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Dr. Ed Yardeni

Dr. Ed Yardeni

Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research for institutional investors. In this blog, we highlight some of the more interesting relationships and developments that should be of interest to investors. Our premium research service is designed for institutional investors.

Articles by Dr. Ed Yardeni

Analysts Still (Too) High on S&P 500 Earnings

4 days ago

The latest earnings reporting season seemed to contribute to the sharp selloff in stocks during October, as some companies reported bullish earnings that were more than offset by bearish guidance about future earnings prospects. Collectively, however, the S&P 500 companies’ Q3 earnings results reported through the 11/8 week were 4.9% better than analysts had expected during the 9/28 week, i.e., just before the start of the latest earnings season (Fig. 1). As I’ve noted many times before, this pattern is par for the course. (The pattern shows up on our “earnings squiggles” data series as a hook at the end of the line—see our S&P 500 Earnings Squiggles Annual & Quarterly.)
In aggregate, the negative guidance corporate managements provided during earnings conference calls somewhat

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Fed’s R-Star Is A Black Hole

17 days ago

President Donald Trump must regret that he didn’t renew Janet Yellen’s contract to head the Fed for another four years. She probably would have been more accommodating to his supply-side policies. They both are populist do-gooders at heart. They want as many people to get jobs as possible.
Instead, Trump appointed Jerome Powell to be the new Fed chairman at the start of this year. Powell had been the vice chairman under Yellen. Trump appointed Richard H. Clarida to fill Powell’s vacant position after he was promoted. Both Powell and Clarida are all for continuing to raise interest rates. Both see strong economic growth and a tight labor market as potentially inflationary. So they want to raise interest rates to avert this scenario, by slowing the economy down.
No wonder that the 10/23

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Fed’s Restrictive Chatter Rattles Stocks

26 days ago

Some Fed officials have signaled in the weeks since the September 25-26 FOMC meeting that the economy may be so strong that they might have to raise the federal funds rate higher than they had mentioned doing in the past. That would be unfortunate given how well they’ve prepared the financial markets for a federal funds rate raised to 3.00% by the end of 2019. Now they’re talking more about 3.40% in 2020. Is that really necessary? A “gradual normalization” of the federal funds rate to what they’ve claimed is a “neutral” rate (3.00% in 2019) has been clearly telegraphed and is widely anticipated. Why suddenly speculate about turning restrictive in 2020?
It was widely noted that the 9/26 FOMC statement deleted the following language that had appeared in previous statements: “The stance

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Trump’s Poison Pills for China

October 10, 2018

A week ago I wrote about “China’s Syndromes.” I noted that aging demographic forces, which were significantly exacerbated by the Chinese government’s one-child policy, are already depressing the growth rate of real retail sales in China (Fig. 1 and Fig. 2). As a result, the government is scrambling to expand its overseas military and economic power to counter the structural weakness at home.
I argued that President Donald Trump is implementing policies aimed at either slowing or halting China’s drive to become a superpower. He wants to reduce America’s huge trade deficit with China by forcing US and other manufacturers to move out of that country. In the process, the US would no longer be financing China’s ascent with our trade deficit and providing technological know how that has been

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China’s Syndromes

October 1, 2018

China I: Getting Trumped. I’m coming around to a new working hypotheses on the outlook for China’s economy. I think it could be much weaker much sooner than widely recognized. A significant slowing in the growth rate of inflation-adjusted retail sales over the past couple of years suggests that the aging demographic factor—attributable to the government’s previous population control measure—may be hitting consumer spending significantly already. As a result, Trump’s escalating trade war with China may very well hurt China’s economy much harder than widely realized.
Furthermore, what if Trump’s trade war with China isn’t just about trade? Yes, we all know it is also about intellectual property rights. But what if at heart it’s about China’s superpower ambitions—as evidenced by its

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Bear Traps for Stocks?

