Albert Edwards, global strategist at Societe Generale, says the Federal Reserve has repeated the mistakes of the past by allowing the third major asset bubble of the past 20 years to form.
The London-based analyst scoffed at statements made this week by Fed Chair Janet Yellen in her legally required testimony to both houses of Congress.
“As I noted on previous occasions, waiting too long to remove accommodation would be unwise,” Yellen told lawmakers. The Fed has raised interest rates only twice in the past 10 years to encourage debt-fueled economic growth as the country recovered from the worst slump since the Great Depression.
“Is this some sort of joke?” Edwards asked in a Feb. 16 report obtained by Newsmax Finance. “Yellen has presided over a Fed that has dithered, dallied and dodged raising rates for the last few years, wheeling out feeble, data-dependent excuse after feeble excuse. We all know that the only data the Fed is really focused on is the daily S&P print.”
The S&P 500 stock index has climbed about 30 percent in the past 12 months to record highs. About 10 percent of that gain happened after Republican Donald Trump won the Nov. 8 presidential election on a platform of cutting taxes and regulation.
The record-setting rally has worried some investors who see stock valuations reaching levels last seen in the dot-com bubble of 1995-2000 and the subprime mortgage bubble of 2002-2007.
“Wall Street strategists trying to tempt investors into buying more stocks at these levels are playing with fire,” Michael Lewitt, a hedge fund manager, said in a Feb. 1 newsletter. He pointed to valuation metrics such as the Shiller cyclically adjusted price-to-earnings ratio of 28.4 times for the S&P 500, compared with a historical mean of 16.7 times, as a sign that stocks are in bubble territory.
Yellen this week didn't say if Fed policymakers expected three interest rate increases this year, as they signaled after their December meeting. She also didn't specify whether the next hike would be at the meetings in March or June, when most analysts expect a rate increase.
Edwards compares Yellen’s mistakes in keeping interest rates too low for too long with those of Alan Greenspan, who led the Fed from 1987 to 2006, the year the U.S. housing market started to crash.
“The Greenspan Fed did raise rates from 1 percent in mid-2004 to 5.25 percent by 2006, but the pace was far too slow and the timing far too late,” Edwards said. “Just like the Greenspan Fed, the die has been cast and it is simply too late for the Yellen Fed to avoid a disaster.”
The rising price of copper, a metal that is widely used in industrial products like pipes and wiring, is an indicator of late-stage economic growth, Edwards said. Copper has risen 40 percent to 20-month highs after hitting a bottom in January 2016.
“What we are seeing now are the traditional cyclical price pressures that occur toward the end of the economic cycle,” Edwards said.
He said stocks will have difficulty rising while interest rates and commodity prices also climb.
"Given the inverse correlation between commodity and equity prices since 2011 it beggars belief how equity investors have flipped from seeing the deflationary backdrop of falling commodity prices and bond yields as good for equities, to rising bond yields and commodity prices also being good for equities." Edwards said. “It’s marvelous that equities can go up in any scenario! Of course they can’t!”
Source: Societe Generale, Datastream
Edwards has been on the record with bearish calls since introducing his “Ice Age” thesis in 1996. The forecast advised investors to put money into bonds and be cautious with stocks as deflationary pressures like those seen in Japan spread throughout the world.
Japan has struggled with repeated recessions and slim growth since its economic bubble collapsed in the 1990s.
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