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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

Disconnecting the Fed’s Dots (Melissa Tagg and Ed Yardeni)

2 days ago

Don’t look too closely at the Fed’s dot plot or you might miss the larger monetary policy picture, warned Federal Reserve Chairman Jerome Powell in a 3/8 speech titled “Monetary Policy: Normalization and the Road Ahead.” To make his point, he showed two unusual images: an unrecognizable close-up of a bouquet of flowers from impressionist painter Georges Seurat’s “A Sunday Afternoon on the Island of La Grande Jatte” and a very recognizable image of the full painting. Monetary impressionists may not be seeing the forest for the trees, to mix up the metaphor.
The Fed began issuing its Summary of Economic Projections (SEP) for the next three years and longer run back in 2007, specifically with the 10/30-10/31/07 Federal Open Market Committee (FOMC) meeting materials. Included in the SEP

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Happy Birthday to the Bull Market!

9 days ago

In this video podcast, I examine the prospects for the bull market that turned 10 years old on March 9. I also discuss potential peace and productivity dividends that may prolong the bull run.

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Should Stock Buybacks Be Banned?

27 days ago

The Government Is Here To Help
Journalist H.L. Mencken famously observed: “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.” Ronald Reagan just as famously warned: “The nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help.’” Rahm Emanuel summed it all up neatly when he said: “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things that you think you could not do before.”
The corollary of Rahm’s Law is that the government will tend to create crises so that we will need more government to fix them. A case in point is stock buybacks.
Senators Chuck Schumer

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Lipstick on a Pig: US Federal Government Debt

February 15, 2019

In this video podcast, I review the latest developments in the US federal government’s budget and I explain why I disagree with the proponents of Modern Monetary Theory who claim that deficits and debt don’t matter as long as the government borrows in its own currency and inflation remains subdued.

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Bonds: Doing the Unexpected

February 8, 2019

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Last year, the 10-year US Treasury bond yield peaked at 3.24% on November 8 (Fig. 1). Last year, when the yield first rose above 3.00% on May 14, there was lots of chatter about how it was likely to rise to 4.00% and even 5.00%. Those forecasts were based on the widespread perception that Trump’s tax cuts would boost economic growth, inflation, and the federal deficits. In addition, the Fed had started to taper its balance sheet during October 2017, and was on track to pare its holdings of Treasuries and mortgage-related securities by $50 billion per month (Fig. 2). It was also widely expected that the Fed would hike the federal funds rate four times in 2018, which is what happened, and that the rate-hiking would continue in 2019 into 2020.
Furthermore, the Bond Vigilantes model,

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Stocks: Something for Worriers

January 30, 2019

The S&P 500 is one of the 10 components of the Index of Leading Economic Indicators (LEI). The LEI stalled during the last three months of 2018—falling 0.3% in October, rising 0.2% in November, then falling again by 0.1% in December. The drop in stock prices accounted for much of that weakness. The rebound in the S&P 500 so far in January is a relief.
However, the selloff late last year and the partial government shutdown early this year depressed the expectations sub-index of the Consumer Optimism Index (COI) during January (Fig. 1). This is the average of the expectations components of the Consumer Sentiment Index (CSI) and the Consumer Confidence Index (CCI). That average is also one of the LEI indicators, and it has fully reversed the jump it took after Trump was elected

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On the Demographic Path to Human Self-Extinction

January 10, 2019

In Chapter 16 of my book Predicting the Markets, I observe that fertility rates have dropped below replacement rates around the world as a result of urbanization. Only in India and Africa are couples having enough babies to replace themselves. Humans are on a demographic path of self-extinction.
Leading the way has been Japan. I have often described the country as the world’s largest nursing home. That distinction undoubtedly will soon belong to China. All around the world, nursing homes will be bulging with more occupants, while the maternity wards will have lots of vacant cribs.
The economic consequences of these demographic trends will be slower growth and subdued inflation, if not outright deflation. That means that interest rates most likely will remain historically low for a very

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Video Podcast: Is the Fed Done?

January 1, 2019

Today is January 1, 2019. I wish you all a healthy, happy, and prosperous New Year! In this video, I discuss why the new year is likely to start with some downbeat economic data that should cause the Fed to pause hiking interest rates. Regional business surveys conducted by five of the Fed district banks were very weak during December. That explains the recent drop in the 10-year Treasury bond yield below 2.70%. The 2-year Treasury yield tends to be a good one-year leading indicator of the federal funds rate, and is currently predicting no change this year. Are the implications bearish or bullish for the stock market? VIDEO

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Less Inflation Gives Fed Room to Pause

December 4, 2018

The Fed made lots of headlines last week. Evidence mounted that following another likely rate hike at the FOMC meeting on December 18-19, the monetary policy committee might pause during the first half of next year to reevaluate the course of monetary policy. Not as widely noticed last week was that inflationary pressures may be ebbing, which would also argue for a pause. Consider the following:
(1) PCED. While the labor market continues to tighten and wage gains are picking up, price inflation remains subdued according to the most currently available data. For starters, the core PCED rose 1.8% y/y during October, the lowest such pace since February (Fig. 1). Over the past three months through October, this measure is up just 1.1% (saar), the lowest reading since May 2017 (Fig. 2).
(2)

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

November 14, 2018

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

November 1, 2018

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

October 23, 2018

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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