Email of the day on getting it wrong:
Comment of the Day

August 19 2022

Commentary by Eoin Treacy

Email of the day on getting it wrong:

With all due respect Albert Edwards has been bearish his whole career, he has made a career out of being wrong, so I struggle to believe much of what he writes. Make no mistake, I am very concerned about the economic backdrop and confess to find it challenging to distinguish between what is happening in the U.K. (a complete mess) to what is happening in the States. We only have to go back a few months though to your view (a view I shared at the time), that the Fed would be "one and done", because they had little to no precedent of being anything other than dovish. The government's balance sheet has enormous liabilities and as discussed by you months ago, they can ill afford to roll this over at much higher rates. That dynamic has not changed.

Eoin Treacy's view

Thank you for raising this important point. In defense of Albert Edwards, he has been wrong about the stock market more often than not but was right about yields failing to break out on multiple occasions over the last decade. I was wrong in opining the Fed’s interest rate policy would be one and down. I underestimated the lag between tighter policy and its effects on government finances. I also addressed these issues in the Service when I started shorting the Nasdaq in March.
Let’s take the conclusion the Fed will ride to the rescue at the first sign of trouble; by cutting rates and boosting money supply, as gospel. Historically, that has happened following 20% pullbacks. Between, January and mid-June, the S&P500 fell 24%. The kneejerk reaction of traders is to buy that dip. That’s particularly true because it coincided with the region of the 1000-day MA which is the secular trend mean.

The Fed did not ease policy and did not boost money supply. Instead, they continue to raise rates and quantitative tightening will accelerate next month. To me the logical place to expect the Fed to pivot and provide remedial action would be when prices approach early 2019 levels. However, it would be reasonable to expect an overshoot.
Apple today is within a few percent of its all-time peak but trades on a price/sales of 7 in a tightening liquidity environment. That’s not a recipe for a breakout to new highs.

Back then, there was clear awareness that valuations were pricey. Since then, the surge in money supply supported earnings and make it look like today’s prices are attractive. That narrative is entirely dependent on earnings remaining strong indefinitely, which seems unreasonable to expect against a background of tighter liquidity.
Bitcoin rolling over also suggests tighter global liquidity and its performance is often a lead indicator for the wider stock market.

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