September 26, 2018

In the past, the worst time to buy stocks typically has been when the unemployment rate was making a cyclical low (Fig. 1). Needless to say, initial unemployment claims was doing the same at the same time—and screaming “Get out! Get out!” (Fig. 2). Buying stocks when the yield curve was flat and on the verge on inverting has also been a bad idea (Fig. 3). Buying stocks when the Fed is raising interest rates can work okay for a while, until higher rates trigger a financial crisis, which often turns into a credit crunch and a recession (Fig. 4 and Fig. 5). Rising bond yields aren’t always bad for stocks, until they are (Fig. 6). Those times late in an expansion when the profit margin exceeds its mean tend to set it up for a bruising reversion to the mean and even below, which is bad for

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Financial Crisis of 2008 Part VII: FEDDIE

September 16, 2018

This seven-part series is excerpted from Chapter 8 of my book, Predicting the Markets: A Professional Autobiography.
WITH THE FINANCIAL crisis rapidly spreading during September 2008, US Treasury Secretary Henry Paulson proposed a plan under which the Treasury would acquire up to $700 billion worth of MBSs to relieve banks of these toxic assets. Only three pages long, the plan was called the “Troubled Asset Relief Program” (TARP). A longer version became the formal legislation enacted on October 3.
Just 10 days later, at a meeting with nine major US banks on October 13, TARP was changed. It became a program in which the Treasury would purchase individual banks’ preferred shares to inject capital into the banking system. Some of the bankers initially balked at the switch, but Paulson

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The Financial Crisis of 2018 Part VI: FLAW IN THE MODEL

September 16, 2018

This seven-part series is excerpted from Chapter 8 of my book, Predicting the Markets: A Professional Autobiography.
IN THE MOVIE Casablanca (1942), police Captain Louis Renault walks into the back room of Rick’s Café and asserts, “I’m shocked, shocked to find that gambling is going on in here!” As he shuts the place down, the casino manager hands him his recent winnings. Likewise, Alan Greenspan repeatedly professed his shock at what had gone on in the credit casino under his watch, and he certainly lost some of his public admiration when he did so—though Greenspan’s shock was a good deal more genuine than Renault’s.
In the prepared remarks for his October 23, 2008 testimony before the House Committee on Oversight and Government Reform, at a hearing on the role of federal regulators in

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The Financial Crisis of 2008 Part V: FAULTY INSURANCE POLICIES

September 16, 2018

This seven-part series is excerpted from Chapter 8 of my book, Predicting the Markets: A Professional Autobiography.
LLOYD BLANKFEIN, CEO of Goldman Sachs, wrote an article in the February 8, 2009 Financial Times titled “Do Not Destroy the Essential Catalyst of Risk.”[1] He observed that it should have been obvious something wasn’t right about CDOs: “In January 2008, there were 12 triple A-rated companies in the world. At the same time, there were 64,000 structured finance instruments, such as collateralised debt obligations, rated triple A.” It was a belated warning, to say the least! “It is easy and appropriate to blame the rating agencies for lapses in their credit judgments,” Blankfein continued. “But the blame for the result is not theirs alone. Every financial institution that

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The Financial Crisis of 2008 Part IV: THE GREAT RECESSION

September 16, 2018

This seven-part series is excerpted from Chapter 8 of my book, Predicting the Markets: A Professional Autobiography.
THE DAY CAME when the house of cards collapsed upon itself. The rapidity of destruction was astonishing:
• First half of 2007. The financial system started to come unglued during the fourth quarter of 2006 as delinquency rates on subprime mortgages rose, leading to a wave of bankruptcies among subprime lenders. On February 8, 2007, HSBC Holdings, the multinational bank headquartered in London, said it would have to add to loan loss reserves to cover bad debts in the subprime lending portfolio. On June 20, a couple of hedge funds at Bear Stearns announced major losses resulting from bad bets on securities backed by subprime loans.
• Second half of 2007. On July 30, German

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The Financial Crisis of 2008 Part III: WEAPONS OF MASS FINANCIAL DESTRUCTION

