Ian Harnett
@IanRHarnett
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Veteran macro strategist - Co-founder Absolute Strategy Research - All views are my own and not those of ASR. RT does not mean endorsement
Joined January 2022
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Bear markets only end after the Fed have cut rates because every rate cycle leads to financial crisis. The Fed will raise rates until something breaks...this is why we remain underweight equities
7. Historically bear markets needed rate cuts to sustainably bottom.
h/t
@Marlin_Capital
$FED $MACRO $SPX $SPY
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The biggest risk for Equities is no longer valuations - but the outlook for earnings - even US CEO's are now indicating the kind of conditions that in the past have seen earnings recessions...
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#valuationsmatter
Several people asked how long can you have 'dead money' in Equities if you include dividends. The chart below shows inflation adjusted total returns since 1920. It appears that buying at the wrong valuation can leave you out of pocket for 10 years or more.
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Just a reality check on buying the S&P at these levels for anything more a 'trade'. Shiller Cyclically Adjusted Price Earnings (CAPE) valuations are still at 29x... If you are 'buying the dip' or buying 'Stocks for the Long Run' then time is not on your side at these valuations
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Housing is the business cycle... a chart we shared with
@asr_london
clients before, showing how the NAHB data leads unemployment...the risks of recession and higher unemployment are getting clearer every day
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Sorry that we have to repeat this message - but the key reason to remain cautious is that the CREDIT CRUNCH FOR CORPORATES IS ONLY JUST STARTING…
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The only question you need to ask for your asset allocation "will unemployment be higher in a year's time?" If the answer is yes, then underweight Equities vs Bonds...Simple but effective...
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Detrended Bond/Equity Yield Ratios have an excellent record for providing 'strategic' rotations between Bonds and Equities. The 3yr detrended Global Bond / Equity Yield Ratios are at levels typically seen ahead of previous bear markets...
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The biggest market read from the Q4 senior loan officers survey is for credit. The tightening of lending standards today implies that by the middle of next year corporate credit default rates could be 8% - not the 3.5% currently discounted in the markets
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@johnauthers
used this chart in his
@opinion
piece earlier this week. The US 10yr detrended Bond/Equity Yield Ratio is at levels seen in 2000, 1981, 1968, 1955 and 1929. Peak to trough losses seen over the subsequent 5 years were -25%/-75%. This is no time to be bullish!
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The Senior Loan Officers Opinion Survey gave plenty of reason to stick with the view that a 'Hard Landing' is more likely than a 'Soft Landing', or 'No Landing'. Maybe it will be different this time, but for 30 years the SLOOS has signalled where Unemployment is heading!
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Be careful what you wish for this holiday… previous
@federalreserve
pivots produced a median decline for US Equities vs US Bonds of -28%
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This chart shows 100 years of Chair Powell's preferred US yield curve (10yr-3m rates). Whatever your view about the accuracy of the yield curve as a recession predictor, the curve has only been this inverted three times before - 1929, 1973 and 1979-80. None of those ended well.
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This is our 'Inflation Delta' linking US CPI and US Shiller PEs back to 1913. The longer CPI inflation stays close to current levels, the greater the risk that PEs head back toward 15x. This chart reminds us that both deflation and high inflation damage market multiples
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An excellent reminder that ‘bear market rallies’ are both frequent and futile. A very useful data table of the rallies seen in the last three major bear markets from
@MrBlonde_macro
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Changes in new home inventories lead changes in equities. Higher inventories have tended to imply lower equities 6m later. This is one of the largest increases we have seen in inventories in 60 years... and is one reason we remain bearish on equities
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Will this time be different? Over the last 40 years US recessions tended to see -15% to -20% Global EPS declines… what are you expecting this time… we are expecting more of the same…
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At
@asr_london
, we believe that you will see another down year for US (and Global) Equities in 2023. Two down years in a row are unusual (outside world wars), but a not unheard of... 1/8
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many thanks to
@Callum_Thomas
for including this
@asr_london
chart in his weekly
@topdowncharts
chartstorm - an excellent curation of the best charts seen on
#fintwit
- always an honour when one of our charts 'makes the cut' :)
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Credit remains the key to the outlook for 2023. Todays NFIB data has lots of interesting takeaways, but for me, this was the important one…small and mid-cap companies are finding it harder to get funding… at some point credit spreads will respond
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Before everyone gets too bullish - a reminder that US recession is still looking likely.... We have been sharing with clients this chart of US Manufacturing Overtime Hours - the 18% fall in a year is consistent with previous recession periods - Total O/T hours are also falling
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If you are long Banks vs the rest of the equity market, you might want to look at the Senior Loan Officer Opinion Survey (SLOOS). Its been a pretty good guide to future relative Bank returns...and it doesn't look pretty
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In the last three recessions, analysts forecasts missed by -33%, -46% and -25%. The synchronized slowdown in Global PMIs suggests that a high probability of EPS being 20% below current forecasts in the coming year
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1/3. Markets are getting excited about the prospect of lower rates next year. Early this week I sent a note to
@asr_london
clients showing that Fed pivots tend to be BAD NEWS not GOOD NEWS for Equities. Since 1970, the 14 Fed pivots saw Equities vs Bonds fall by a median -25%
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If you think recession is discounted in markets - think again!
