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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

Are Stocks Overvalued?

1 day ago

In my book Predicting the Markets (2018), I reviewed various valuation models that stock investors follow. My main takeaway was that, “Judging valuation in the stock market is akin to judging a beauty contest. … Not only is beauty subjective, Hollywood tells us—it can be dangerous. At the end of the original version of the movie King Kong (1933), the big ape’s death is blamed by his handler on Ann Darrow, Kong’s blonde love interest, played by Fay Wray: ‘It was beauty that killed the beast.’ Valuation is in the eye of the beholder too. And buying stocks when they are most loved and very highly valued can also be deadly.”
In today’s politically correct times, it’s probably best to compare valuation to a talent contest rather than a beauty contest. Like any objective judge at a talent

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Zombies in the Fed’s Soup

6 days ago

I’m finishing up writing my next book, Fed Watching for Fun and Profit: A Primer for Investors. I’ve had a lot of fun writing it, and it has given me a broader perspective on the making of monetary policy by the Fed in particular and central bankers in general.
In my opinion, they all suffer from group-think.
They all use the same or similar models of the economy. Some are empirical models, but most are theoretical. The empirical ones create the illusion of a precise scientific analysis of how the economy works. The theoretical ones tend to be, well, too theoretical. Both can be quite misleading, especially if they are based on faulty assumptions and logic. Put simply, most of the models reflect thinking that bears little resemblance to reality and lacks plain old common sense.
When

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Lifestyle of the Rich & Famous President

26 days ago

The US economy continues to grow despite recurring recession scares. By my count, they’ve triggered 65 panic attacks in the stock market since the start of the bull market during March 2009. (See our S&P 500 Panic Attacks Since 2009 chart book and table.) The panic attacks—which include both corrections and mini-selloffs—have been followed by relief rallies. As a result, the S&P 500 remains near its record high of 3025.86 on 7/26 (Fig. 1).
The current economic expansion became the longest one on record during July of this year. It has now lasted 124 months. I expect it will continue through 2020. The main risk might be a radical regime change if President Donald Trump is defeated by one of the Democratic socialist candidates come the November 2020 election. Then again, our Founders

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Another Upside Hook for S&P 500 Earnings?

October 21, 2019

The Q3 earnings reporting season has started. Industry analysts’ estimates for the S&P 500 operating earnings per share plunged 8.7% from $44.85 at the end of last year to $40.93 during the 10/10 week (Fig. 1). As a result, the y/y growth rate in the consensus estimate for Q3 plummeted from 5.1% at the end of last year to -4.1% (Fig. 2).
It’s not unusual to see such downward revisions since industry analysts tend to be too optimistic about the future and become more realistic as the actual results approach during earnings-reporting seasons. Oddly, they tend to overshoot on the pessimistic side in the weeks before earnings seasons. That, in turn, means that there is often an earnings “hook” to the upside as actual results beat expectations.
I have weekly “earnings squiggles” data going

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The Myth of Income Stagnation, Again

October 6, 2019

The key to a happy economic outlook and a continuation of the bull market in stocks is productivity growth. I think productivity growth is starting to make a comeback as the labor market gets tighter. If so, then wages—which have been rising faster than prices since the mid-1990s—would rise at a faster clip. Faster growth of real wages likely would more than offset the supply-side slowdown in payroll employment growth. A quicker pace of productivity growth would keep a lid on inflation. Profit margins would remain at recent historical highs or even go higher. The bull market in stocks would continue as earnings moved higher.
At a meeting recently in San Francisco with one of our accounts, I was asked to explain why an 8/7/18 Pew Research Center study disputed my claim that real wages

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No Recession In Purchasing Managers Report

October 3, 2019

One of my favorite songs is “We Didn’t Start the Fire” (1989), by Billy Joel, who is one year older than I am. The lyrics are simply a long list of major personalities and issues that have pleased, pained, and plagued my generation—the Baby Boomers—since our parents started to have children during the late 1940s. The lyrics include brief, rapid-fire allusions to more than 100 domestic and global headlines during the Cold War, from 1949 through 1989. Many of them refer to troublesome events during that period.
Today, Billy Joel would have no trouble updating his list of troublesome events: Red China, North Korea, South Korea, vaccine, Ayatollah’s in Iran, foreign debts, homeless vets, China’s under martial law, impeachment, MMT, negative rates, deflation, inverted yield curve, M-PMI, and