September 16, 2018

This seven-part series is excerpted from Chapter 8 of my book, Predicting the Markets: A Professional Autobiography.
CREDIT DERIVATIVES TURNED out to be weapons of mass financial destruction. They took off after the passage of the Commodity Futures Modernization Act of 2000. Once again, a key architect of the Act was Phil Gramm. His accomplices included Fed Chairman Alan Greenspan, Treasury Secretary Robert Rubin, Deputy Secretary Lawrence Summers, and SEC Chairman Arthur Levitt.[1] All four adamantly opposed what they viewed as a power grab by Brooksley Born, the head of the Commodity Futures Trading Commission (CFTC). In retrospect, her actions suggest she was guided not by power as much as by prescience and a strong moral code.
Born insisted that her agency should regulate the

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The Financial Crisis of 2008 Part II: ROUNDING UP THE SUSPECTS

September 16, 2018

This seven-part series is excerpted from Chapter 8 of my book, Predicting the Markets: A Professional Autobiography.
HOUSING CERTAINLY CONTRIBUTED to making the Great Recession the worst US economic downturn since the Great Depression. It lasted 18 months, from December 2007 through June 2009, which was longer than all the prior postwar recessions. Real GDP fell 4% from the end of 2007 through mid-2009. That was bad, but so were the recessions of the early 1970s and early 1980s. What made the Great Recession so great was that it was followed by a very weak recovery. The Great Recession was associated with a financial crisis deeply rooted in extraordinary excesses in the mortgage industry. The consequences lingered well past the official end of the recession and weighed heavily on the

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The Financial Crisis of 2008 Part I: IN THE BEGINNING

September 16, 2018

This seven-part series is excerpted from Chapter 8 of my book, Predicting the Markets: A Professional Autobiography.
“THE HOUSE OF the Rising Sun” is a folk song that once topped the charts in the United States; the most famous version was recorded by the English rock group The Animals in 1964. It’s a remorseful ballad that tells of a life gone wrong in New Orleans.
The housing market has a history of going wrong from time to time and certainly has been “the ruin of many a poor boy,” like the house of ill repute in the song; but never has the market extinguished more wealth and hopes than it did following the bursting of the housing bubble in 2007. That event was actually the culmination of numerous wrong turns by the housing industry that started at the beginning of the previous

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What If … ?

September 5, 2018

What if Trump’s trade war leads to less protectionism and more global prosperity? What if Trump’s deregulation of business unchains the animal spirits of businesses, especially smaller ones that arguably have been more stymied by regulations than large ones? What if jobs actually do come back to the US?
What if the pace of technological innovation is increasing, disrupting business models in ways that keep a lid on inflation and finally boost productivity? What if the growth of distressed asset funds has created a shock absorber in the capital markets, reducing the severity of credit crunches? What if Baby Boomers downsize, while Millennials remain minimalists?
I can go on, but we have enough to work with in this list of “what ifs.” So let’s explore the implications of these mostly

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Capital Ideas Investing Podcast

August 25, 2018

Predicting the Markets with Ed YardeniEconomist and investment strategist Ed Yardeni discusses his new book, Predicting the Markets: A Professional Autobiography, and offers his thoughts on why the nine-year-long bull market in U.S. equities can continue. Listen to hear his straightforward rationale.

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Extended Expansion Sends Stocks to Record Highs Again

August 22, 2018

S&P 500 revenues and earnings soared to record highs during Q2-2018. No wonder the S&P 500 stock price index is back in record-high territory again. Let’s review the latest data before turning to the outlook for the fundamentals driving the stock market:
(1) Revenues at all-time high. Most extraordinary is that S&P 500 revenues jumped 10.3% y/y last quarter to a new record high (Fig. 1 and Fig. 2). Normally this far into an economic expansion, revenues growth tends to be around 4%-6%.
(2) Earnings at all-time high. S&P 500 earnings as measured by Thomson Reuters I/B/E/S soared 25.6% y/y last quarter, reflecting the strength in revenues as well as the cut in the corporate tax rate (Fig. 3 and Fig. 4).
(3) Profit margin at all-time high. Notwithstanding all the chatter about rising

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US Stocks Outperforming in Trump’s World

August 19, 2018

US stocks have been outperforming other major overseas stock price indexes since early February. That’s when President Donald Trump started his “America First” protectionist campaign aimed at making free trade fairer trade with America’s major trading partners. During the current bull market, I had been recommending a Stay Home investment strategy until the fall of 2016. On November 8, 2016, I switched to a Go Global strategy on mounting evidence that the global economy was rebounding from the worldwide energy-led mini-recession of 2015. I switched back to Stay Home in early June of this year in response to the escalating trade war.US stocks have outperformed the major overseas stock indexes priced in local currencies so far this year. They’ve done even better when foreign indexes are

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US Economy Slowing? Not So Fast!

