Bullish on US Treasuries that is, which the SocGen strategist expects to hit record levels before before government profligacy and the Fed’s printing presses take the world back to both double-digit inflation and bond yields.
From Edwards’ latest Strategy Weekly:
Many think I am mad. But I am not the only commentator expecting a deflationary bust the sort of bust that will take the S&P down to 400 from the current 1300. I recently watched John Authers of the FT Lex and Long View columns interview Russell Napier, formally [sic] of CSLA and a leading stockmarket historian. Russell's views are as interesting as ever and well worth 11 minutes of watching time. His views are similar to mine, although he articulates his thoughts far more clearly than I – Long View: Historian sees S&P fall to 400 – ft.com 16 May.
For those of you who cannot see the video let me try and paraphrase Russell. He believes massive central bank balance-sheet expansion has failed to boost broad money in the west, but rather this huge monetary stimulus has been transferred to emerging markets (EM) via foreign exchange (FX) intervention to peg EM currencies to a weakening US dollar (most notably the Chinese Renminbi). Together with the impact of a weak dollar driving commodity prices higher, the emerging markets own version of QE has led to overheating and inflation. EM countries are now far more inclined to aggressive monetary tightening, including allowing currency appreciation, which will halt the flow of EM-driven demand for US Treasuries. The creditor Chinese and other EM nations will tighten global liquidity, not the debtor US. This will cause what Russell terms “The Great Reset” which will drive US real bond yields higher and, amid a deflationary bust send the S&P down to its ultimate bottom commensurate with levels of compelling cheapness represented on the Shiller PE at around 400 on the S&P.(For reference, at pixel time the S&P 500 was at 1,316.)
Where I diverge slightly from Russell is that the world he describes sounds pretty recessionary to me. Clearly the S&P falling to 400 destroys household balance sheets and consumption anew. And EM liquidity tightening could cause hard landings. In China, for example, a recent calculation showed FX intervention accounted for around one half of the countrys runaway money supply which has helped propel the boom). My own view would be that despite the cessation of the EMs need to buy US Treasury debt as they curtail liquidity, weak economic fundamentals will drive US Treasury yields still lower in the near term. The printing presses being turned off will hit risk assets hard and that should boost Treasuries. So in my world, 400 on the S&P goes hand-in-hand with lower, not higher US bond yields. Ultimately I would concur that there is also going to be “The Great Reset” on US yields as well, but that will come after a frenzied orgy of balance sheet debauchment (both Fed and Federal) which will make events over the last three years look like an afternoon tea-party with the Vestal Virgins.Crikey. Fresh lows for government bond yields!
And there was us thinking they might push higher after the Fed’s latest bond buying programme ends in June.