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As Germany Sinks, Draghi Promotes MMT

September 25, 2019

Germany’s Homegrown Problems. IHS Markit has released its flash estimates for September’s Purchasing Managers’ Indexes (PMIs) in the Eurozone along with those for France and Germany. The German data were downright ugly. There’s no oomph or oompah in Germany. Instead, manufacturing has fallen into a recession and is dragging down the rest of the economy. Real GDP edged down 0.3% (saar) during Q2 and is up just 0.4% y/y (Fig. 1). Another q/q decline is likely during Q3.

In the Eurozone, Markit estimates that the Composite PMI (C-PMI) fell from 51.9 during August to 50.4 this month (Fig. 2). The drop was led by the Manufacturing PMI (M-PMI), which is down from a recent peak of 60.6 during December 2017 to 45.6 this month. However, the Nonmanufacturing (NM-PMI) also contributed to the

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US Bond Yields Made in Germany

September 12, 2019

Another round of central bank easing is underway. So why are bond yields rising?
The 10-year US Treasury bond yield rose from a recent low of 1.47% on 9/4 to 1.72% on Tuesday (Fig. 1). The record low was 1.37%, hit on 7/8/16 just after the Brits voted to leave the European Union (EU). The risks of a no-deal Brexit have eased in recent days, though it still could happen next month. A hard Brexit could cause the bond yield to retest its recent low.
In any event, the main reason that the US bond yield has moved higher in recent days has more to do with Germany than the UK. The 10-year German government bond yield has risen from a recent record low of -0.71% on 8/30 to -0.54% Tuesday. Reuter’s reported: “Germany’s 30-year government bond yield briefly rose into positive territory on Tuesday

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From FOMO to FONIR

September 5, 2019

I visited with our accounts in Atlanta and Chattanooga recently. They seemed relatively calm. Most of them believe that the US economy can continue to grow for the foreseeable future. So they aren’t freaking out about the recent inversion of the yield curve. However, they are somewhat anxious about the prospect of negative interest rates in the US, though they think it is a remote possibility. Consider the following:
(1) US bond yields stand out. We discussed in our meetings the expectation that the Bank of Japan (BOJ) is likely to keep its official policy interest rate at -0.10% for the foreseeable future, as it has since 1/29/16, while the Governing Council of the European Central Bank (ECB) is likely to lower its official deposit rate, currently -0.40%, deeper into negative territory

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Trump’s Game of Chicken

August 28, 2019

President Donald Trump seems to be playing simultaneous games of chicken with Fed Chair Jerome Powell and Chinese President Xi Jinping. Last Friday, he raised tariffs again on US imports from China and ordered US companies to leave China. He also said that Fed Chair Jerome Powell is a greater enemy than Xi. Trump’s game plan is to create more uncertainty about trade, thus increasing the risks for US economic growth so that the Fed will have to respond with more interest-rate cuts. At the same time, he hopes that Xi will relent by agreeing to a trade deal that is good for the US economy.
Games of chicken are often reckless and dangerous, with dire consequences. The S&P 500 tumbled 2.6% on Friday. In the classic movie “Rebel Without a Cause” (1955), Jimmy (played by James Dean) agrees to a

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Bonds In Neverland

August 22, 2019

The negative interest rate policies of the European Central Bank (ECB) and the Bank of Japan (BOJ) have created a Neverland in the global fixed-income markets. An 8/18 Bloomberg story reported: “The world’s headlong dash to zero or negative interest rates just passed another milestone: Homebuyers in Denmark effectively are being paid to take out 10-year mortgages. Jyske Bank A/S, Denmark’s third-largest lender, announced in early August a mortgage rate of -0.5%, before fees. Nordea Bank Abp, meanwhile, is offering 30-year mortgages at annual interest of 0.5%, and 20-year loans at zero.”
A 7/29 story in The Washington Times reported: “The latest estimates are that approximately 30 percent of the global government bond issues are now trading in negative territory. Last week, Swiss 50-year

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Yield Curve Inverts: Head for the Hills?