August 11, 2018

Real GDP rose 4.1% (saar) during Q2 (Fig. 1). That was good, but not surprisingly good. Actually, given that taxes were cut at the end of last year, it’s surprising that it wasn’t better. In fact, GDP growth was temporarily boosted by exports as US exporters scrambled to beat Trump’s tariffs. Exports of goods and services contributed 1.12 percentage points to Q2’s real GDP growth, the most since Q4-2013 (Fig. 2).
I like to look at the y/y growth rate of real GDP to assess whether the trend growth rate of the economy is changing (Fig. 3). It was up 2.8% y/y during Q2. That’s not a new high for the current expansion, and remains in the 1.0%-3.8% range it has spanned since 2010. In other words, real GDP growth still may be fluctuating around 2.0%, as it has been doing since 2010.
Consumer

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Tug of War In the Bond Market

August 2, 2018

Helping stocks to recover from the year’s lows in early February is the eerie calm in the US bond market. The Bond Vigilante Model suggests that the 10-year Treasury bond yield tends to trade around the growth rate in nominal GDP on a y/y basis (Fig. 1). It has been trading consistently below nominal GDP growth since mid-2010. The current spread is among the widest since then, with nominal GDP growing 5.4% while the bond yield is around 3.00% (Fig. 2).
Why isn’t the bond yield closer to 4.00% or even 5.00%? After all, the Tax Cuts & Jobs Act enacted at the end of last year and additional fiscal spending passed by Congress earlier this year are projected by the Congressional Budget Office to result in federal budget deficits averaging about $1 trillion per year for the next 10 years

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Weekly Fundamental Stock Market Indicator Remains Bullish, So Far

July 27, 2018

So far, the escalating trade and currency wars aren’t weighing on the weekly stock market fundamentals that I track and discuss below. That’s because the US economy received a big boost from the Tax Cuts and Jobs Act (TCJA) at the end of last year. Federal tax receipts as a percentage of nominal GDP dropped from 18.2% during Q4-2017 to 17.5% during Q1-2018 (Fig. 1 and Fig. 2). That’s the lowest reading since Q4-2012. Normally, this ratio drops during recessions, not during expansions. So the TCJA is giving a big boost to an economy that is already at full employment. Let’s have a closer look:
(1) Individual tax receipts still growing after TCJA. The y/y growth rate of income taxes in personal income fell to 3.6% during May, down from a recent peak of 7.1% at the end of last year (Fig.

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CFA Institute’s Review of My Book, Predicting the Markets

July 23, 2018

Financial Analysts Journal
Book Reviews2018, Volume 13 Issue 1Predicting the Markets: A Professional Autobiography (a review)
Reviewed by Janet J. ManganoEdward Yardeni’s (“Dr. Ed’s”) Predicting the Markets: A Professional Autobiography is a massive, entertaining, and enlightening work that captures the reader’s imagination and challenges established investment and analytical processes. The title only begins to suggest what is inside. Beyond “predicting the markets,” the book encompasses decades of intense, thoughtful research that shows there is no single simple—or even complex—way to predict the markets, the economy, or any sector within them. Solid research goes a long way, however, toward blazing a trail, creating new insights, and hypothesizing about the future.To some extent,

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Donald Trump vs Blanche DuBois

