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Say what you want about Albert Edwards, SocGen’s longstanding international strategist and 37-year vet of the conflict on optimism — he’s a cracking author.
Right here’s the opener of his newest International Technique Weekly:
As US bond yields surge ever increased, do you’re feeling like you’re in a automobile you simply know is about to crash however are powerless to cease? All you are able to do is brace your self and hope for one of the best.
The hook this week is whether or not elevated uncertainty is driving up time period premia, the extra yield buyers need for holding longer maturities. As just lately mentioned by the Unhedged crew, it’s potential that weakening demand for Treasuries is being overwhelmed by increased supply.
Generalised uncertainty is extra of a convincing clarification to Edwards than different potentialities, corresponding to that lengthy bonds have been pricing in higher-for-longer charges and/or improved progress prospects. How can the actual financial system and the rate of interest outlook be driving markets “within the face of fiscal dysentery”, he asks:
The fairness market’s present resilience within the face of rising bond yields jogs my memory very a lot of occasions in 1987, when fairness buyers’ bullishness was ultimately squashed. And in an additional parallel, foreign money turbulence in 1987 performed a key function in exacerbating recession worries for an fairness market priced for the beginning of a brand new financial cycle. Identical to in 1987, any trace of recession now would certainly be a devastating blow to equities. But it surely could possibly be worse: fortunately we aren’t within the seasonally most dangerous month of the yr . . .
(That’s September.)
By no means in my profession have I witnessed such uncertainty about the place we’re within the financial cycle. Is that lengthy promised recession nonetheless lurking across the nook or are we firstly of a brand new financial cycle? Many buyers are apparently more and more satisfied it’s the latter.
My very own view is {that a} recession nonetheless lurks, however like many I’ve held that view for some time now and have been proved unsuitable — thus far. However there’s nonetheless loads of proof to recommend a recession is imminent.
Earlier than you all rush to misquote Paul Samuelson’s best joke within the remark field, check out this week’s portents of doom. Edwards directs us in the direction of this dip within the US Bureau of Labor Statistics chart on trucker employment . . .
Recession is closing in
Buckle up. pic.twitter.com/6AiEqozrhH
— Recreation of Trades (@GameofTrades_) October 1, 2023
. . . and final Thursday’s revisions to US GDP and its non-identical twin, gross home earnings, which didn’t shut a record-wide hole between the measures.
The macro bulls had been hoping for a giant GDI revision as a result of the Federal Reserve was altering its methodology for corporate earnings. Briefly, GDI consists of Fed financial institution earnings however excluded their curiosity funds. Fed financial institution earnings have deteriorated this yr as charges elevated on the Fed’s liabilities, so including again curiosity paid may need been a helpful counterweight.
What the bulls bought as an alternative was a 2.2-percentage-point hole between US actual GDP and GDI progress, with the latter revised as much as a still-anaemic 0.2 per cent yr on yr. The GDP-GDI hole has solely been equally huge thrice earlier than: within the final two quarters of 2007 and the second quarter of 2008, in keeping with economist David Rosenberg.
And what about cash provide, Edwards asks, not for the primary time.
When individuals are switching out of financial institution deposits into cash market funds it’s straightforward (and unsuitable) to dismiss contraction in slim measures of cash provide, he says — however broader measures are exhibiting the identical factor:
The previous few a long time have seen economists (particularly on the Fed) more and more disregard cash provide. Monetarists have been marginalised — if not dismissed as cranks. That could be a mistake in my view. I wouldn’t name myself a monetarist, however when cash provide weak point (not least the report 1.5% yoy decline in eurozone M3 in August) is confirmed within the information, I sit up and take be aware.
All of which brings us again to Edwards’ current large hit, The Maddest Macro Chart He Has Seen In Years. It’s the one which exhibits borrowing amongst US non-financial corporates rising and their internet curiosity funds collapsing.
This, he concludes, is as a result of corporations borrowed closely in the course of the pandemic on fastened charges and have parked the money at variable charges. Different commentators, corresponding to Absolute Technique Analysis chief economist Dom White, have stated it appeared extra like a data collection quirk that could possibly be fastened by final month’s methodology revisions.
And . . . . . . . . nope.
Whereas increased charges are pushing smaller US companies into bankruptcy on the quickest tempo since early pandemic, it actually does look lots like mega-caps are coining it in, having performed the yield curve profitably (borrowing lengthy to deposit quick).
“Mad,” Edwards concludes, not for the first time.