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Treja Vu: Albert Edwards Expects New Lows On Bond Yields, Equity Rally Turning To Dust, "Just As It Did In 2011"

Tyler Durden's picture





 

Nothing that we haven't said already many times, but always good to hear someone, in this case SocGen's Albert Edwards, observe what is patently obvious - namely that the start of every year now sends a consistently wrong signal that the economy is improving due to seasonal adjustments that no longer are applicable in the New Normal. This coupled with the liquidity boost that takes places just prior to each and every run up completely explains why 2012 is not only deja vu, as it continues to be a carbon copy replica of 2011 (when the market peaked in late April), but is really a treja vu, mimicking the action of 2010. After all it was none other than Reuters who in its puff spin piece tried to caution readers that we have been here before: "This time last year, the U.S. economy was adding jobs at a similar pace of more than 200,000 a month between February and April...Growth was nipped in the bud by the Arab uprising, which sent oil prices soaring. In 2010, prospects had looked even stronger. Between March and May, companies were adding a net 309,000 new jobs each month, and first-quarter growth came in at a 2.7 percent. The rebound proved temporary." And yet here we are, wondering if this time it's different. It isn't. Albert Edwards explains: 'With bond yields breaking out to the upside and the equity bull run continuing, investors are back to their same old hopeful habits. Many are thinking that if we have seen the all-time lows on bond yields investors will be forced into equities. We already can observe leading indicators rolling downwards in exactly the same way as they did in 2011." And here is why Edwards will once again be unpopular with the permabull, momentum chasing crowd: "Expect new lows on bond yields by Q3 and this equity rally to turn to dust – just as it did in 2011."

He adds:

The Chinese data have been weaker than expected and the authorities there have shifted their stance on the currency in response. That call has been going our way. But the stronger US economic data have shifted the market further away from our vision of sub-1% US bond yields. This does not concern us. We have been here many, many times before.

 

It is clear to us that despite the economic data looking a bit perkier, the underlying profits situation is deteriorating significantly. This earnings season has produced its usual burst of manipulation, but as my Quant colleague Andrew Lapthorne points out, the Q4 EPS outturn looks decidedly weak - perhaps not being subjected to the same faulty seasonal adjustment as the economic data. And, as our erstwhile college James (or Jim as Zero Hedge now call him) Montier has pointed out, US margins have already begun to turn downwards - link.

Those suffering from treja vu are forgiven - just look at the chart.

Many commentators have noted that the bounce in US activity in Q4 2011 and Q1 this year mirrors closely what happened towards the end of 2010 and start of 2011. This may have more to do with faulty seasonal adjustments in the wake of the economic slump at the end of 2008 and start of 2009. Hence seasonal adjustments for subsequent years are incorrectly inflating turn-of-the-year activity. We note this concern and if correct, investors should ready themselves for noticeably weaker economic data as we move into Q2 and Q3.

 

The recent US bond sell-off is overdue and nothing to get excited about [see first two charts above].

 

Have investors already forgotten that, in the mini-recovery at the end of 2010, bond yield surged from 2¼% to 3½%. Then too there was a touching level of investor confidence that we had moved into a self-sustaining recovery and that the multi-year bull market in bonds had ended. Only a few funds thought otherwise and remained committed to The Ice Age. These funds saw 30%+ returns in 2011.

 

It is always the case that, in the long bond bull market since 1982, cyclical upturns push bond yields higher for a short while - most especially when nominal GDP rebounds above bond yields (see chart below). Nominal GDP growth in this cycle is now declining from the weakest cyclical high since the war and very low bond yields now reflect the unusual weakness in nominal quantities as the cycle abates.

Alas, not only is institutional memory so short it has no recollection what happened one year ago, it no longer even habituates to disappointment, since what happened in 2011 happened in 2010.

And for those curious why Goldman is now bidding up every TSY it can get its hands on and selling equities like a man possessed:

We are not at all surprised to see implied inflation expectations now beginning to tick upwards as the market responds to rising unit labour costs (see chart below). In the next few weeks though, I expect a return to weaker economic data in the US as the seasonal uplift unravels and as already signaled by the rolling over of the Conference Board leading indicator (on the 3-month change definition shown previously on p3). Bond yields will move back down to new cycle lows and the equity market rally will dissolve into dust just as it did in 2011.

God bless central planning though, which manages to step in just when the bottom is about to fall out of the market, and make market participants believe it can control the business cycle entirely on its own. Until it fails, and starts all over again.

Incidentally, when bond yields really start moving, it will not be a smooth transition. It will be quite violent, as it will be the precursor to the Fed losing control of it all.