August 16, 2019

The stock market tanked on Wednesday, August 14 because the yield spread between the 10-year US Treasury bond and the 2-year Treasury note turned negative. Such an inversion of the yield curve is widely viewed as a reliable leading indicator of economic recessions. In fact, it is one of the 10 components of the Index of Leading Economic Indicators. But so is the S&P 500, which remains close to its recent high but would fall sharply if stock investors become convinced that a recession is imminent.
Not only did the stock market react badly to the latest yield-curve inversion, but so did President Donald Trump, who tweeted: "CRAZY INVERTED YIELD CURVE! We should easily be reaping big Rewards & Gains, but the Fed is holding us back."
An inverted yield curve has predicted 10 of the last 7

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The Great Inflation Delusion

August 5, 2019

The Fed, the European Central Bank (ECB), and the Bank of Japan (BOJ) came up with lots of headline-grabbing shock-and-awe programs over the past 10 years in reaction to the Great Financial Crisis. Over time, they seemed to lose their effectiveness and ability to shock or awe.
Nevertheless, the US economy had improved sufficiently by 2014 that the Fed terminated Quantitative Easing (QE) in October 2014 and started very gradually to raise interest rates in late 2015. However, by the end of July 2019, the Fed was lowering the federal funds rate again. The ECB terminated its QE at the end of 2018 and was expecting to raise interest rates by mid-2019. However, by July 2019, the ECB signaled that it would most likely lower its deposit rate further into negative territory in September, and

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Embezzelcoin

July 1, 2019

In late 2017, when bitcoin was soaring toward a record-high price of $18,961 on 12/18/17, a distant relative asked me what I thought about the cryptocurrency. He had bought one bitcoin when it was around $4,000 in mid-2017. I said it reminds me of digital tulips. “What do you mean?,” he responded. He is a Millennial who had never heard of the Dutch Tulip Bubble from 1634-38. I explained what happened back then and noted that the bubble was mostly confined to Amsterdam, whereas the bitcoin bubble is global.
Of course, some bitcoin fans believe that bitcoin has a legitimate role in a portfolio as a hedge against the madness of central banks. I concede that point. However, as we saw last year, it can crash, which is what it did on its way back down by gut-wrenching 83% from the high of

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Running Out of Workers?

June 17, 2019

I am not convinced that the demand for labor was hard hit by Trump’s escalating trade war during May. Granted, payroll employment was weak last month, rising just 75,000 (Fig. 1). That compares poorly to the average gains of 186,250 per month during the first four months of this year and 223,250 per month during 2018.
The problem may be that all the anecdotal evidence of labor shortages is actually constraining the growth of payrolls. Perhaps we really are finally running out of workers, or at least those with the appropriate skills and geographic proximity to fill job openings. Consider the following:
(1) Openings. There certainly are plenty of job openings. They totaled 7.45 million during April, exceeding the number of unemployed workers by a record 1.6 million (Fig. 2).
(2) The

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Income Stagnation Is a Progressive Myth

May 3, 2019

The Progressives claim that—despite the (Old) New Deal, the Great Society, and Obamacare—the incomes of the vast majority of Americans have stagnated for three decades and that income distribution remains disturbingly unequal and must be fixed with more progressive taxes. Who would know better than Joseph Stiglitz? After all, he is a Nobel laureate in economics. In 1972, I took Stiglitz’s course on microeconomics in Yale’s PhD program. He gave me a good grade, so I like him.
In a 4/19 NYT article titled “Progressive Capitalism Is Not an Oxymoron,” he lamented: “Despite the lowest unemployment rates since the late 1960s, the American economy is failing its citizens. Some 90 percent have seen their incomes stagnate or decline in the past 30 years. This is not surprising, given that the

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S&P 500 Run, Forrest, Run!

April 25, 2019

Forrest Gump’s fans cheered him on during his remarkable roundtrip cross-country marathon by exhorting him to “Run, Forrest, run!” Similarly, bullish investors are cheering for the bull market in stocks with their gleeful chant, “Run, bull, run.” In this video podcast, I discuss why I believe that the bull market still has legs with revenues and earnings likely to keep it moving higher.

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

March 17, 2019

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!

March 10, 2019

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?

February 20, 2019

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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