@EthanYWu
and
@rbrtrmstrng
used our US Equity Risk Premium chart in today's
@FT
. The ERP rises in recession - recently, it has fallen. Either the recession view is wrong, or Equity prices and Bond yields must fall
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Re the discussion with the every excellent and interesting
@crossbordercap
re credit... these are the kind of charts I worry about - the SLO survey leading the default rates (and credit spreads)...
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Mikael - You are not alone - we get very similar results in our macro-to-market models as well... maybe the world has changed and our models are wrong. But if not, a lot of people are going to have been spoofed into losing a lot of money on the 'no-landing'/'soft-landing' stories
🌎 Where I disagree with the current equity market sentiment... monetary tightening takes time to run through the economy. My models still say later, deeper and longer recession...
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Others have also highlighted the gap between what Senior Loan Officers are reporting and Credit market spreads. LOTS of investors must be making BIG BETS on 'soft landing' and low corporate default rates. Let's hope that they are right or markets could get very messy in 2023!
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The downtrend in US Equities that started at the beginning of 2022 remains in place. Expect the S&P to test 3600 and head toward 3,200. The big level of support established in 2018/19 remains 2,900.
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Our caution on the macro and market outlook is supported by the fact that only one manufacturing subsector is reporting growth (worse than the low-point of the pandemic) and only lower in the GFC - a big disconnect from the underlying ISM index
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The NY Fed recession risk model is still suggesting over 60% probability of recession in the year ahead (the ASR model is also in elevated territory). Maybe this time WILL be different, but too many of our models are still pointing to weaker activity and markets, not stronger...
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Wondering when the Fed will pivot? Just watch the yield curve…
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We wrote to
@asr_london
clients that 'Time is NOT Your Friend' if you buy Equities at the wrong valuation. While Equities trend higher in nominal terms, in real terms you can be out of the money for a long time; 30 years after 1929, 20 years from 1968 and 15 years from 2000.
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Tobin's q is the ratio between a physical asset's market value and its replacement value. Our latest estimate shows this at a new 120 year high. There is debate about its theoretical basis and its empirical calculation...but 1.7x in Q2 2021 was enough to see a pause in the rally.
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This was one of the charts that caught my attention in the last week... Small caps are the outsourced supply chain of the large caps... and the NFIB survey showed they are feeling the monetary stress... Historically, this has been a key warning sign for credit (and risk assets)
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Wow! How did that happen? Thank you to everyone who helped increase my followers to 12,000! I will try and find a cracking chart, or two, as a thank you to everyone who has been kind enough to be interested in my views… I have also learned much from many of you…MANY THANKS 😀
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@Callum_Thomas
Maybe it’s just a coincidence that every US rate cycle since 1970 ended with a financial/market crisis. We are still sharing this chart with clients in our presentations, just to make sure that none of us forget this key point!
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This chart goes back to the 1960s and shows that the
#CREDITCRUNCH
for the CONSUMER will get really tough in the coming year…making it hard for sales to keep driving earnings and margins…
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Many thanks to
@johnauthers
for including
@asr_london
in his latest
@opinion
article on the US CPI data. He kindly included our chart that shows how the gap between Fed Funds and 2yr US yields are discounting recession, not soft landing, based on 70 years of history.
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We still believe market earnings expectations are too optimistic. Despite the AI 'hype' Tech stocks are cyclical - as as their sales and earnings. This great chart from
@CharlesMCara
and Nick Nelson at
@asr_london
shows how Tech sales are slowing relative to costs...buyer beware
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Before everyone gets too bullish - one last chart we recently shared with clients... lower asset prices seriously damage your wealth...and typically lead to weaker consumer spending and recession. Maybe this time will be different - but probably best not to invest on that basis!