July 19, 2018

Much like Blanche DuBois in Tennessee Williams’ play “A Street Car Named Desire,” the US has “always depended on the kindness of strangers,” or at least it has for a very long time. That’s because foreigners have been big buyers of bonds issued by Americans. They’ve helped to finance the US federal budget deficit. They’ve also bought lots of mortgage-backed and corporate bonds.
Trump’s escalation of the trade war between the US and all our major trading partners has raised concerns that foreigners will respond to Trump’s “America First” protectionism by cutting back on their purchases of US debt. Furthermore, Trump’s tariffs may boost inflation in the US by increasing the cost of imports. Both possibilities should be bearish for bonds. Yet bond yields remain eerily subdued. Let’s

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Predicting the Markets

July 16, 2018

May I suggest you take my recently published book Predicting the Markets: A Professional Autobiography along to the beach this summer? If you like reading biographical histories that focus on financial markets and the economy, you should enjoy my book. If you prefer thrillers, then The President Is Missing by Bill Clinton and James Patterson might be a better choice.
I wrote my book to share what I have learned over the past 40 years as an economist and investment strategist on Wall Street. My hope is that investors in my age bracket find it to be an enjoyable and thought-provoking walk down Memory Lane and that younger folks find plenty of insights they can put to good use in their financial life. In writing the book, I’ve avoided jargon for a narrative that appeals mostly to one’s

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Is the Yield Curve Bearish for Stocks?

July 10, 2018

The yield curve is commonly measured as the spread between the 10-year US Treasury bond yield and the federal funds rate (Fig. 1). This spread has narrowed significantly since the start of this year, raising fears of an imminent recession and bear market in stocks (Fig. 2). That’s because in the past, the yield curve spread has flattened (i.e., narrowed) and then inverted (i.e., the bond yield was below the federal funds rate) immediately preceding the past seven recessions.
Recessions cause bear markets in stocks, which is why the yield curve has received lots of buzz in recent weeks (Fig. 3). Do a Google Trends search on “yield curve” for the past five years, and you’ll see a trendless series through the end of last year, followed by an upward-trending series so far this year with a

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Mother of All Credit Bubbles?

July 5, 2018

A 6/8 article in The Washington Post was ominously titled “Beware the ‘mother of all credit bubbles.’” Author Steven Pearlstein is a Post business and economics writer and the Robinson Professor of Public Affairs at George Mason University. The article has been “trending,” with 555 comments since it was posted on the Post’s website. I received several emails from accounts asking me to comment on it. So here goes:
(1) The end is coming. Pearlstein concluded his article as follows: “It’s hard to say what will cause this giant credit bubble to finally pop. A Turkish lira crisis. Oil prices topping $100 a barrel. A default on a large BBB bond. A rush to the exits by panicked ETF investors. Trying to figure out which is a fool’s errand. Pretending it won’t happen is folly.”
I agree that

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Buyback Bonanza

June 27, 2018

S&P 500 buybacks are back. Actually, they never left the current bull market despite recurring chatter that the buyback binge was over. Since 2014, they’ve fluctuated around an annualized rate of roughly $550 billion. They jumped during Q1-2018 to an annualized $756 billion. That’s a record high, exceeding the previous record high of $688 billion during Q3-2007.
Obviously, buyback activity was boosted by repatriated earnings following the passage of the Tax Cuts and Jobs Act at the end of last year. It lowered the corporate tax rate on such earnings from the 35.0% statutory rate to a one-time mandatory tax of 15.5% for liquid assets and 8.0% for illiquid assets payable over eight years. Odds are that corporations will continue to buy back their shares at a solid pace through the

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Trade War Noise vs Earnings Signal

June 21, 2018

President Donald Trump’s protectionist saber-rattling has led to multi-front trade skirmishes with America’s major trading partners. Now Trump threatens to up the tit-for-tat ante with an incremental 10% tariff on $200 billion of Chinese imports. He did so Monday evening. The Chinese immediately said that they would retaliate in kind.
This may all be Trump’s art of the deal-making. However, bullying the Chinese in public rather than negotiating with them in private is risky. The longer that the noisy dispute continues, the more it could harm global economic growth as businesses postpone spending until the smoke clears. The biggest risk, of course, is that the smoke is actually the fog of war. Trump’s approach risks escalating the trade skirmishes into an all-out trade war, which would

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