Last chance to buy shares in the dip, US expert Larry Jeddeloh warns

Larry Jeddeloh is bearish on US bonds and bullish on shares with the current correction “the last major dip to buy” as quantitative easing drives a renewed surge like that of the late 1990’s (reports The Australian).
5th March 2021
Resources Rising Stars

Larry Jeddeloh is bearish on US bonds and bullish on shares with the current correction “the last major dip to buy” as quantitative easing drives a renewed surge like that of the late 1990’s (reports The Australian).

In early May 2020, the influential Minneapolis-based founder of The Institutional Strategist newsletter and institutional advisory service TIS Group said the Fed’s unprecedented monetary stimulus — including near-zero interest rates and “whatever-it-takes” approach to financial asset purchases — was the main force behind a 12.7 per cent rise in the S&P 500 in April, its best month since 1988, and that the Fed was aiming to head off a negative wealth effect from Wall Street.

“You could make a case that we’re going back to the highs in the S&P 500,” he told The Australian at the time. The S&P 500 surged 75 per cent in the next nine-months, but the US 10-year bond yield rose 101 basis points, and recently unsettled the US share market and risk assets globally.

“We’ve been out of bonds now for over a year, which has turned out to be fine, but I got a lot of complaints about this in March-April last year as the equity markets came down and this sort of hyper-view that we were heading for a deflationary bust took hold,” Mr Jeddeloh told UBS clients in a conference call on Wednesday. In his view the forty year downtrend in US rates is “done”.

The four-decade downtrend in rates was accelerated two decades ago by then Fed chairman Greenspan’s adoption of “credit cycle policy” over “business cycle policy” - where everything really began to depend on the amount of credit in the system – and recessions were to be avoided.

It’s in the context of four years of supply-side economics and two decades of credit cycle economics, plus the start of digitisation and decarbonisation which may be “highly inflationary” and “begin to outweigh the deflationary effect of further digitalisation” that Mr Jeddeloh frames his view that inflation is heading higher. He laments a lack of agreement globally on decarbonisation in particular.

“China now is going to build 300 fossil fuel plants next year – coal (fired) plants primarily - and they’re exporting that technology to Indonesia…to all the countries basically along the Belt & Road – that’s one of the principal exports is coal fired plants. So they’ll run off fossil fuels,” he said.

“So the pressure to create the electricity that we need to decarbonise and all have electronic vehicles – cars and trucks and eventually airplanes – is going to rise.

How do you do that without some sort of massive plan to both build the infrastructure in the meantime, but also to supply the fuel to do this?

It just seems to me like we’re going to move to a crunch period here, where the capex that should have been done to decarbonise the world, basically has not been done…we need a lot more copper in the world to decarbonise, but we don’t have enough copper right now.”

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Without that capex spending globally, “decarbonisation is going to take an awfully long time”.

The price of crude oil – up about 300 per cent since last March – will soar as US production peaks with President Biden’s green energy policies which will return pricing power returns to OPEC.

These structural forces may see rising inflationary pressures erode real interest rates at the long end of the US bond market, which is “probably what’s causing some of the disturbance in the long-duration part of the (share) market (such as the tech sector),” according to Mr Jeddeloh.

Famed investor Warren Buffett warned this week that, “bonds are not the place to be these days” after a 94 per cent fall in US 10-year bond yields since 1981.

Bond investors “face a bleak future” and some “may try to juice the pathetic returns now available by shifting their purchase to obligations backed by shaky borrowers” like junk bonds, he said.

And despite all the concern about soaring bond yields and the biggest one-day fall in the Nasdaq in 12 months, the day of reckoning for bond investors is still to come.

“We’re not there (yet),” Mr Jeddeloh said. “I do probably 30 calls a month with different clients around the world, and no one has said to me they’re reducing their bond exposure.

In fact it’s more the other way around…it seems to me they’re assessing how much risk they have left in what they hold – so they’re not there (in terms of capitulation of bullish views on bonds).

I would think if you break (above) 2 per cent on the 10-year - and it stays there - there would be a massive reassessment, particularly with investors that have liabilities - pension funds and insurers.

As you start to go above 2 per cent…if you’re an active manager, the convexity…the risk is so great.”

He noted that with the selloff in bonds this year, the typical balanced (bond-equity) portfolio in the US market is already near the point where those losses have offset the gains from the equities.

As far as where the S&P 500 is going from here, Mr Jeddeloh is keeping an eye on the Fed’s balance sheet. He notes that since the pandemic, each $100bn of QE has increased the S&P 500 by 20-25 points, compared to about 40 points per $100bn in the QE during the years after the GFC.

“It’s diminishing a little bit, but I think the (Fed’s) balance sheet is going to $10 trillion (from $7.56 trillion) – not this year – so that would be roughly about 500 S&P points so that’s how we reach our S&P 500 target of about 4,100-4,300. We think the US market is in the midst of a correction now that probably will run through the end of the month, then I think we will lift off again.

His view is that the US market is a similar situation to mid-1999, where the Fed “turned on the monetary juice in front of Y2K and then we had the blow off in the first quarter of 2000.”

The trading pattern between today and 1998-2000 markets is pretty close too.

“We should have for the full-year, an up-market….the fifth wave…the last wave, is still in front of us and that’s how I get up also as well to 4,200-4,300…maybe a bit more on the S&P 500,” he said.

So this is the last major dip to buy in this whole cycle.”

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