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This is the root cause of the UK's problems. Not taxation, or even the energy crisis. These labour shortages were clear long before the Ukraine crisis. We flagged them as a
#blackswan
almost a year ago.
@Simon_Nixon
,
@johnauthers
and
@rbrtrmstrng
reported on them. Who listened?
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The TINY (
#thereisnoyeild
) market means that you can now get almost 4x the yield in Treasury Bills rather than US Large Cap stocks...in the last 100 years has only ever been the case in the Tech Bubble years
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One push back on our cautious stance on housing and US recession is that the consumer balance sheets look fine...but this charts highlights that, especially since 1990, improving balance sheets over the previous 5 years have not stopped recessions emerging
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As Fed policy tightens, US housing is taking the strain…Only the GFC has seen a bigger 3m fall in US house prices in the last 45 years according to the
@asr_london
US House Price Index.
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Valuations always matter. This is what the picture of subsequent 10yr returns looks like for any given starting value of the S&P500 Shiller PE since 1950...3% to 5% compound is what you should expect
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Before everyone gets too bullish - this is the valuation chart that I referred to in my retweet of the excellent
@hussmanjp
valuation chart earlier - we pointed out to clients that the Shiller and Tobin measures have rarely been higher other than in the Tech bubble and 1929
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Unemployment and Equities have similar characteristics. Unemployment comes down for 7-8 years but then rises rapidly. Equities rally for longer than one expects but correct faster than can be imagined. This is why it pays to be bullish 80% of the time, but very bearish 20%.
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#ValuationsMatter
This is the link between Shiller PEs and returns over the next 10 years since 1950 - showing why we expect returns to be in the 3%-5% range over the coming decade
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As a thank you for people's patience while I was away talking to clients, three key charts we flagged to them. Maybe its our lack of imagination, but when we started
@asr_london
, we never dreamed we would have three macro charts giving signals similar to those seen in 1929! 1/6
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This is one reason why we expect Global EPS growth to come under real pressure in the coming year
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This is why new home inventories matter... We have talked to clients about this as a
#BlackSwan
chart. Maybe 'it will be different this time'... if not, this points to unemployment being higher than any forecast we have seen. A small probability (perhaps) but a big impact!
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Another chart that I stumbled across showing that
#britainisntworking
... I was genuinely shocked to see that the number of stoppages in the UK is at levels never seen before in the last 90 years that the ONS data has been collected
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Even before today’s data Global Consumer Confidence was close to record lows… so much for the healthy finances of the consumers… they are hurting from the erosion of their purchasing power by inflation
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It might be tempting to capitulate on a bearish macro and markets view...but this chart that we sent to our
@asr_london
clients last week points to higher unemployment ahead... households and corporates are building surpluses - a sign of reduced investment or increased saving...
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The Bond/Equity correlation has moved back into negative territory...from a macro perspective this suggests that the brief period of stronger economic activity and higher inflation may be behind us (for now...at least)...
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Several people commented that my original chart did not include any valuation data... so lets try to put that right. Fundamental valuations, such as the Shiller PE and Tobin's Q, have only been higher than now on three occasions 1929, the late 1960s and 2000...
#valuationsmatter
#valuationsmatter
Several people asked how long can you have 'dead money' in Equities if you include dividends. The chart below shows inflation adjusted total returns since 1920. It appears that buying at the wrong valuation can leave you out of pocket for 10 years or more.
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A key chart for 2023. Central Bank balance sheets matter. CB B/S increased by 20% of GDP due to QE and Global Non-Financial debt increased by 80% of Global GDP…Real economy levered the CB balance sheets 4x over. On the way up and on the way down! QT matters for markets & growth
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We have shared this chart with the
@asr_london
clients in recent weeks showing the scale of the ‘credit crunch’ that will expect to emerge in H2 2023. If you are a qualifying investor and would like to read more about our views go to and ask for a trial…
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This week we presented a webinar to the
@asr_london
clients "Don’t Believe All the Bull(s) About the Rally"... This is the 120 year chart of fundamental Equity valuations for US Equities. Stocks are not yet 'cheap' based on valuations such as Tobin's Q or Shiller PE...
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The end of the bear market tends to come after the Fed capitulates, as in cutting rates aggressively
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Great chart from
@hussmanjp
showing how far earnings are above their long-run trend - and the key point that earnings tend to trough only after they are BELOW the trend line - and this also tends to come AFTER the end of the recession...
"Every recession sees earnings ending below trend."
