This page has been archived and commenting is disabled.
Albert Edwards: "The Trend Is Your Friend Until It Hits A Bend"
Even as GDP "surprises" Goldman Sachs to the upside, courtesy of some inventory build that only the government is seeing, and which completely skipped all the regional Fed reports, the market continues being stuck in an "sideways is up" mode, where any major economic upside surprise is a solid case for the Fed finally raising rates (yeah right). Yet the markets continue being on a good news is good news and bad news is even better news, roll.
So as we digest the GDP report, here are the latest observations from Soc Gen's Albert Edwards, who is not sharing any of the optimism generated courtesy of Goldman's 24-hour GDP reveral call.
One of the key conclusions from our late-1996 Ice Age thesis was that once the bubble burst, the close 35-year positive correlation between equity and bond yields would break down. This relationship had persisted for so long that it had become ingrained in investor psychology.
The 35-year period could be divided into two phases. The 1982-2000 equity bull market had largely been driven by PE expansion (not profits), which in turn had been driven by lower bond yields and lower inflation. Conversely, in the dismal years, the Dow went sideways for 17 years between 1965-82 as profits growth was wholly offset by multiple compression - driven this time by higher bond yields and higher inflation. Indeed, throughout this 35-year period, ?bad? economic news was generally good for equities as it drove bond yields lower and PEs higher. Equities had only a very loose relationship with the profits cycle.
We knew though from Japan that in a post-bubble world, once bonds and equities had decoupled, that the equity market would mirror the economic and profits cycle. And so, despite Japan?s structural equity bear market, one could enjoy numerous 50%+ rallies if one invested as the cyclical lead indicators bottomed out. Conversely one should have ALWAYS sold when these same lead indicators peaked out. After recent massive cyclical gains in equities, that extremely dangerous topping out phase looks as if it has begun (see below).
We have long advocated that in a post-bubble world, investors could participate in explosive upside equity rallies driven by decent economic data and an underlying improvement of
profits. We saw many of these rallies in the Nikkei over Japan?s lost decade. And even if onebelieved, correctly as it turned out, that each 50% rally would wither away, it would be simply daft not to participate in these policy-induced cyclical rallies.
Hence the explosive rally in the equity markets this year should not have come as a surprise to our readers. The cyclical indicators after all turned up around December time (for the ECRI
and the Conference Board) and a touch later for the OECD leading indicator (see chart below). But, having flagged up so strongly that one should tactically become a buyer of equities onthe upturn of these indicators, I failed to follow my own advice! To be perfectly honest, as the market powered ahead, I, like so many others, waited for the pull-back that never arrived. Do I feel like a grade 1 moron? Yes, I most sincerely do. Should I be beaten mercilessly to within an inch of my miserable life? Definitely.But I remain convinced we are still in a structural bear market and that this economic recovery rests on such shallow foundations that it will be washed away by the first moderate wave.
Many clients and salespersons point out though that lead indicators, including the ECRI,
suggest instead that a traditional V-shaped recovery might unfold with 10%-plus quarterly
GDP advances just over the horizon (see chart below).
And some observations on cyclical feedback loops that impact the thinking of both consumers and analysts:
I could be mean of spirit and point out that many of these proprietary lead indicators do actually include the equity market itself and so buying equities because the lead indicator is rising may be an entirely circular argument; but I think that is wrong. Indeed the tendency of analysts to upgrade their eps forecasts has been a pretty good sign a real economic recovery is underway (see chart below). My colleague, Andrew Lapthorne, monitors these data closely on a weekly bottom-up basis (as opposed to the top-down data below) and publishes these regularly in the extremely useful Global Equity Market Arithmetic document which comes out first thing every Monday morning ? link. This is worth getting.
If in the Ice Age, post-bubble world, the equity market is far more connected to the cycle (see chart below), we should be very aware of possible cyclical turning points. They say the trend is your friend until it hits a bend. Beware, we may have just hit one.
