustained profits growth - link. Hence nominal revenue growth will be the key driver to the profits outlook. In targeting margins, companies are currently driving the US economy to the very abyss of outright deflation - something we will all realise as this cycle soon stalls.
And, as always very little of this matters: the only relevant metric is how much higher does the Fed need to see equity markets before it stops its loose monetary policy. If prior periods are any indication, even the complete collapse of the economy, which is what we would be having if it weren't for stimulus after stimulus, is completely irrelevant as manifested by unprecedented multiple valuations on numerous companies. One thing that is certain is that as long as there are tens of billions of free dollars flooding the market courtesy of Chairman Ben, there is little in terms of actual underlying data that will prevent i) the dollar from falling ever lower and ii) an equity melt up. Yet with every passing day, the Rubicon of the liquidity/dollar short unwind approaches, and when it does occur not even the threat of printing trillions of dollars in billion dollar bills daily will be enough to prevent the complete collapse of not just equities but all risky and safe assets: the ultimate bubble implosion. The Fed can now only hope to contain that day, as it can no longer be stopped.