-
@IanRHarnett
Great interview with
@gnoble79
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2/6
#1
US 10yr Treasury - 3m Treasury Bill Yield Curve It's popular to doubt the usefulness of yield curves, but this is only the forth time in 100 years the Yield Curve has been this inverted: 1980, 1973 and 1929 were the others - they did not end well for US economy or markets
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A final word of warning... previous multi-year bear markets (other than 1913-14) saw the second year deliver larger losses than the first. 7/8
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Here is a 'thank you' chart to all of you who are following me and
@asr_london
. This is one of our 'black swan' charts... charts we hope will break down... because the 'left-field' outcome suggested, a 5% fall in rates, points to the Fed having to respond to major macro stress
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For those that don’t know the record of
@gnoble79
I still have the Enron Cap and Bear Stearns Bear that George gave me as mementos of our discussions following the demise of each of those two entities! He has an outstanding record of spotting such things!
👇 👇 👇Over one year ago. If only someone could have anticipated the demise of Sam Bankman Fraud
#FTX
#cryptocurrecy
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Everyone's excited by China reopening, lower inflation and a potential Fed pivot... but we asked
@asr_london
clients to answer just one question... will any of these things stop unemployment from rising in the next 12 months? If not, Equities will likely struggle vs Bonds
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20
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We shared this chart with the
@ASR_London
clients last week. 'Macro beta' can account for 80% of returns in the last 12 months. The bigger point, is that the importance of 'macro beta' has been rising relative to 'stock alpha' on a structural basis over the last 30 years.
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Bear markets only end with the 3yr Z-score well below zero - we will likely see sharply lower equity prices AND lower bond yields before this 'strategic' bear market ends
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Slowing inflation is supposed to be a good thing for Equities… but the ASR Newsflow indicators show nominal revenue growth slowing sharply for companies… and historically this leads US non-financials sales growth. It may be hard to generate the EPS growth currently discounted.
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A decade of macro policy…We have moved from QE to QT and now on to what we have termed ‘QD’
#QuantitativeDestruction
as central banks prioritise inflation stability over financial stability - this may mark the end of an era. 1/6
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120 years of the Bond/Equity Yield Ratio. This chart shows how today's extreme divergence between Bonds and Equity yields was previously only seen briefly in 1987, and a longer period in the Tech bubble... It may not matter in the short run, but longer-term, valuations matter
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The bank loan officers also suggested mortgage loan demand was weaker than at the low point of the GFC… within a whisker of the ‘94-95 low. This has a good link to housing starts. Expect starts to fall 600k to below 1m in the coming year.
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Before everyone gets too bullish - an earnings chart we have shared with clients... While Global trailing EPS may only be down -5% according to MSCI ACWI, the (broader) Refinitiv Datastream measure is down -7%... exclude resources and it is -11%...over half way to our -20% target
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The whole yield curve surface tends to converge and invert ahead of recessions… with 80% of yield curves inverted the risks for Equities vs Bonds are increasing. Source:
@asr_london
using FRB and refinitiv datastream data
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We suggested to
@asr_london
clients that they should re-frame the AI rally as simply 'growth' vs 'value'. The growth/value performance has been extreme. Growth tends to beat value when activity is slowing, pricing power falling and earnings becoming scarce!
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Many thanks
@johnauthers
and
@isabelletanlee
for sharing this
@asr_london
chart in their article yesterday...It shows how rising unemployment tends to be GOOD for Bonds but BAD for Equities...NOT good for both as the markets seem to assume! via
@opinion
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This is the
@asr_london
Global House Price Index data that
@Simon_Nixon
referred to in his article…the impact of the Global tightening in policy rates is really beginning to hurt residential property around the world…this is based on data from 23 major economies.
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@jasongoepfert
@jasongoepfert
- just a quick question? How many of those occasions had the Fed already started cutting rates???
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When you have had enough of looking at the US NFP data maybe take another look at the Global housing data... the Global housing crisis that we and others are worried about is very evident in today's UK house price data from the Halifax Building Society - shocking
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It was great to see that Simon White at
@bloomberg
@markets
used this chart yesterday, linking the yield curve and the VIX... It was one of the first charts that
@David_Bowers55
and I built together when we launched
@asr_london
back in 2006/7 1/5
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@biancoresearch
History definitely suggests that pivots are, indeed, bad news for risk assets… with a median loss of 28% for equities vs bonds… sometimes that takes three years -sometimes three weeks…
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If you do want to add-in the buyback yield on top of the dividend yield to look at the relative valuation of Bonds and Equities this is what you get... a level of overall yield still lower than anytime since the mid-2000s, the early 2000s, 1987 and the Nifty-50 period.