 


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Wed, 03/21/2012 - 14:45 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Thanks, more evidence of diminishing returns, hedge accordingly.  Another set of compression trades to come?  Thoughts?  Equities and credit markets don't seem to have their story straight.

 

Wed, 03/21/2012 - 14:45 | Link to Comment Marge N. Callz
Marge N. Callz's picture

The death of the bond market has been greatly exaggerated.  As if the Fed could allow interest rates to actually go up.  That would spell game over.

Wed, 03/21/2012 - 14:54 | Link to Comment CClarity
CClarity's picture

Exactly . . . how could European sovereigns make debt payments if interest rates in US return to a more normal 6% 10 year yield.  Italy and Spain at 9%?  Not gonna happen.  US State and municipalities needing to pay twice as high rates (despite the fact that it was the norm not long ago).  Yep, good 'ol Greenspan really screwed us all when he artificially kept rates so low so long, to stimulate consumption and housing, but now we are saturated in debt that we cannot service if rates go up.  A complete quandry.  I almost feel sorry for Bernanke . . . almost.

Wed, 03/21/2012 - 14:58 | Link to Comment Dr. Engali
Dr. Engali's picture

The fed isn't going to be given a choice. The FX market will tie the fed's hands eventually. Then bond rates will go where they should be. Either way it doesn't matter, it's game over soon. It's all a matter of how. Death by higher rates or dollar collapse. Maybe even both.

Wed, 03/21/2012 - 14:46 | Link to Comment Lost Wages
Lost Wages's picture

Bill Gross recommends PTTRX, bitchez.

Wed, 03/21/2012 - 14:46 | Link to Comment -1Delta
-1Delta's picture

sorry ipads and central banks will fix this.. .

 

and dont forget that 15 vix which mens everything is fine- just move along

Wed, 03/21/2012 - 14:46 | Link to Comment rosiescenario
rosiescenario's picture

The Ceridian Index is worth a look....it has not been looking pretty for a few months, despite our guddermint data to the contrary. Ceridian just measure diesel truck fuel usgae....a fairly good coincident measure of what is actually happening in the macro economy here. It is based on fuel volume, not price, so that variable is removed when comparing different monthly reports.

 

 

Wed, 03/21/2012 - 14:47 | Link to Comment BackOffice Slut
BackOffice Slut's picture

WTF?!   Goldman says it's the best time in a GENERATION to Buy stocks, SELL BONDS!!!!

http://finance.yahoo.com/blogs/breakout/goldman-sachs-best-time-generation-buy-stocks-154722104.html

 

Please tell me this farce of a market is going to drop, sooner than later

 

Wed, 03/21/2012 - 15:02 | Link to Comment Uber Vandal
Uber Vandal's picture

Might as well put that quote on the cover of Time Magazine.

Much like I simply can not believe that PCLN has broken over $700. Actually, I can't believe any of the equity prices I look at lately.

The last time PCLN was priced in the $700 range was May, 1999, and would eventually hit about $975.

Then, it dropped to under $8.00 per share by the end of 2000.

https://www.google.com/finance?client=ob&q=NASDAQ:PCLN

 

Wed, 03/21/2012 - 15:12 | Link to Comment xela2200
xela2200's picture

Opportunity of a life time!

http://www.cnbc.com/id/46808343

 

I like to follow what these idiots say, and every time it precedes a move on the opposite direction. If Goldman says but, then it is time to sell. If the FED says there is no way of QE in hell, Then QE is coming. They just don't give a Sh!t anymore.

Wed, 03/21/2012 - 15:17 | Link to Comment Waterfallsparkles
Waterfallsparkles's picture

They are just trying to pull all of the Money on the Sidelines or in Bonds into the Market at the top so they can Sell.  Right now I do not think they have anyone to Sell to except other Market participtants that are waiting for the same thing.

All we need is one big Hedge Fund to take profits and it is good by to new highs.

Wed, 03/21/2012 - 15:56 | Link to Comment catacl1sm
catacl1sm's picture

There are no profits if there's no one to sell to.

Wed, 03/21/2012 - 14:53 | Link to Comment SheepDog-One
SheepDog-One's picture

No one left for the central bankster gangsters to rob....now we'll have trouble coming when the banksters feel the pinch.

Wed, 03/21/2012 - 15:00 | Link to Comment Village Smithy
Village Smithy's picture

No one left to rob except themselves. Maybe the first sign that the leg down has begun will be when one of them (the squid I would presume) goes rogue.

Wed, 03/21/2012 - 14:55 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

"Incidentally, when bond yields really start moving, it will not be a smooth transition. It will be quite violent, as it will be the precursor to the Fed losing control of it all."

Rock, meet hard place. Hard place, meet rock.