»
- 14677 reads
- Printer-friendly version
- Send to friend
- advertisements -
LOVE edwards.
btw - guess whats happening riiiiiiigghhhttt now.
http://www.ny.frb.org/markets/pomo/display/index.cfm
Like any good comedian, the Fed should immediately leave the stage when the audience is laughing the hardest, regardless of whether the routine is finished or not.
But then again I still wish upon a falling star and that's failed to work for 50+ years so why would I get it right now?
From the CBO Report:'The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP after subtracting 1.42 percentage points from the second-quarter change. Private businesses decreased inventories $130.8 billion in the third quarter, following decreases of $160.2 billion in the second quarter and $113.9 billion in the first.'
Okay, I'll bite. How can a $160 billion reduction in Q2 lower the GDP 1.42 points and a 130 billion inventory reduction in Q3 add .94 points? Or could it be that wacky CBO added .94 when it should have subtracted .94?
They keep extending unemployment. Now looking for another 20 weeks. Desperately trying to keep people from defaulting on all forms of debt.
The tide will not turn no matter how big a dyke they build with UE benefits. Eventually people will get upside down in their ability to earn their way out of the debt holes they are still digging.
The sink hole will crash in on itself.
Neither the market nor the GDP reflects the true economy. It is gushing wealth out the jugular. You cannot build wealth with a government subsidized service economy.
"You cannot build wealth with a government subsidized service economy. "
Amen and amen.
Science and engineering are not much fun for a lot of people. In the late 60's, the WSJ, posted an editorial containing a graph of college enrollments in engineering vs enrollment in law. The supply of engineers was to be going down and the supply of lawyers would be going up.
But it is not just the technical(whatever that is) training. It is the struggle with the inexorable laws of natural science and the probations against erroneous assertion that generally go with the discipline.
We also have a kinder, gentler world. Why can’t we call fraud “fraud”? Is it because we might be subject to lawsuit by the fraud perpitrator in a court of law?
Maybe you can get your answer here:
"This is what is happening now. The positive impact that inventories is having on GDP growth has to do with the fact that GDP growth is a first derivative statistic where even subtracting a less negative number is positive.
Let me give you an example to illustrate. Let’s say you are running a road race and you do a bunch of practice runs with a coach who docks you seconds for not keeping a consistent pace or having bad form. After your first run, he docks you 35 seconds. In the second run, you have the same time. But, you make a concerted effort to stick to your pace and form. So the coach docks you only 15 seconds. Your time is the same but you are now subtracting a less negative number. The net effect is a better time. That’s what is happening with inventories.
So, after a massive inventory purge in Q1 and Q2, inventories are set to add to GDP growth in Q3 and Q4 regardless of whether inventories are restocked or not."
http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corr...
And more here:
http://www.creditwritedowns.com/2009/07/ism-is-this-the-mother-of-all-in...
The Dane
HAL 9000's clock flipped a bit, retrieved incorrectly indexed data and yesterday, GS published a prediction of GDP numbers with the real data, instead of the today's "fit for public consumption" GDP numbers.
Being a conspiracist at heart, I see the Great Vampire Squid's press release of yesterday as simply another chance for them to suck some more cash out of the other market players. N'est pas?
oui oui monsieur
Oui...(sighs)...Oui .
I worry that legitimate complaints against Goldman Sachs (and other Wall Street firms) will get lost in a bunch of (what often seems like) vitriolic whining.
If the number came in lower then 3, but higher than 2.5, the complaints would have been that Goldman had the number early. Anything over 3 would have been -- and was -- spun as GS lowering expectations in order to make money trading the upside, or to foster a continuation of upside momentum. Anything lower than 2.5 would have led to accusations that GS was trying to prepare people for the bad news.
The mindset of "I hate GS so no matter what they do I will criticize" is counterproductive. (It is the same inanity you find on political rant radio.) Point out real grievances and let the rest go.