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After record house price inflation in Q1 2022, the Global housing bubble is deflating rapidly
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6/6 We clearly hope that it really will be 'different this time', but it is still worrying that three of our key macro to market charts are giving similar signals to levels that were seen 1929!
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From a Shiller PE of 29x the prospective 10yr total returns for US equities are likely to be 3%-5% per annum
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@nickgerli1
and
@MichaelKantro
have flagged the same issue - but this is the chart we sent to clients at the start of the week - now with the updated NAHB data - the trajectory for housing is not a good. Given that ‘Housing IS the Cycle’ - beware this equity bear market rally
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12
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If you are interested in
#Globalhousing
, we updated the
@asr_london
monthly Global House Price Index data for clients just before the holidays... This is the picture for the 23 countries we (and the
@DallasFed
) monitor. It ain't pretty... and remember this is nominal data! 1/3
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Thank you to everyone who has taken my followers to 17k - despite the fact that I have been a bit quiet these past few weeks due to COVID and work factors (not just the market going up 😉)…. I remain deeply nervous about these markets and the US economic outlook…
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4
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Many thanks to
@johnauthers
and
@isabelletanlee
covering some of my views on the yield curve today. The key point being that it does not matter where on the curve you look, it is probably inverted. Maybe it will be different this time - but the odds looked stacked against it!
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15
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The kind of credit contraction that we are seeing is symptomatic of a broader debt deleveraging. As
@kayfabecapital
points out, these periods are rare and don’t tend to end well.
@DomWh1te
has a great long run chart of US deposits - showing record contraction. It won’t end well..
Bank runs are a distraction - the real issue is credit contraction as banks reign in lending as the shadow bank system also contracts.
How unusual is it for bank credit to contract? We can see the recent impact since SVB in March:
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My co-founder
@David_Bowers55
shared this chart with
@asr_london
clients in his latest
#FunkyCorrelations
product. The chart warns investors of becoming too complacent about low Equity volatility. If you like macro-to market charts like this, trial
#FunkyCorrelations
Our latest
#FunkyCorrelations
by David Bowers is out | ‘45 Rules of Thumb for Busy Asset Allocators'
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You can decide for yourselves whether AI is in bubble territory... but in our latest
@asr_london
note we highlight that US Tech is now as large a share of US and Global market cap as it was in 2000...
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11
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One issue with Global Equities being led by the
#magnificent7
is that they are IP and 'intangible' heavy. The popular view is that this means 'old fashioned' valuations such as 'price to book' are irrelevant... sadly, I can remember the same narrative in 2000...
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Jonathan - they never seem to ask the independent strategy teams for their views! For the record - at
@asr_london
I am expect to see 3200 on the S&P. Thats 200 on EPS and 16x PE - neither of which are aggressive calls. The direction of travel is still downward. Happy Holidays.
Your 2023 S&P 500 forecasts:
Deutsche Bank 4500
Oppenheimer 4400
BMO 4300
JPMorgan 4200
Jefferies 4200
Wells 4200
Evercore 4150
RBC 4100
Credit Suisse 4050
Goldman Sachs 4000
HSBC 4000
Citi 4000
BofA 4000
UBS 3900
Morgan Stanley 3900
Barclays 3725
SocGen 3650
BNP Paribas 3400
238
502
2K
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While markets may keep going up for some time - this chart that we shared with
@asr_london
clients last week shows the potential for increased market volatility as we head towards 2025...historically, rising real rates do make a difference...albeit with a long (and variable) lag
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20
59
@BobEUnlimited
Bob - I have a lot of sympathy with your view. It’s very easy to bash policy makers - but Bernanke, Geithner and Paulson did great work as did Messrs King and Brown in the U.K. in avoiding complete meltdown. The issue for me is that we persisted with these ‘emergency’ measures…
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Paul this looks like a brilliant piece of financial detective work! We have been saying to our
@asr_london
clients to remember that even private companies can’t ignore cash flow pressures for long! This chart proves the point very nicely… thank you!!!
Favourite data set I’ve discovered in a while: Tracks capital calls and distributions from and to investors in private equity funds, which I turned into a quarterly cash flow. It’s … not been good recently! >>
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@MichaelAArouet
@TS_Lombard
The BRICS+ group are united by one thing - desire to move away from a dollar based system - and they definitely appear to be adding to their Gold holdings - regardless of price…
5
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