This morning, Goldman made tons of noise with a call saying that now is a generational opportunity to rotate from expensive Treasuries into stocks, and ride a wave of growth and portfolio rebalancing to higher profits.
Well, leave it to SocGen’s uber-bear Albert Edwards to come out with basically the exact opposite argument in his new note: As good as it gets.
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. Expect new lows on bond yields by Q3 and this equity rally to turn to dust – just as it did in 2011.
We retain our heavy overweight in 10y+ government bonds. We have been overweight bonds now since the end of 1996 and conversely underweight global equities. This stance has served us well. Despite having retained this stance for 16 years, let me say that I do not think being long 10y+ government bonds is a good idea on a 5-10 investment horizon. Indeed, I see it as a very bad idea. But, in the near term, while global de-leveraging continues apace, we feel comfortable that we remain in an Ice Age investment environment.
So why is he so negative (other than the fact that he’s always negative)?
Here are a few key points:
- Chinese data is worse than expected.
- US corporate profits are rolling over.
- Analysts are getting super-bullish again.
- The 3-month change in the Conference Board leading indicators (excluding the yield curve) is turning down again.
- The economy and markets look exactly like it did in 2011.
As for recent history repeating, Edwards writes:
Have investors already forgotten that, in the mini-recovery at the end of 2010, bond yield surged from 21⁄4% to 31⁄2%. 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.