Thank you. +100. I find this "rage against GS" to be just so much populist nonsense, and not something I would expect to see on an otherwise intelligent and financially sophisticated blog.
Well, let me be clear: I have "rage against GS." And I'm cool with honest populism. (In fact when I made that post, I worried a bit that I might dampen someone's enthusiasm, which was the last thing I wanted to do.) It's just that there is plenty to be outraged about without manufacturing anything.
I'm not cynical enough -- or I'm too naive -- to be pleased if someone is on my side for the wrong reasons.
Anyone else notice how CNBC "unintentionally" blackouts Ron Paul? Asstards!
0101
Cnbc Owned by Government Electric ? By the way LKud just declared the Recession over.
Coffee spit !
i think he still has crack caught in his nose
And now we have Missy Francis telling Santelli to dig down in the GDP numbers because he isn't creaming his jeans like the reat of the nitwits known as anchors on CNBC.
God these people are awful.
They are news readers.
However, considering the recent CNBC ratings performance, they can correctly be called anchors.
More and more I can understand the concept of a p3 in Prechter's thesis. It is what I read about some hedge fund managers in London saying about the UK gnp figures"they could have polished the numbers better to look like what the Americans do". If more and more money managers (if the increase today due to money managers purchases)buy and sell based on numbers that they themselves believe are rigged,then it is only a matter of time before a big implosion.And when a giant company's ceo tells you that current prices of what he sells are unjustifiably high,then who do you believe?the seller who knows what he is selling,or the market which most people participate in despite their non believe in its efficiency?. It has become a fools market and not investment place;everybody is buying the dip in the hopes of selling it to the next sucker. untill no suckers are left,and that is when we have hte final collapse.
which CEO said their selling prices were unjustifiably high?
It could be the 30-1 who are selling stocks. They are voting (speaking) with their poccketbook.
Shell regarding oil
CNBS - no shame, no shame
Edwards is a stopped clock. Would never trade off him. Even if he is right and the leading indicators have properly turned, doesn't mean equities will. Leading indicators turned before equities at the lows.
What Edwards cannot understand is that equities are a nominal asset class in a world of fiat money. The bias is always up because that is the game. Hence, you need to be very careful about playing the short side.
+1
"Many clients and salespersons point out..."
you had me at hello
or was that hell no?
We're so sorry, Uncle Albert. Good comment from Bob the Horse. That's vision, I'm tellin ya!
I'm not looking at stocks until 3:30 at the earliest.
I had a bad feeling the GDP would 'beat estimates' and create a bounce when GS made that 'downward revision'. Unfortunately I didn't bet that way
:(
Will this stupid market ever even see a minor pullback of more than a couple of hundred points in a stretch ever again?
Yep after being short for a month I am starting to lose patience. I watch my position improving at small steps day by day then... These guys sure know how to rig the rigged. Maybe we should just stay apart.
"Hence the explosive rally in the equity markets this year should not have come as a surprise to our readers. The cyclical indicators after all turned up around December time (for the ECRI and the Conference Board) and a touch later for the OECD leading indicator (see chart below). But, having flagged up so strongly that one should tactically become a buyer of equities onthe upturn of these indicators, I failed to follow my own advice! To be perfectly honest, as the market powered ahead, I, like so many others, waited for the pull-back that never arrived. Do I feel like a grade 1 moron? Yes"
__________
When tools like this figure out that it's impossible to consistantly forecast future price movements, and catch exact tops and bottoms, then, they might be able to actually make money.
Time to short! All balls in!
"clients and sales persons" = those individuals I am forced to listen to because of my position but who are always wrong.
Wasn't this the guy who was bearish for the entire bull market from 2003 to 2007 and then bullish for about a week in October of '08? good thing they don't actually let him manage money, and certainly not leveraged money.
Steve Leuthiold makes money in bull and bear markets with REAL money to manage. He's bullish now. 'nuff said.
hey brett..how do you do that thing with the picture? is that metro bair's butt? is this how the market will swing?