Wed, 03/21/2012 - 14:56 | Link to Comment BackOffice Slut
BackOffice Slut's picture

Long time reader, but just got signed up. Really appreciate your insight and comments CD.

 

Cheers

Wed, 03/21/2012 - 15:08 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Thank you for your long time ZH readership and your recent effort to begin commenting.

For those faithful readers of mine who have been wondering why I haven't posted any articles in some time, life has thrown me a very nice curve ball recently, temporarily taking me out of the ball game.

Goddess willing and the creek don't rise.........I shall return.

Wed, 03/21/2012 - 15:09 | Link to Comment Dr. Engali
Dr. Engali's picture

Well CD that's a pretty ominous statement. I hope everything is alright.

Wed, 03/21/2012 - 15:13 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Thanks for asking, but there is no problem. It was a very nice curve ball that did a bit more than just brush me back from the plate. I am healthy, wealthy and wise and all is well. Just very little time and even less inclination to ponder the dark reaches of the present day insanity.

I expect to be busy for several more weeks, then my time will once again free up. Rest assured that the gray matter is still working on all the angles and a few new ones to boot.

 

Wed, 03/21/2012 - 15:15 | Link to Comment noob
noob's picture

goodluck coggy...

I'll Be Back

http://www.youtube.com/watch?v=M1ypn0y32Ac

Wed, 03/21/2012 - 15:18 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Nice shades! :)

Wed, 03/21/2012 - 15:35 | Link to Comment noob
noob's picture

Terminator 3: Rise of the Machines

T-X: [smiling] I like your gun.

Wed, 03/21/2012 - 15:15 | Link to Comment Dr. Engali
Dr. Engali's picture

That is good to hear. You had me worried for a moment.

Wed, 03/21/2012 - 14:59 | Link to Comment SheepDog-One
SheepDog-One's picture

Yep, this idea going around that if there is a market decline it surely will be a calm orderly controlled affair is just preposterous. Think instead 'Towering Inferno'.

Wed, 03/21/2012 - 14:57 | Link to Comment SheepDog-One
SheepDog-One's picture

Well at least the Golden Slacks gangsters are smart enough to sell while there are still some buyers out there...when the panic starts everyone in the casino will rush for the exits at once and find the doors all chained and locked from the outside. 

Wed, 03/21/2012 - 14:57 | Link to Comment gjp
gjp's picture

Bonds may rise in price again, but stocks will go up regardless.  That seems to be the way it is in Benny's Brave New World.

Just look at today.  Bonds rising, dollar up too, and stocks ... wait for it ... up again!  Led by ... wait for it ... Apple and the Nasdaq triple-digit PE club like CRM, AMZN, PCLN etc.  Again!

Jump in and buy your favourite tech miracle.  Don't worry about valuations.  Benny's got your back.

Wed, 03/21/2012 - 14:57 | Link to Comment Conman
Conman's picture

OT: When things start moving off the "Dollar menu" and onto a "Value menu" (read - not 99cents anymore) there is REAL inflation. We are getting to the point of compressed margins for companies. Somethings gotta break soon.

Wed, 03/21/2012 - 15:02 | Link to Comment SheepDog-One
SheepDog-One's picture

I just cant believe anyone actually eats at McDonalds.

Wed, 03/21/2012 - 16:00 | Link to Comment catacl1sm
catacl1sm's picture

4 Piece McNuggets are no longer on the dollar menu.

Wed, 03/21/2012 - 15:03 | Link to Comment lolmao500
lolmao500's picture

So one more year of BS... and how many times will this repeat??? Or are doomed to this pattern forever??

Wed, 03/21/2012 - 15:11 | Link to Comment Dr. Engali
Dr. Engali's picture

No this is it. This next round of QE will collapse everthing. People will catch on to the fact that it's not working and prices are rising eveywhere. The bond market will blow up no matter how much Ben prints.

Wed, 03/21/2012 - 15:56 | Link to Comment SheepDog-One
SheepDog-One's picture

1 thing is for sure, the 'next round of QE' even if there is one which I doubt, will put a solid floor on $115 oil...so I say hey go for it clowns.

Wed, 03/21/2012 - 15:34 | Link to Comment monopoly
monopoly's picture

"The Fed losing control of it all". I patiently wait for that moment to occur. I yearn for a free market. 

Wed, 03/21/2012 - 15:37 | Link to Comment monopoly
monopoly's picture

AMZN forward PE 75+, stock value based on earnings 48.00. Todays price 192.00. What a buy.

Wed, 03/21/2012 - 15:54 | Link to Comment waterdude
waterdude's picture

Guys been a bear since 1996. Missed every market opp since the mid 90's. Nuff Said

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